UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2012
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to _____________
Commission File No. 001-34566
CHINA BIOLOGIC PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
75-2308816
(I.R.S. Employer Identification No.)
18th Floor, Jialong International Building, 19 Chaoyang Park Road
Chaoyang District, Beijing 100125
People’s Republic of China
(Address of principal executive offices)
(+86) 10-6598-3111
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.0001 per share
Preferred Share Purchase Rights
Name of each exchange on which registered
NASDAQ Global Select Market
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
1
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files)
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ]
Non-Accelerated Filer [ ]
(Do not check if a smaller reporting company)
Accelerated Filer [X]
Smaller reporting company [ ]
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
There were a total of 26,822,072 shares of the registrant’s common stock outstanding as of March 12, 2013.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for its 2013 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the close
of the Registrant’s fiscal year are incorporated by reference into Part III of this Annual Report on Form 10-K.
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Annual Report on Form 10-K
Year Ended December 31, 2012
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting fees and Services
Item 15.
Exhibits, Financial Statement Schedules
PART IV
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68
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Special Note Regarding Forward Looking Statements
In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,”
“target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements
include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; expectations
regarding governmental approvals of our new products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the
plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all
assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, as well as assumptions, which, if they were to ever materialize or prove incorrect,
could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements. Risks and uncertainties
that could cause actual results to differ materially from those anticipated include risks related to, among others: our ability to overcome competition from
local and overseas pharmaceutical enterprises; decrease in the availability, or increase in the cost, of plasma; failure to renew plasma collection permits
for plasma stations; failure to meet the GMP standard or other mandatory requirements for any of our facilities; failure to obtain PRC governmental
approval to increase retail prices of certain of our biopharmaceutical products; loss of key members of our senior management; and unexpected changes in
the PRC government’s regulation of the biopharmaceutical industry in China, or changes in China’s economic situation and legal environment. Additional
disclosures regarding factors that could cause our results and performance to differ from results or performance anticipated by this report are discussed in
Item 1A “Risk Factors.”
Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports
attempt to advise interested parties of the risks and factors that may affect our business, prospects, financial condition and results of operations. The
forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide
updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.
Use of Terms
Except as otherwise indicated by the context and for the purposes of this report only, references in this report to:
(cid:122) “China Biologic,” the “Company,” “we,” “us,” or “our,” are to the combined business of China Biologic Products, Inc., a Delaware corporation,
and its direct and indirect subsidiaries;
(cid:122) “Taibang Biological” are to Taibang Biological Limited (formerly Logic Express Limited), our wholly owned subsidiary and a BVI company;
(cid:122) “Taibang Holdings” are to Taibang Holdings (Hong Kong) Limited (formerly Logic Holdings (Hong Kong) Limited), our wholly-owned
subsidiary and a Hong Kong company;
(cid:122) “Taibang Biotech” are to Taibang Biotech (Shandong) Co., Ltd. (formerly Logic Management and Consulting (China) Co., Ltd.), our wholly
owned subsidiary and a PRC company;
(cid:122) “Taibang Beijing” are to Taibang (Beijing) Pharmaceutical Research Institute Co., Ltd. (formerly Logic Taibang Biotech Institute (Beijing)), our
wholly owned subsidiary and a PRC company;
(cid:122) “Dalin” are to Guiyang Dalin Biologic Technologies Co., Ltd., our wholly owned subsidiary and a PRC company;
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(cid:122) “Shandong Taibang” are to Shandong Taibang Biological Products Co. Ltd., our majority owned subsidiary and a sino-foreign joint venture
incorporated in China;
(cid:122) “Taibang Medical” are to Shandong Taibang Medical Company, our wholly owned subsidiary and a PRC company;
(cid:122) “Guizhou Taibang” are to Guizhou Taibang Biological Products Co., Ltd. (formerly Guiyang Qianfeng Biological Products Co., Ltd.), our
majority owned subsidiary and a PRC company;
(cid:122) “Huitian” are to Xi’an Huitian Blood Products Co., Ltd., our minority owned investee and a PRC company;
(cid:122) “Board” are to our board of directors;
(cid:122) “BVI” are to the British Virgin Islands;
(cid:122) “Hong Kong” are to the Hong Kong Special Administrative Region of the People’s Republic of China;
(cid:122) “PRC” and “China” are to the People’s Republic of China and for the purpose of this report only, excluding Hong Kong, the Macau Special
Administrative Region of the People’s Republic of China and Taiwan;
(cid:122) “SEC” are to the Securities and Exchange Commission;
(cid:122) “Securities Act” are to the Securities Act of 1933, as amended;
(cid:122) “Exchange Act” are to the Securities Exchange Act of 1934, as amended;
(cid:122) “Renminbi” and “RMB” are to the legal currency of China;
(cid:122) “U.S. dollars,” “dollars” and “$” are to the legal currency of the United States; and
(cid:122) “New GMP Standard” are to the Drug Good Manufacturing Practice Regulations enacted by China’s Ministry of Health on February 12, 2001 and
the Good Manufacturing Practice Implementation Guidelines published by China’s State Food and Drug Administration on February 24, 2011.
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ITEM 1. BUSINESS.
Overview of Our Business
PART I
We are a biopharmaceutical company principally engaged in the research, development, manufacturing and sales of human plasma-based pharmaceutical
products in China. We have two majority owned subsidiaries, Shandong Taibang, a company based in Tai’an, Shandong Province and Guizhou Taibang,
a company based in Guiyang, Guizhou Province. We also hold a minority equity interest in Huitian, a company based in Xi’an, Shaanxi Province. The
human plasma-based biopharmaceutical manufacturing industry in China is highly regulated by both provincial and central governments. Accordingly,
the manufacturing process of our products is strictly monitored from the initial collection of plasma from human donors to finished products.
Our principal products are human albumin and immunoglobulin products. Albumin has been used for almost 50 years to treat critically ill patients by
replacing lost fluid and maintaining adequate blood volume and pressure. Immunoglobulin is used for certain disease prevention and treatment by
enhancing specific immunity. These products use human plasma as the principal raw material. Human albumin and human immunoglobulin for
intravenous injection, or IVIG products, are our top-selling products. Sales of human albumin products represented approximately 44.6%, 54.5% and
48.0% of our total sales for each of the years ended December 31, 2012, 2011 and 2010, respectively. Sales of IVIG products represented approximately
39.0%, 32.3% and 34.3% of our total sales for each of the years ended December 31, 2012, 2011 and 2010, respectively. All of our products are
prescription medicines administered in the form of injections.
We sell our products primarily to hospitals and inoculation centers in the PRC directly or through approved distributors. We usually sign short-term
contracts with customers and therefore our largest customers have changed over the years. For the years ended December 31, 2012, 2011 and 2010, our
top 5 customers accounted for approximately 10.8%, 13.2% and 12.3%, respectively, of our total sales. As we continue to diversify our geographic
presence, customer base and product mix, we expect that our largest customers will continue to change from year to year.
We operate and manage our business as a single segment. We do not account for the results of our operations on a geographic or other basis.
Our principal executive offices are located at 18th Floor, Jialong International Building, 19 Chaoyang Park Road, Chaoyang District, Beijing 100125, the
People’s Republic of China. Our corporate telephone number is (86)10-6598-3111 and our fax number is (86)10-6598-3222. We maintain a website at
http://www.chinabiologic.com that contains information about our company, but that information is not part of this report.
Our History and Background
China Biologic Products, Inc. was originally incorporated on December 20, 1989 under the laws of the State of Texas as Shepherd Food Equipment, Inc.
On November 20, 2000, Shepherd Food Equipment, Inc. changed its corporate name to Shepherd Food Equipment, Inc. Acquisition Corp., which is the
survivor of a May 28, 2003 merger with GRC Holdings, Inc. On January 10, 2007, the Company was converted into a Delaware corporation and changed
its name to China Biologic Products, Inc.
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Taibang Biological and Shandong Taibang
On July 19, 2006, we completed a reverse merger with Taibang Biological, whereby we issued to the shareholders of Taibang Biological 18,484,715
shares of our common stock in exchange for 100% of the issued and outstanding shares of capital stock of Taibang Biological and its majority-owned
Chinese operating subsidiary, Shandong Taibang. As a result of the merger, Taibang Biological became our wholly owned subsidiary, the former
shareholders of Taibang Biological became our controlling stockholders with 96.1% of our common stock and Shandong Taibang became our 82.76%
majority-owned indirect subsidiary. Shandong Taibang is a sino-foreign joint venture company.
The remaining 17.24% equity interest of Shandong Taibang is held by the Shandong Institute of Biological Products (“Shandong Institute”), a stated-
owned entity established in 1971. Directly administrated by the Shandong Provincial health department as its research arm, Shandong Institute specializes
in the research, development and production of biological and plasma-based biopharmaceutical products. In 2002, the Shandong Institute transferred all
of its business and the licenses necessary to carry on its business and seconded certain of its employees to Shandong Taibang as the consideration for the
minority interest in Shandong Taibang.
Plasma Collection Stations of Shandong Taibang
Shandong Taibang has seven plasma collection stations in Shandong Province and two in Guangxi Province. The assets of these plasma stations are held
through separate subsidiaries of Shandong Taibang, specially formed for this purpose. The subsidiaries holding the nine plasma stations are Xia Jin
Plasma Company, Qi He Plasma Company, He Ze Plasma Company, Huan Jiang Plasma Company, Liao Cheng Plasma Company, Zhang Qiu Plasma
Company, Fang Cheng Plasma Company, Ning Yang Plasma Company and Yishui Plasma Company.
In June 2008, we received approval from the Guangxi Province Bureau of Health to set up an additional plasma station in Pu Bei County, Guangxi
Province. The plasma station will be located in the Centralized Industry Zone of Pu Bei County and when it becomes operational, it could replace our
existing Fang Cheng Plasma Collection Station with a more strategic location to increase collection volumes. However, due to disagreement among local
government branches on the approval of the plasma station, the management is uncertain whether this station will be approved or when it will be
approved. The management is still working with the local government for the approval of the Pu Bei Plasma Station.
In February 2010, Shandong Taibang acquired Yuncheng Ziguang Biotechnology Co., Ltd., or Yuncheng Ziguang, a company located in Yuncheng,
Shandong Province for RMB10,066,672 (then approximately $1,476,781). Shandong Taibang later relocated its subsidiary He Ze Plasma Company into
the nearby facility of Yuncheng Ziguang. Currently Yuncheng Ziguang has no other operations.
In January 2013, Shandong Taibang obtained the approval from relevant PRC authorities to establish an additional wholly-owned subsidiary, Cao Xian
Plasma Company, in Shandong Province for plasma collection. We expect to obtain the operating permits and commence the collection operation by the
end of June 2013.
Taibang Medical
In September 2006, Shandong Taibang established a wholly owned subsidiary, Shandong Taibang Medical Company (former known as Shandong
Missile Medical Co., Ltd.), or Taibang Medical.
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In September 2010, Taibang Biotech acquired Taibang Medical from Shandong Taibang with a cash purchase price of RMB6,440,000 (then
approximately $947,327), making it our indirect wholly-owned subsidiary.
Taibang Medical is primarily focused on the sales and marketing of our plasma products. On September 28, 2011, Taibang Medical renewed its
distribution license for biological products (including vaccine) for a license period of five years till September 27, 2016.
Hong Kong Subsidiary
In December 2008, we established Taibang Holdings, our wholly-owned Hong Kong subsidiary, as a holding company for Dalin.
Guizhou Taibang and the Dalin Acquisition
We acquired 90% interest in Dalin in April 2009 for a total consideration of RMB194,400,000 (then approximately $28,443,500). In January 2011, we
acquired the remaining 10% interest in Dalin at a consideration of RMB50,000,000 (then approximately $7,585,000). With this acquisition, Dalin became
the Company’s indirect wholly-owned subsidiary.
According to the records of the local Administration for Industry and Commerce, or AIC, Dalin is a 54% shareholder of Guizhou Taibang (formerly
Guiyang Qianfeng Biological Products Co., Ltd.). Dalin’s ownership, however, may be diluted to as low as 41.3%, pending the final judgment on an
ongoing suit regarding Guizhou Taibang’s strategic investors. For details, see our disclosure under Item 3 “Legal Proceedings” herein.
Guizhou Taibang initially owned 85% equity interest in seven plasma collection stations at the time of our acquisition, of which two plasma stations
remain in operation as of the date of this report. The remaining 15% equity interest in these plasma stations is owned by certain non-controlling
shareholders through their holdings in an intermediate company, Guiyang Qianfeng Renyuan Bio Material Co., Ltd. (“Renyuan”). In January 2013,
Guizhou Taibang reached an agreement with these non-controlling shareholders to purchase their equity interest in Renyuan, which agreement effectively
transfers the remaining 15% interest in the plasma stations to Guizhou Taibang. Guizhou Taibang completed this transaction in January 2013.
In November 2010, the Company established Qianfeng Biological Science Company (PRC), a wholly-owned subsidiary of Guizhou Taibang, in Guiyang,
Guizhou, for the purpose of research and development of placenta based products.
The New GMP Standard, which has significantly increased standards for quality control, documentation, and overall manufacturing processes, will
become applicable to all of our production facilities by the end of year 2013. We had planned to construct a new production facility for Guizhou Taibang
at a new site to meet the New GMP Standard. However, due to delays in government approval procedures with respect to the land use rights, the
construction of the new production facility may not be completed as planned. In order to minimize operation disruption, we plan to upgrade the current
production facility at Guizhou Taibang to meet the New GMP Standard. We will also work closely with local authorities to speed up the approval
procedures of the land use rights for the new manufacturing facility to ensure the production expansion in the long run.
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Minority Equity Interest in Huitian
In October 2008, we purchased a 35% interest in Huitian, a manufacturer of plasma-based biopharmaceutical products in Xi’an, Shaanxi Province.
Huitian produces about 80 tons of plasma-based products per year and has 200 tons of annual production capacity. Huitian has been approved by the
SFDA for the production of human albumin, human immunoglobulin, IVIG, and human hepatitis B immunoglobulin products.
The current plasma production facilities of Huitian are not expected to be able to meet the New GMP Standard and therefore will cease production by the
end of 2013. Huitian is considering constructing a new production facility and will take appropriate actions to minimize the impact of production
suspension to ensure a smooth transition.
Other PRC Subsidiaries
In December 2009, our Hong Kong subsidiary, Taibang Holdings, established Taibang Biotech as an intermediary holding company for Dalin and to
facilitate our Chinese operations at the holding company level.
In August 2010, Taibang Biotech formed a wholly-owned subsidiary, Taibang Beijing, which focuses on facilitating the research and development in
Shandong Taibang and Guizhou Taibang.
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Corporate Structure
The following chart reflects our current corporate organizational structure:
10
Our Industry
Plasma Collection in China
The collection of human plasma in China is generally influenced by a number of factors such as government regulations, geographical locations of plasma
collection stations, sanitary conditions of plasma stations, living standards of the donors, and cultural and religious beliefs. Until 2006, only licensed
plasma stations owned and operated by the government could collect human plasma. Furthermore, each plasma station was only allowed to supply plasma
to the one manufacturer that had signed the “Quality Responsibility” statement with them. However, in March 2006, the Ministry of Health promulgated
certain “Measures on Reforming Plasma Collection Stations,” or the Blood Collection Measures, whereby the ownership and management of PRC plasma
stations are required to be transferred to plasma-based biopharmaceutical companies and the local government is charged with regulatory supervision and
administrative control in accordance with the policies of the central government. These measures also tightened operational standard for plasma stations.
As a result, all plasma stations are now having direct supply relationship with their parent fractionation facilities. In 2011, on the 11th National People’s
Congress which contemplated the China’s 12th Five-Year Plan, Mr. Zhu Chen, China’s Minister of Health, encouraged China’s plasma industry to double
plasma supply from 2011 to 2015 to meet China’s needs. As a result, more plasma stations are expected to be built throughout China in the foreseeable
future.
We believe that these regulatory changes, including measures which limit illegal selling of blood, have improved the quality of blood and plasma by
increasing hygiene standards at plasma stations. As the operation of the plasma stations become more regulated and the donor population expands, we
believe that the overall quality of plasma supply will continue to improve, leading to a safer, more reliable finished product.
The supply of plasma for plasma-based products in the PRC has been on the decline since 2003 from the historical high of annual supply of
approximately 7,000 metric tons to approximately 3,130 metric tons in 2008 and gradually recovering to approximately 4,180 metric tons in 2010. We
believe that the decline prior to 2008 was a direct result of the government’s industry reforms of the country’s collection practices which led to the closure
of many stations that did not meet the new industry standards. In July 2011, the Guizhou Provincial Health Department issued and implemented the
revised “Plan for Guizhou Provincial Blood Collection Institutional Setting (2011-2014)” which limited the territories permitted to set up plasma stations
in Guizhou Province to four counties only. As a result, 16 plasma stations, including four plasma stations of Guizhou Taibang, were closed down in July
2011. Based on reports promulgated by the PRC Ministry of Health and taking into consideration such closure of 16 plasma stations in Guizhou Province,
we estimate that the annual supply of plasma in China amounts to approximately 4,000 metric tons, as compared to 34,000 metric tons in the global
market as of December 31, 2012. The six largest manufacturers of plasma products in China are estimated to account for approximately 50% of the
annual plasma collection. We estimate revenues from the sale of plasma products in China amounted to approximately $1.1 billion in 2012, of which
revenues from the sale of human albumin and immunoglobulin products accounted for about 88% in 2012.
Plasma-Based Products Industry in China
We produce approved human albumin and immunoglobulin products, with human plasma as the primarily raw material. Compared to the more developed
countries, China has a lower usage level of plasma products and the make-up and range of the plasma-based pharmaceutical products is significantly
different. Based on our analysis, in most developed countries, immunoglobulin products account for the majority of the plasma-based biopharmaceutical
products, while in China, human albumin products account for the vast majority of such products. We estimated that total immunoglobulin products and
human albumin products accounted for approximately 41% and 10%, respectively, of the total annual plasma-derived products in developed countries in
2012, and accounted for approximately 27% and 61%, respectively, of China’s during the same period.
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Our Growth Strategy
Our mission is to become a first-class biopharmaceutical enterprise in China. To achieve this objective, we have implemented the following strategies:
(cid:122) Securing the supply of plasma. Due to the shortage of plasma, we plan to build new plasma collection stations throughout China as well as to
expand collection territories of existing plasma stations in order to secure our plasma supply. By the end of year 2012, we have a total of eleven
plasma stations in operation, of which seven in Shandong Province, two in Guangxi Province, and two in Guizhou Province. In 2013, we
established a new plasma station in Cao Xian, Shandong Province and expect to commence collection operation by the end of June 2013. In
addition, we are working with the local government to obtain the plasma collection permit of our subsidiary located in Pu Bei, Guangxi Province.
In the meanwhile, we carried out various promotion activities to stabilize and expand our donor base for the existing plasma stations. Most of our
plasma stations recorded increases in plasma collection volume in 2012 as compared to 2011.
(cid:122) Acquisition of competitors and/or other biologic related companies. In addition to organic growth, acquisition is an important part of our
expansion strategy. Although there are about 33 approved plasma-based biopharmaceutical manufacturers in the market, we believe that there are
only 25 manufacturers in operation, and only about half of them are competitive. The top six manufacturers in China are estimated to account for
more than 50% market share as of December 31, 2012. Furthermore, we believe that the regulatory authorities are considering further industry
reform and those smaller, less competitive manufacturers will face possible revocation of their manufacturing permits by the regulators, making
them potential targets for acquisition. If we are presented with appropriate opportunities, we may acquire additional companies, products or
technologies in the biologic related sectors (including but not limited to medical, pharmaceutical and biopharmaceutical) to complement our
current business operations.
(cid:122) Further strengthening of research and development capability. We believe that, unlike other more developed countries such as the U.S., China’s
plasma-based biopharmaceutical products are at the initial stage of development. There are many other plasma-based products that are being used
in the U.S. which are not currently being manufactured in China. We intend to strengthen our research and development capability so as to expand
our product line to include plasma-based biopharmaceutical products that have higher margins and are technologically more advanced. We believe
that our increased focus on research and development will give us a competitive advantage in China over our competitors.
(cid:122) Market development and network expansion. Leveraging on the high quality and excellent safety record of our products, we intend to (i) enhance
our product penetration with our existing customers by introducing new products and (ii) expand our geographic market to include other provinces
where we envision significant market potential.
Our Products
Our principal products are our approved human albumin and immunoglobulin products. Human albumin is principally used to treat critically ill patients
by replacing lost fluid and maintaining adequate blood volume and pressure. Human immunoglobulin products are primarily used to enhance specific
immunity, a defense mechanism by which the human body generates certain immunoglobulin, or antibodies, against invasion by potentially dangerous
substances. In a situation where the human body cannot effectively react with these foreign substances, injection of our products will provide sufficient
antibodies to neutralize such substances. We are currently approved to produce 25 biopharmaceutical products in nine major categories as follows:
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Approved Products (1)(2)
Treatment/Use
albumin:
-
20%/25ml,
Human
20%/10ml,
20%/50ml,10%/100ml,
10%/20ml,
10%/50ml,
25%/50ml and 20%/50ml
(10g, from factor IV)
Shock caused by blood loss trauma or burn; raised intracranial pressure caused by hydrocephalus or trauma; oedema or
ascites caused by hepatocirrhosis and nephropathy; prevention and treatment of low-density-lipoproteinemia; and
Neonatal hyperbilirubinemia.
hepatitis
–
B
Human
immunoglobulin
100
International Units, or IU,
200IU, 400IU
Human
10%/3ml and 10%/1.5ml
immunoglobulin –
Prevention of measles and contagious hepatitis. When applied together with antibiotics, its curative effect on certain
severe bacteria or virus infection may be improved.
Original immunoglobulin deficiency, such as X chain low immunoglobulin, familiar variable immune deficiency,
immunoglobulin G secondary deficiency; secondary immunoglobulin deficiency, such as severe infection, newborn
sepsis; and auto-immune deficiency diseases, such as original thrombocytopenia purpura or kawasaki disease.
IVIG – 5%/25ml, 5%/50ml,
5%/100ml and 5%/200ml
Same as above.
Thymopolypeptides injection
– 20mg/2ml,5mg/2ml
Treatment for various original and secondary T-cell deficiency syndromes, some auto- immune deficiency diseases and
various cell immunity deficiency diseases, and assists in the treatment for tumors.
Human
rabies
immunoglobulin – 100IU,
200IU and 500IU
Mainly for passive immunity from bites or claws by rabies or other infected animals. All patients suspected of being
exposed to rabies will be treated with a combined dose of rabies vaccine and human rabies immunoglobulin.
Human
immunoglobulin – 250IU
tetanus
Mainly used for the prevention and therapy of tetanus. Particularly applied to patients who have allergic reactions to
tetanus antitoxin. (3)
Placenta
4ml/vial
polypeptide
–
Treatment for cell immunity deficiency diseases, viral infection and leucopenia caused by various reasons, and assist in
postoperative healing.
factor
Treatment for coagulopathie such as hemophilia A and increase concentration of coagulation factor VIII.
Human coagulation
VIII (“FVIII”)– 200IU
________________
Notes:
(1)
“%” represents the degree of dosage concentration for the product and each product has its own dosage requirement. For example, human albumin
20%/10ml means 2g of human albumin is contained in each 10ml packaging and human immunoglobulin 10%/3ml means 300mg of human
immunoglobulin is contained in each 3ml packaging. Under PRC law, each variation in the packaging, dosage and concentration of medical
products requires separate registration and approval by the SFDA before it may be commercially available for sale. For example, among our
human albumin products, only human albumin 20%/10ml, 20%/25ml, 20%/50ml, 10%/100ml, 10%/20ml, 10%/50ml, 25%/50ml and 20%/50ml
(10g, from factor IV) products are currently approved and are commercially available.
“IU” means International Units, or IU. IU is a unit used to measure the activity of many vitamins, hormones, enzymes, and drugs. An IU is the
amount of a substance that has a certain biological effect. For each substance there is an international agreement on the biological effect that is
expected for 1 IU. In the case of immunoglobulin, it means the number of effective units of antibodies in each package.
Tetanus antitoxin is a cheaper injection treatment for tetanus. However it is not widely used because most people are allergic to it.
(2)
(3)
We received the manufacturing approval certificate from SFDA for FVIII in June 2012, obtained the GMP certification for our production facility in
October 2012 and commenced the commercial production shortly thereafter. FVIII is widely used in the treatment of hemophilia A. In China, there is a
large hemophilia patient population whose treatment requires lifelong medication. Currently, only three domestic companies produce plasma-based FVIII
products. We are in the process of building additional manufacturing line for FVIII in order to capitalize on the market demand of coagulation products in
China.
13
Our approved human albumin, immunoglobulin and FVIII products all use human plasma as the primarily raw material. All of our approved products are
prescription medicines administered in the form of injections.
We have two product liability insurances covering Shandong Taibang’s and Guizhou Taibang’s products in the amount of RMB20 million (approximately
$3,174,000) each. Since our establishment in 2002, there has not been any product liability claims nor has any legal action been filed against us by
patients related to our products.
Raw Materials
Plasma
Plasma is the principal raw material for our biopharmaceutical products. As of December 31, 2012, we operate nine plasma stations through Shandong
Taibang and two plasma stations through Guizhou Taibang. We believe that our plasma stations give us a stable source of plasma supply and control over
product quality. Also, we believe that we have enjoyed benefits of economies of scale, including sharing certain administration and management expenses
across our several plasma stations. We currently maintain sufficient plasma supply for approximately 6 months of production.
Other Raw Materials and Packaging Materials
Other raw materials used in the production of our biopharmaceutical products include reagents and consumables such as filters and alcohol. The principal
packaging materials we use include glass bottles for our injection products as well as external packaging and printed instructions for our
biopharmaceutical products. We acquire our raw materials and packaging materials from our approved suppliers in China and overseas. We select our
suppliers based on quality, consistency, price and delivery of the raw materials which they supply.
Our five largest suppliers in the aggregate accounted for approximately 19.6%, 52.7% and 47.3% of our total procurement for the years ended December
31, 2012, 2011 and 2010, respectively. We have not experienced any shortage of supply or significant quality issue with respect to any raw materials and
packaging materials.
Plasma Collection
All of our plasma was collected through plasma stations of Shandong Taibang and Guizhou Taibang. These stations purchase, collect, examine and
deepfreeze plasma on behalf of Shandong Taibang and Guizhou Taibang and are subject to provincial health bureau’s rules, regulations and specifications
for quality, packaging and storage. Each station is only allowed to collect plasma from healthy donors within its respective districts and in accordance
with a time table set by its respective parent company, Shandong Taibang or Guizhou Taibang. The plasma must be tested negative for HBsAb, HCV and
HIV antibodies and the RPR test, contain ALT ≤25 units (ALT) and plasma protein ≥55g/l, and contain no virus pollution or visible erythrolysis, lipemia,
macroscopic red blood cell or any other irregular finding. The plasma is packaged in 25 separate 600g bags in each box and then stored at -20°C within
limited time after collection to ensure that it will congeal within 6 hours. Each bag is labeled with a computer-generated tracking code. Shandong Taibang
and Guizhou Taibang are responsible for the overall technical and quality supervision of the plasma collection, packaging and storage at each plasma
station.
14
Sales, Marketing and Distribution
Because all of our products are prescription drugs, we can only sell to hospitals and inoculation centers directly or through approved distributors. For the
years ended December 31, 2012, 2011 and 2010, direct sales to hospitals and inoculation centers represented approximately 66.4%, 62.8% and 51.1%,
respectively, of our total sales. Our five largest customers in the aggregate accounted for approximately 10.8%, 13.2% and 12.3% of our total sales for the
years ended December 31, 2012, 2011 and 2010, respectively. Our largest customer accounted for approximately 3.6%, 6.2% and 2.8% of our total sales
for the years ended December 31, 2012, 2011 and 2010, respectively.
As part of our effort to ensure the quality of our distributors, we conduct due diligence to verify whether potential distributors have obtained necessary
permits and licenses and facilities (such as cold storage) for the distribution of our biopharmaceutical products. We also assess a distributor’s financial
condition before appointing it as our distributor. Certain of our regional distributors are appointed on an exclusive basis within a specified geographic
territory. Our supply contracts set out the quantity and price of products to be supplied by us. For distributors, our contracts also contain guidelines for the
sale and distribution of our products, including restrictions on the geographical territory in which the products may be sold. We provide our distributors
with training in relation to our products and on sales techniques. We generally ask our distributors to pay in advance before we deliver products, with few
exceptions for a credit period of no longer than 30 days. For hospitals and clinics, we generally grant a credit period of no longer than 90 days, with
exceptions to certain high credit-worthy customers of up to 6 months. During 2012, we have not incurred any significant bad debts from our customers.
As of December 31, 2012, our largest geographic market is Shandong province, representing approximately 24.1%, 23.0% and 22.0% of our total sales
for the years ended December 31, 2012, 2011 and 2010, respectively. Guizhou is our second largest geographic market, representing 7.7%, 6.2% and
5.7% of our total sales for the years ended December 31, 2012, 2011 and 2010, respectively. In addition to Shandong and Guizhou provinces, we also
have sales presence in 24 other provinces and 4 municipal cities.
Our marketing and after-sales services department currently employs 118 employees.
We believe that due to the nature of our products, the key factors of our competitiveness centers on product safety, brand recognition, timely availability
and pricing. As all of our products are prescription medicines, we are not allowed to advertise our products in the mass media. For the years ended
December 31, 2012, 2011 and 2010, total sales and marketing expenses amounted to approximately $14.4 million, $14.6 million and $7.4 million,
respectively, representing approximately 7.8%, 9.5% and 5.3%, respectively, of our total sales.
Our Research and Development Efforts
Shandong Taibang and Guizhou Taibang each has its own research and development department (together, our “R&D Departments”). Our R&D
Departments are equipped with specialized equipment including advanced testing and analytical equipment, such as atomic absorptimeter, fully
automated blood coagulation analyzer, high performance liquid chromatograph, gas chromatograph, radioimmunoassay analyzer, ultraviolet-visible
spectrophotometer, and protein chromatograph, most of which were imported from the U.S., Japan, Italy, Germany and Australia. Our R&D Departments
consist of about 37 researchers, all of whom hold degrees in medicine, pharmacy, biology, biochemistry or other relevant field. Our R&D Departments
are responsible for the development and registration of our products.
15
We employ a market driven approach to initiate research and development projects, including both product and production technique development. We
believe that the key to the industry developments revolves around (i) safety of products and (ii) maximizing the yield per unit volume of plasma. Our
research and development efforts are focused around the following areas:
(cid:122) broaden the breadth and depth of our portfolio of plasma-based biopharmaceutical products;
(cid:122) enhance the yield per unit volume of plasma through new collection techniques;
(cid:122) maximize manufacturing efficiency and safety;
(cid:122) promote product safety through implementation of new technologies; and
(cid:122) refine production technology for existing products.
All the products we currently manufacture have been developed in-house. The following table outlines our research and development work in progress:
Products Currently
in Development
Human prothrombin
complex concentrate
Human hepatitis B
immunoglobulin (pH4) for
intravenous injection
Human fibrinogen
Varicella hyperimmune
globulins
Human IVIG – 10%
Treatment/Use
Used for the prophylaxis and treatment of bleeding
in patients with single or multiple congenital
deficiencies of factor II or X and in patients with
single or multiple acquired prothrombin complex
factor deficiency requiring partial or complete
reversal.
Prevention of measles and contagious hepatitis.
When applied together with antibiotics, its curative
effect on certain severe bacteria or virus infection
may be improved.
Treatment for lack of fibrinogen and increase
human fibrinogen concentration.
Used for treatment of eczema vaccinatum, vaccinia
necrosum, and ocular vaccinia.
Treatment for original immunoglobulin deficiency;
secondary immunoglobulin deficiency and auto-
immune deficiency diseases.
Status of Product
Development
Application made to the SFDA for official
production permit and product certification.
Commercial production expected in late 2013 or in
the first half of 2014.
Clinical trial commenced in 2010, commercial
production expected in 2014.
Clinical trial program under SFDA review,
commercial production expected in 2015.
Develop scope and technique for testing the new
medicine.
Develop laboratory-scale manufacturing process.
Stage*
9
8
8
3
3
* These stages refer to the stages in the regulatory approval process for our products disclosed under the heading “Regulation” in this report.
For the years ended December 31, 2012, 2011 and 2010, total research and development expenses amounted to approximately $3.0 million, $4.0 million
and $2.3 million, respectively, representing approximately 1.6%, 2.6% and 1.7%, respectively, of our total sales.
Competition
We are subject to intense competition. There are both local and overseas pharmaceutical enterprises that are engaged in the manufacture and sale of
potential substitute or similar biopharmaceutical products as our products in the PRC. These competitors may have more capital, better research and
development resources, more manufacturing and marketing capability and experience than we do. In our industry, we compete based upon product
quality, product cost, ability to produce a diverse range of products and logistical capabilities.
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We believe that we have a strong competitive position in the marketplace with our 82.76% majority-owned operating subsidiary, Shandong Taibang, 54%
majority-owned operating subsidiary, Guizhou Taibang and 35% equity interest in Huitian.
Our profitability may be adversely affected if (i) competition intensifies; (ii) competitors drastically reduce prices; or (iii) PRC government’s interference
on prices of our products; or (iv) competitors develop new products or product substitutes having comparable medicinal applications or therapeutic effects
which are more effective and /or less costly than those produced by us.
There are currently about 33 approved manufacturers of plasma-based pharmaceutical products in China. Many of these manufacturers are essentially
producing the same type of products that we produce: human albumin and various types of immunoglobulin. However, due to Ministry of Health
regulations, we believe that it is difficult for new manufacturers to enter into the industry. We believe that our major competitors in the albumin and
immunoglobulin market in China are Hua Lan Biological Engineering, Shanghai Institute of Biological Products, Shanghai RAAS Blood Products Co.,
Ltd., Beijing Tiantan Biological Products, Jiangxi Boya Bio-pharmaceutical Co., Ltd. and Sichuan Yuanda Shuyang Pharmaceutical Co..
In addition, we also face competition from imported products. The PRC became a member of the WTO in December 2001 and as a result imported
biopharmaceutical products enjoy lower tariffs. Since 2009, we have seen a substantial increase in volume of imported human albumin in China. If the
trend of importation of human albumin continues, we may face more fierce competition in domestic human albumin market.
We believe that we continued to be one of the top ranked plasma-based biopharmaceutical companies in China in 2012 based on our analysis of plasma
product approval announcement published by China National Institute for the Control of Pharmaceutical and Biological Products throughout the year. To
solidify our market position, we have also expanded our product portfolio to include FVIII in 2012. We have received the manufacturing approval
certificate from SFDA for FVIII in June 2012, obtained the GMP certification for our production facility of FVIII from SFDA in October 2012 and
commenced the commercial production of FVIII shortly thereafter.
We will continue to meet challenges and secure our market position by enhancing our existing products, introducing new products to meet customer
demand, delivering quality products to our customers in a timely manner and maintaining our established industry reputation.
Seasonality of our business
Our business, operating results and operating cash flows historically have not been subject to significant seasonal variations. This pattern may change,
however, as a result of new market opportunities or new product introductions.
Our Intellectual Property
We have 34 registered patents and 10 pending patent applications in the PRC for certain manufacturing processes and packing designs. We also have one
registered Trademark “CTBB” in the PRC.
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In addition, we have registered the following domain names: www.chinabiologic.com, www.ctbb.com.cn and www.taibanggz.com.
Regulation
This section summarizes the major PRC regulations relating to our business.
Due to the nature of our products, we are supervised by various levels of the PRC Ministry of Health and/or SFDA. Such supervision includes the safety
standards regulating our raw material supplies (mainly plasma), our manufacturing process and our finished products.
We are also subject to other PRC regulations, including those relating to taxation, foreign currency exchange and dividend distributions.
Plasma Collection
Substantially all plasma donations for commercialized plasma-based biopharmaceutical products are done through plasma stations. Plasma donation
means donors give only selected blood components — platelets, plasma, red cells, infection-fighting white cells called granulocytes, or a combination of
these, depending on donors blood type and the needs of the community. Plasma stations in China are commonly used to collect plasma. In China, current
regulations only allow an individual donor to donate blood in 14-day intervals, with a maximum quantity of 580ml (or about 600 gram) per donation.
The following are the regulatory requirements to establish a plasma station in China:
(cid:122) meet the overall plan in terms of the total number, distribution, and operational scale of plasma stations;
(cid:122) have the required professional health care technicians to operate a station;
(cid:122) have the facility and a hygienic environment to operate a station;
(cid:122) have an identification system to identify donors;
(cid:122) have the equipment to operate a station; and
(cid:122) have the equipment and quality control technicians to ensure the quality of the plasma collected.
Plasma stations were historically owned and managed by the PRC health authorities. In March 2006, the Ministry of Health promulgated the Blood
Collection Measures whereby the ownership and management of the plasma stations are required to be transferred to plasma-based biopharmaceutical
companies while the regulatory supervision and administrative control remain with the government. As a result, all plasma stations are now having direct
supply relationship with their parent fractionation facilities.
Set out below are some of the safety features at China’s plasma stations:
(cid:122) Plasma stations can only source plasma from donors within the assigned district approved by the provincial health authorities.
(cid:122) Plasma stations must perform a health check on the donor. Once the donor passes the health check, a “donor permit” is issued to the donor. The
standards of the health check are established by the health authorities at the State Council level.
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(cid:122) The designing and printing of the “donor permit” is administrated by the provincial health authorities, autonomous region or municipality
government, as the case maybe. The “donor permit” cannot be altered, copied or assigned.
(cid:122) Before donors can donate plasma, the station must verify their identities and the validity of their “donor permits.” The donors must pass the
verification procedures before they are given a health check and blood test. For those donors who have passed the verification, health check and
blood test and whose plasma were donated according to prescribed procedures, the station will set up a record.
(cid:122) All plasma stations are subject to the regulations on the prevention of communicable diseases. They must strictly adhere to the sanitary
requirements and reporting procedures in the event of an epidemic situation.
The operation of plasma collection stations is subject to stringent regulations by the PRC government. We estimated that there are approximately 150
plasma stations in operation in China as of December 31, 2012.
Importation of Blood Products
According to current Chinese regulations, the following blood products are banned from importation into China:
(cid:122) Plasma – frozen, liquid and freeze-dried human plasma;
(cid:122) Immunoglobulin – human normal immunoglobulin, specific immunoglobulin, human anti-tetanus immunoglobulin, human anti-hemophilia
globulin, human anti-HBs immunoglobulin, human anti- D(Rho) immunoglobulin and immunoglobulin for intravenous administration;
(cid:122) Factor VIII – cryoprecipitated Factor VIII and Factor VIII concentrate (only Bayer is allowed, under a special arrangement with PRC government,
to import this product into PRC, commencing November 2007);
(cid:122) Factor IX concentrate;
(cid:122) Human fibrinogen;
(cid:122) Platelet concentrate;
(cid:122) Human prothrombin complex; and
(cid:122) Whole blood or blood components.
Production of Plasma-based Products
The manufacture and sale of plasma-based biopharmaceutical products are subject to stringent regulations by the PRC government. Under PRC law, each
variation in the packaging, dosage and concentration of medical products requires separate registration and approval by the SFDA before it may be
commercially available for sale. For example, among our human albumin products, only human albumin 20%/10ml, 20%/25ml, 20%/50ml, 10%/100ml,
10%/20ml, 10%/50ml, 25%/50ml and 20%/50ml (10g, from factor IV) products are currently approved and are commercially available. All references, in
this report, to our manufacture and sale of human albumin relate to our approved human albumin products.
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The table below shows the PRC approval process for the manufacture and sale of new medicines:
Stage (Estimated Time
Period)
1
Planning stage (1 month)
2
Feasibility study and assumption
clarification (2 months)
3
4
5
Determine the scope and develop
technique for testing the new
medicine (6 months)
Preparation of a virus inactivation
report and submission to the
National Institute for the Control of
Pharmaceutical and Biological
Products, or NICPBP, for
preliminary review (4-6 months)
R&D test product information
submitted to the SFDA for
preliminary assessment (4-6
months)
6
Formal application to the NICPBP
for test of
virus inactivation and for
CDE certification of
Clinical Trial (6-7 months)
Activities
Prior to the development of potential new products, our Research & Development department will
engage in a comprehensive review of existing medical literature, patent status and market information,
including expected product demand and competition, in order to determine the feasibility of development
and production of a new product offering. Typically taking about 1 month to complete, this stage
precedes development efforts for a new product, which could take several months or even years to
complete. For products with lengthy development periods, we may be required to periodically revisit this
stage to confirm the feasibility of continued development efforts.
If we determine that development, ownership and marketing of a potential new product is possible and
potentially advantageous, we proceed with development efforts. However, potential new products are
typically developed in a laboratory or small batch setting, and in order to obtain approval for potential
new products and to market new products, we must develop a plan for testing and producing the new
product. The first step in developing such plan involves a feasibility study and assumption clarification.
This study is conducted following or during the development of a new product, and involves a review
and study of our technical, production and financial capabilities, production conditions and financial
forecasts. We also review the feasibility of preparing and conducting a clinical study, or a Clinical Trial
program, during this stage.
If following the completion of a Stage 2 study we make a determination that producing and testing a
potential new product is feasible and potentially advantageous, we will determine the scope and develop
techniques for testing the potential new product. This involves confirming the sourcing of materials
needed for production and marketing of the potential new product and development of the method of
production, dosage design and prescription selections. During this stage, we will also develop a clinical
research sample.
If following development of testing methods for the potential new product we determine that testing can
be successfully completed, we will prepare and finalize the virus inactivation method for the potential
new product. We are then required to prepare a report with details on the production method and
procedures and basis of quality evaluation for preliminary review by the NICPBP. NICPBP staff usually
makes an onsite visit during this stage to supervise testing and re- testing of the virus inactivation
process. Test samples will be sent back to the NICPBP central office in Beijing for evaluation.
Before the NICPBP can determine that our clinical research sampling and virus inactivation method and
procedures are successful, we are required to submit our method and procedures for clinical research
sampling and virus inactivation to the SFDA via the provincial FDA for preliminary assessment. We also
develop the parameters for a Clinical Trial program at this stage. Our program usually requires the
establishment of a committee comprised of our Research and Development staff whose responsibility is
to communicate with the hospitals and doctors who are invited to participate in the trial. After our
submission of information to the SFDA we will become subject to random onsite sampling by the SFDA
as they review our reports and procedures regarding testing of the potential product. The SFDA will
usually inform us of the exact sampling date and SFDA staff will randomly select certain samples during
their visit for additional testing. The SFDA will then provide us with their preliminary assessment of our
new product and our related procedures. Depending on the results of its preliminary assessment the
SFDA may recommend that we make certain amendments to our reports and the proposed Clinical Trial
programs, or even repeat our Stage 3 and Stage 4 trials and resubmit related reports. The SFDA review
process typically takes 4-6 months, but this process could take longer if we are required to amend or
repeat our trials or if we amend our reports aiming for a more favorable preliminary assessment.
Once we receive a favorable or satisfactory preliminary assessment from the SFDA, the NICPBP will
continue the process begun at Stage 4. The NICPBP will conduct tests of virus inactivation based on
defined medical literature and on our prescribed procedures and method of production. If the tests are
successful, the NICPBP will transfer the application to the CDE for review of our prescribed procedures
and method of production and the CDE may request additional information before making a
determination. If the CDE is satisfied with our procedures and method of production, it will certify the
new product for Clinical Trial.
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Stage (Estimated Time
Period)
7
SFDA review of
Clinical Trial program
for approval (1 month)
8
Clinical Trial: Phases 1 to 4
(3 years for a new drug and 2
years for a generic drug)
9
Application to the SFDA
for official production
permit and product
certification (8- 9 months)
10
Commercial Production
Activities
According to the CDE product certification provisions, we must submit our Clinical Trial program
(developed at Stages 5 and 6) to the SFDA for formal approval. The SFDA may request additional
information regarding our proposed Clinical Trial program. If the SFDA rejects our Clinical Trial
program or requires changes to any of our procedures and methods, we may be required to amend our
Clinical Trial program, which may require repeating several of the processes previously conducted. The
criteria for SFDA approval for Clinical Trial programs are based on Good Clinical Practice which is
publicly available in the PRC.
Following the approval of our Clinical Trial program by the SFDA, we will begin Clinical Trials of the
potential new product. There are four phases to the clinical trial process and any failure of the potential
new product at any of the Clinical Trial phases, could cause a significant delay in approval of the new
product, or termination of the new product launch:
Phase 1: Basic clinical pharmacology and human safety evaluation studies are conducted by the
Company. Prior to determining the effectiveness of our potential new product, we must determine that
certain pharmacological and safety standards are met by our potential new product. These standards are
set in stage 4 or according to medical literature. If the clinical trial indicates that such standards are met,
we then move on to Phase 2 of the trials. If the Phase 1 standards are not met, we may be required to
conduct further R&D on the potential new product, alter the product formulation and amend the Clinical
Trial program, which could require us to repeat several of the stages referenced above.
Phase 2: A preliminary exploration of the product’s therapeutic efficacy is conducted by the Company. If
we determine at this stage that the potential new product is not effective, we may conduct further R&D
on the potential new product, alter the product formulation and amend the Clinical Trial program, which
would require us to repeat several of the stages referenced above.
Phase 3: If we determine that the potential new product meets the required standards of Phases 1 and 2
above, we must then submit a report of the Clinical Trial results to the SFDA together with an
application for trial production of the product. If the SFDA rejects application for trial production or
otherwise requires a repeat of our Clinical Trials, we may be required to repeat all or a portion of our
Clinical Trial program, which may require repeating several of the processes previously conducted.
Phase 4: If we receive SFDA approval to conduct a trial production of the new product, we will then
conduct a larger test of approximately 2,000 samples. We will conduct this test while also conducting a
new drug post-marketing study.
The trial production of the potential new product will be monitored by an SFDA inspector who will also
make onsite visits and assess the results of the trial production. We will also be required to prepare and
submit to the SFDA a report on the results of the trial production by gathering statistical information
obtained during the trial period. The CDE will also conduct a final review of the trial production for the
potential new product. Upon satisfactory completion of the trial production, the CDE will inform the
SFDA. The SFDA will then issue a permit to us for official production, the issuance of which is
announced on the SFDA’s website, and copied to the NICPBP and the provincial FDA. The SFDA will
also issue the new product a Good Manufacturing Practice, or GMP, certification. The provincial FDA
will follow with the issuance of a provincial production permit for the new product. Although the
SFDA’s criteria for final approval of new products are not publicly available in the PRC, if a
manufacturer makes the adjustments to its methods and procedures recommended by the SFDA early on
in the product approval process, it is likely that the SFDA will approve the new product for production.
Following the issuance of state and provincial production permits and certifications, we may begin
production of the new product.
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New GMP Standard
All of our production facilities are required to obtain GMP certificates for their pharmaceutical production activities. In February 2011, SFDA enacted the
New GMP Standard, which has significantly increased standards for quality control, documentation, and overall manufacturing processesof blood
products, vaccines, injections and other sterile pharmaceutical products. The New GMP Standard, among others, requires us to maintain and operate a
comprehensive and effective product quality control system throughout the production process. In addition, it imposes higher standards for our production
facility. The New GMP Standard will become applicable to all of our production facilities by the end of 2013. See Item 1A “Risk Factors – Risk related to
our business – One of our production facility will suspend production for technical upgrade in order to meet the New GMP Standard, which may
materially and adversely affect our business, financial condition and result of operations.”
Pricing
Retail prices of certain pharmaceutical products are subject to various regulations. According to the “Regulations on controlling blood products”
promulgated by the State Council in 1996, regional offices of the Pricing Bureau and the Ministry of Health have the authority to regulate retail prices for
controlled plasma products. In addition, retail prices of pharmaceutical products fully or partially covered under the national insurance system are also
subject to the price ceilings set out in the National (Medical) Insurance Catalog (the “NIC”), which may be adjusted by Chinese National Development
and Reform Commission (“NDRC”) from time to time. The hospitals as participants of the national insurance program cannot sell the products to patients
at prices exceeding such retail price ceilings. The provincial governments in turn often establish a tender price ceiling for product tender offer made to
hospitals based on, amongst other things, the regional living standards, cost of production of the manufacturers and the corresponding retail price ceiling.
The ex-factory prices and the distributor’s wholesale prices cannot exceed the tender price ceiling. Five of our principal products, human albumin, IVIG,
human rabies immunoglobulin, human tetanus immunoglobulin and FVIII, are included in the NIC and are subject to tender price ceilings. Two of our
principal products, Placenta polypeptide and human hepatitis B immunoglobulin, although not included in the NIC, are also subject to tender price
ceilings in certain provinces. Our profit margin for any price-controlled product is effectively controlled by the tender price ceiling. When a tender price
ceiling puts significant pressure on the profit margin of a given product, we may appeal to the provincial governments for lifting of such tender price
ceiling.
In an announcement published in September 2012 (the “2012 Adjustment”), NDRC adjusted retail price ceilings for 95 oncology, immunology and
hematology drug products, which came into effect on October 8, 2012. Two of our approved products, IVIG and FVIII are affected by the 2012
Adjustment. The new retail price ceilings for IVIG products are lower than the current prevailing market retail prices in some of our regional markets
while those for FVIII are close to the current prevailing market retail prices. As a result, some local governments revised tender price ceilings for IVIG
products. In January 2013, NDRC further adjusted retail price ceilings for certain drug products, which came into effect on February 1, 2013 (the “2013
Adjustment”). Three of our approved products, human albumin, human rabies immunoglobulin and human tetanus immunoglobulin are affected by the
2013 Adjustments. The 2013 Adjustment slightly increased retail price ceilings for both human albumin and human tetanus immunoglobulin products and
subject human rabies immunoglobulin products to a retail price ceiling for the first time. The retail price ceiling imposed on human rabies
immunoglobulin products by the 2013 Adjustment is close to the prevailing market retail price.
22
Taxation
On March 16, 2007, the National People’s Congress of China passed the Enterprise Income Tax Law, or the EIT Law, and on November 28, 2007, the
State Council of China passed its implementing rules, which took effect on January 1, 2008. Before the implementation of the EIT Law, foreign invested
enterprises, or FIEs, established in the PRC, unless granted preferential tax treatments by the PRC government, were generally subject to an earned
income tax, or EIT, rate of 33.0%, which included a 30.0% state income tax and a 3.0% local income tax. The EIT Law and its implementing rules
impose a unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions. However, the EIT Law
gives FIEs established before March 16, 2007, or Old FIEs, a five-year grandfather period during which they can continue to enjoy their existing
preferential tax treatments. During this five-year grandfather period, Old FIEs that enjoyed tax rates lower than 25% under the original EIT Law can
gradually increase their EIT rate by 2% per year until their tax rate reaches 25%. In addition, the Old FIEs that are eligible for the “two-year exemption
and three-year half reduction” or “five-year exemption and five-year half-reduction” under the original EIT law, are allowed to continue enjoying their
preference until these holidays expire.
In addition to the changes to the tax structure, under the EIT Law, an enterprise established outside of China with “de facto management bodies” within
China is considered a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing rules define the term “de
facto management bodies” as “an establishment that exercises, in substance, overall management and control over the production, business, personnel,
accounting, etc., of a Chinese enterprise.” If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our
organization’s global income will be subject to PRC income tax of 25%. For detailed discussion of PRC tax issues related to resident enterprise status, see
Item 1A “Risk Factors – Risks Related to Doing Business in China – Under the Enterprise Income Tax Law, we may be classified as a ‘resident
enterprise’ of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.”
Foreign Currency Exchange
The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended (2008). Under
these Rules, RMB is freely convertible for current account items, such as trade and service-related foreign exchange transactions, but not for capital
account items, such as direct investment, loan or investment in securities outside China unless the prior approval of, and/or registration with, the State
Administration of Foreign Exchange of the People’s Republic of China, or SAFE, or its local counterparts (as the case may be) is obtained.
Pursuant to the Foreign Currency Administration Rules, FIEs in China may purchase foreign currency without the approval of SAFE for trade and
service-related foreign exchange transactions by providing commercial documents evidencing these transactions. They may also retain foreign exchange
(subject to a cap approved by SAFE) to satisfy foreign exchange liabilities or to pay dividends. In addition, if a foreign company acquires a company in
China, the acquired company will also become an FIE. However, the relevant PRC government authorities may limit or eliminate the ability of FIEs to
purchase and retain foreign currencies in the future. In addition, foreign exchange transactions for direct investment, loan and investment in securities
outside China are still subject to limitations and require approvals from, and/or registration with, SAFE.
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Dividend Distributions
Under applicable PRC regulations, FIEs in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC
accounting standards and regulations. In addition, a FIE in China is required to set aside at least 10% of its after-tax profit based on PRC accounting
standards each year to its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not
distributable as cash dividends. The board of directors of a FIE also has the discretion to allocate a portion of its after-tax profits to staff welfare and
bonus funds, which may not be distributed to equity owners except in the event of liquidation.
In addition, under the EIT law, the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates, which was
issued on January 29, 2008, the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation
and Prevention of Fiscal Evasion, or the Double Taxation Treaty, which became effective on December 8, 2006, and the Notice of the State
Administration of Taxation Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties, which became effective on October 27,
2009, dividends from our PRC subsidiary, Taibang Biotech, paid to us through our Hong Kong subsidiary, Taibang Holdings, may be subject to a
withholding tax at a rate of 10%, or at a rate of 5% if Taibang Holdings is considered a “beneficial owner” that is generally engaged in substantial
business activities and entitled to treaty benefits under the Double Taxation Treaty.
Our Employees
As of December 31, 2012, we employed 1,445 full-time employees, of which approximately 73 were seconded to us by the Shandong Institute.
We believe we are in material compliance with all applicable labor and safety laws and regulations in the PRC. We participate in various employee
benefit plans that are organized by municipal and provincial governments, including retirement, medical, unemployment, work injury and maternity
benefit plans for our managerial and key employees. In addition, we provide short term insurance plans for all our employees while on duty to cover work
related accidents. We believe that we maintain a satisfactory working relationship with our employees and we have not experienced any significant labor
disputes or any difficulties in recruiting staff for our operations.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, are available free
of charge through our web site as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and
Exchange Commission, at the following address: www.chinabiologic.com. The information within, or that can be accessed through, the web site is not
part of this report.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other
information included in this report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition
or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
You should read the section entitled “Special Note Regarding Forward Looking Statements” above for a discussion of what types of statements are
forward-looking statements, as well as the significance of such statements in the context of this report.
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RISKS RELATED TO OUR BUSINESS
If the PRC government bans or limits plasma-based biopharmaceutical products, our operations, revenues and profitability would be adversely
affected.
The principal raw materials of our existing and planned biopharmaceutical products is human source plasma, which, due to its unique nature, is subject to
various quality and safety control 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 have yet to be discovered, which could result in a wide spread epidemic
due to blood infusion. The primary law that regulates plasma products in China is the PRC Pharmaceutical Law, the Implementation Rules on the PRC
Pharmaceutical Law and the Regulations on the Administration of Blood Products. These rules and regulations require entities producing blood products
to 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 in
general, or otherwise limit the use of such blood product. If the PRC government bans or limits plasma-based biopharmaceutical products, our operations,
revenues and profitability would be adversely affected.
If the plasma we source is found to be contaminated, our operation, revenues and profitability would be severely and adversely affected and we may
be subject to civil and criminal liabilities.
We currently source 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 with liver disease, technical limitation and human errors in the screening test may fail to identify and
exclude from our supply the plasma from infected donors. If such contaminated plasma is not appropriately screened out, our entire plasma source for the
relevant plasma station may become contaminated. If the plasma from our collection is found to be contaminated, we could be subject to civil liability
from suits brought by consumers. Further, we may lose our registration and incur 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.
The production of plasma-based biopharmaceutical products relies on the supply of plasma of suitable quality. For the years ended December 31, 2012,
2011 and 2010, the cost of plasma used by us for production accounted for approximately 74%, 67% and 73%, respectively, of total production cost. The
supply and market prices of plasma may be adversely affected by factors such as regulatory restrictions, weather conditions or outbreak of diseases which
would impact our costs of production. We may not be able to pass on any resulting increase in costs to our customers and therefore any substantial
fluctuation in supply or market prices of plasma may adversely affect our results of operations and profitability.
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The biopharmaceutical industry in the PRC is strictly regulated and changes in such regulations may have an adverse effect on our business.
The biopharmaceutical industry in the PRC is strictly regulated by the government. The regulatory regime, such as administrative approval of medicines
and production approvals, establishes regulations and administrative rules. The PRC regulatory authorities may amend these regulations and rules and
promulgate new ones from time to time. Changes in these regulations and administrative rules could have a material and adverse impact on our business,
prospects, financial conditions and results of operation.
We may not be able to carry on our business if we lose any of the permits and licenses required by the PRC government in order to carry on our
business.
All pharmaceutical manufacturing and distribution enterprises in the PRC are required to obtain from various PRC governmental authorities certain
permits and licenses, including, in the case of manufacturing enterprises, pharmaceutical manufacturing permit and GMP certificate and, in the case of
distribution enterprises, pharmaceutical distribution permit.
We have obtained permits and licenses and the GMP certificates, required for the manufacturing and sales of our pharmaceutical products. Our permits
and licenses are subject to periodic renewal and/or reassessment by the relevant PRC governmental authorities, and the standards of compliance required
in relation thereto may from time to time be subject to changes. We intend to apply for the renewal of such permits and licenses when required by
applicable laws and regulations. However, there is no guarantee that we may renew such permits and licenses in a timely manner, or at all. If this happens,
our business, prospects, financial conditions and results of operation 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 or profitability.
One of our production facilities will suspend production for technical upgrade in order to meet the New GMP Standard, which may materially and
adversely affect our business, financial condition and result of operations.
All of our production facilities are required to obtain GMP certificates for their pharmaceutical production activities. In February 2011, SFDA enacted the
New GMP Standard, which has significantly increased standards for quality control, documentation, and overall manufacturing processes. The New GMP
Standard will become applicable to all of our production facilities by the end of 2013. In order for us to meet the New GMP Standard, we would need to
upgrade some of our production facilities and/or construct new production facilities, which require substantial management effort and substantial capital
expenditure. In addition, we expect our on-going compliance cost to increase under the New GMP Standard as compared to the current GMP standard. As
a result, our business and financial condition may be materially and adversely affected.
In order to meet the New GMP Standard, we had planned to construct a new production facility for Guizhou Taibang at a new site. However, due to
delays in government approval procedures with respect to the land use right for such site, we may not be able to complete the construction of the new
production facility as planned. In order to mitigate the operation disruption at Guizhou Taibang, we plan to upgrade its existing production facility to meet
the New GMP Standard. Such upgrade is expected to commence in June or July 2013 and complete in six to nine months. Guizhou Taibang’s production
will be suspended during this process. As a result, we expect that our total production capacity will be materially and adversely affected during 2013 and
2014.
In addition, we do not expect the current production facility of Huitian would be able to meet the New GMP Standard and Huitian is also considering
constructing a new production facility for this purpose. The suspension of Huitian’s production at its existing facility by the end of 2013 may have a
negative effect on its business operation and profitability, which may in turn affect our income derived from our minority investment in Huitian and
materially and adversely affect our business, financial condition and results of operations.
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Further, there is no guarantee that all of our production facilities, including the planned new facilities, can meet the New GMP Standard. If any of our
production facilities fails to meet the New GMP Standard, we may be subject to fine or other penalties and/or may be forced to cease production at such
facility. In such an instance, our business, results of operations and financial condition could be materially and adversely affected.
We do not have discretion to increase our ex-factory price of our price-controlled products.
Retail prices of certain pharmaceutical products are subject to various regulations. According to the “Regulations on controlling blood products”
promulgated by the State Council in 1996, regional offices of the Pricing Bureau and the Ministry of Health have the authority to regulate retail prices for
controlled plasma products. In addition, retail prices of pharmaceutical products fully or partially covered under the national insurance system are also
subject to the price ceilings set out in the National (Medical) Insurance Catalog (the “NIC”), which may be adjusted by Chinese National Development
and Reform Commission ("NDRC") from time to time. The hospitals as participants of the national insurance program cannot sell the products to patients
at prices exceeding such retail price ceilings. The provincial governments in turn often establish a tender price ceiling for product tender offer made to
hospitals based on, amongst other things, the regional living standards, cost of production of the manufacturers and the corresponding retail price ceiling.
The ex-factory prices and the distributor’s wholesale prices cannot exceed the tender price ceiling. Five of our principal products, including human
albumin, IVIG, human rabies immunoglobulin, human tetanus immunoglobulin and FVIII, are included in the NIC and are also subject to tender price
ceilings. Two of our principal products, placenta polypeptide and human hepatitis B immunoglobulin, although not included in the NIC, are also subject
to tender price ceilings in certain provinces.
In an announcement published in September 2012 (the “2012 Adjustment”), NDRC adjusted retail price ceilings for 95 oncology, immunology and
hematology drug products, which came into effect on October 8, 2012. Two of our approved products, IVIG and FVIII are affected by the 2012
Adjustment. The new retail price ceilings for IVIG products are lower than the current prevailing market retail prices in some of our regional markets
while those for FVIII are close to the current prevailing market retail prices. As a result, some local governments revised tender price ceilings for IVIG
products.
In January 2013, NDRC further adjusted retail price ceilings for certain drug products, which came into effect on February 1, 2013 (the “2013
Adjustment”). Three of our approved products, Human Albumin, human rabies immunoglobulin and human tetanus immunoglobulin are affected by the
2013 Adjustments. The 2013 Adjustment slightly increased retail price ceilings for both human albumin and human tetanus immunoglobulin products and
subject human rabies immunoglobulin products to a retail price ceiling for the first time. The retail price ceiling imposed on human rabies
immunoglobulin products by the 2013 Adjustment is close to the prevailing market retail price.
We do not have discretion to increase our ex-factory price of the price-controlled products above the relevant controlled tender price ceiling. Although we
may appeal to the local governments for favorable pricing policy support in lifting the tender price ceiling, such support is only granted on a case-by-case
basis and there is no guarantee that we may be able to obtain any such support in the future when needed. Since the tender price ceiling may prevent us
from absorbing or offsetting the effect resulting from any increase in the cost of raw materials or other costs, our revenue and profitability could be
adversely affected. If the margin of any of these products becomes prohibitively low, we may be forced to stop manufacturing such product, in which case
our revenue and profitability would be further adversely affected.
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If we are unable to adequately monitor our plasma collection stations, failure to follow proper procedure or comply with safety requirements may
subject us to sanctions by the government, civil and criminal liability, any of which would have a material adverse effect on our business.
We currently operate nine plasma collection stations through Shandong Taibang and two plasma stations through Guizhou Taibang. Huitian, our minority
owned subsidiary, operates three plasma stations in Shaanxi province. To ensure our development, we are seeking opportunities to build more plasma
stations and expect to start operating one additional plasma station through Shandong Taibang by the end of June 2013. 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 procedure requirements in plasma screening, collection, storage and tracking. If we fail to comply with any of these requirements, we may lose our
plasma collection permits or even 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. In addition, failure to comply with hygiene and procedure
requirements may cause harm to donors, including contracting disease from other donors. Any such incident may subject us to government sanctions,
civil or criminal liabilities. If this occurs, our business operation, reputation and prospects may be materially and adversely affected.
Our operations, sales, profit and cash flow will be adversely affected if our plasma-based biopharmaceutical products fail to pass inspection in a
timely manner.
Each batch of our plasma-based biopharmaceutical products requires inspection by Chinese government regulators before we can ship it to our customers.
The SFDA has a quality standard which considers, among other things, the appearance, packing capacity, thermal stability, pH value, protein content and
percentage of purity of the product. We must strictly comply with relevant rules and regulations in our whole production procedures including plasma
collection, delivery, production and packaging. For example, in order to pass inspection, our plasma must be tested negative for any blood irregularities,
including Hepatitis C, HIV and liver disease. The plasma must be packaged in 25 to 30 separate 600g bags in each box and each bag must be labeled with
a computer-generated tracking code. The plasma must be stored at -20°C as soon as possible after collection to ensure that it will congeal within 6 hours.
Government regulators usually take more than one month to inspect a batch of plasma products. The process begins when the regulator randomly selects
samples of our products and delivers them to the National Institute for the Control of Pharmaceutical and Biological Products, or the NICBPB, for testing,
and the process ends when the products are given final approval by the NICBPB. In the event that the regulators delay the approval of or reject our
products, change the requirements in such a way that we are unable to comply with those requirements, our operations, sales, profit and cash flow will be
adversely affected.
We face risks related to general domestic and global economic conditions. Disruptions in the capital and credit markets could adversely affect our
results of operations, cash flows and financial condition, or those of our customers, suppliers and creditors.
We currently generate sufficient operating cash flows, which combined with access to the credit markets, provide us with significant discretionary
funding capacity. However, any uncertainty arising out of domestic and global economic conditions, including any disruption in credit markets, may
impact our ability to manage normal relationships with our customers, suppliers and creditors and adversely impact our results of operations, cash flows
and financial condition, or those of our customers, suppliers and creditors. Disruptions in the capital and credit markets as a result of uncertainty,
changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity needed
to conduct or expand our businesses or conduct acquisitions or make other discretionary investments. Such disruptions may also adversely impact the
capital needs of our customers and suppliers, which, in turn, could adversely affect our results of operations, cash flows and financial condition.
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In addition, the demand for our products is largely affected by the general economic conditions in China as our products are still not affordable to many
patients. As China’s economy grows, we expect more Chinese people will become consumers of medical treatments and procedures, including procedures
requiring human plasma. However, any potential global economic slowdown may result in slower economic growth in China and an unfavorable
economic environment which in turn may make our products less affordable to more patients and result in an overall decreased demand for our products.
Such reductions and disruptions could have a material adverse effect on our business operations.
If we are unable to obtain additional capital or if we experience any shortage of raw materials in future years, we may be unable to proceed with our
long-term business plan and we may be forced to curtail or cease our operations or further business expansion.
We will require additional working capital to support our long-term business plan, which includes identifying suitable targets for horizontal or vertical
mergers or acquisitions, so as to enhance the overall productivity and benefit from economies of scale. Our working capital requirements and the cash
flow provided by future operating activities, if any, will vary greatly from quarter to quarter, depending on the volume of business during the period and
payment terms with our customers. We may not be able to obtain adequate levels of additional financing, whether through equity financing, debt
financing or other sources, especially during time of market downturn. To raise funds, we may need to issue new equities or bonds which could result in
additional dilution to our shareholders and investors. Additional financings could result in significant dilution to our earnings per share or the issuance of
securities with rights superior to our current outstanding securities or contain covenants that would restrict our operations and strategy. In addition, we
have granted and may in the future grant further registration rights to investors purchasing our equity or debt securities. If we are unable to raise
additional financing, we may be unable to implement our long-term business plan, develop or enhance our products and services, take advantage of future
opportunities or respond to competitive pressures on a timely basis. In addition, a lack of additional financing could force us to substantially curtail or
cease operations.
In addition, our production volume, capacity utilization and future expansion are affected by the supply of raw materials, especially plasma. 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 plan for expansion.
Our cash flow could be negatively affected as a result of our extension of relatively long payment terms to customers that we believe are credit worthy.
As is customary in our industry, we extend relatively long payment terms (up to six months) to customers that we believe are credit worthy. The dollar
amount of our accounts receivable, net of our allowance for doubtful accounts as of December 31, 2012, 2011 and 2010 was $11,206,244, $16,757,368
and $9,922,111, respectively. Almost all of our accounts receivables are due from hospitals and clinics. Although we attempt to establish appropriate
reserves for our receivables, those reserves may not prove to be adequate in view of actual levels of bad debts. The failure of our customers to pay us
timely would negatively affect our working capital, which could in turn adversely affect our cash flow.
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We rely on a Secondment Agreement with the Shandong Institute, which is expected to terminate upon the future privatization of the Shandong
Institute, for over 15% of our Shandong Taibang employees. If the Secondment Agreement is breached or terminated, it could have an adverse effect
on our operations and on our financial results.
The Shandong Institute has provided us with approximately 73 of our employees out of a total of approximately 1,445 employees, pursuant to a
secondment agreement, or Secondment Agreement, dated October 28, 2002, between Shandong Taibang and the Shandong Institute. Pursuant to the
Secondment Agreement, we are responsible for the salaries of these employees, as well as for their social benefits such as insurance. Our Secondment
Agreement with the Shandong Institute will expire on the sooner to occur of October 2032 or upon the privatization of the Shandong Institute, which was
originally expected to occur before the end of 2008. However, the completion of privatization of Shandong Institute has been delayed indefinitely due to
delay by the Shandong Ministry of Health in implementing the privatization plan. Upon expiration or termination of the Secondment Agreement, we plan
to hire the seconded employees directly. However, we cannot be sure that all of the employees will accept our employment offers at that time. 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 our Company after the privatization, if the Secondment Agreement is terminated or expires and we
are unable to hire those employees or replacement employees on time, our operations, as well as our financial results, may be materially and adversely
affected.
If the distributors on whom we rely do not purchase our products, our business and results of operations will be adversely affected.
We sell a third of our products in China through our network of about 193 distributors located in about 26 provinces and 4 municipal cities throughout
China. While we have established working relationships with many of our distributors and strictly regulate their sales and marketing activities by annual
distribution agreements, there are no restrictions in these distribution agreements preventing our distributors from also sourcing products produced by our
competitors. Our own marketing and sales staff work to develop and maintain relationships with our distributors, but there can be no assurance that we
will be able to maintain such relationships. For the years ended December 31, 2012, 2011 and 2010, sales to distributors represented approximately
33.6%, 37.2% and 48.9%, respectively, of our total revenues. If a number of our distributors cease to purchase our products and we are unable to find
suitable replacements, our business and results of operations will be materially and adversely affected.
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 Certificate of New Medicine from the PRC Ministry of Health and subsequent
procedures may take approximately three to five years. There is no assurance that our future research and development projects will be successful or that
they will be completed within the anticipated time frame or budget. Also, there is no guarantee that we will receive the necessary approvals from relevant
authorities for the production of our newly developed products. Even if such products could be successfully commercialized, there is no assurance that
they will be accepted by the market as anticipated.
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Our financial position and operations may be materially and adversely affected if our product liability insurance does not sufficiently cover our
liabilities.
Under current PRC laws, manufacturers and vendors of defective products in the PRC may incur liability for loss and injury caused by such products.
Pursuant to the General Principles of the Civil Law of the PRC, or the PRC Civil Law, which became effective in 1987, a defective product which causes
property damage or physical injury to any person may subject the manufacturer or vendor of such product to civil liability.
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 states that manufacturers are liable 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 compensation from such
third parties after paying the compensation amount to the consumer.
We maintain two product liability insurances for sales in the PRC for Shandong Taibang and Guizhou Taibang’s products in the amount of RMB20
million (approximately $3.2 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.
We are subject to intense competition and may encounter increased competition from both local and overseas pharmaceutical enterprises if the PRC
regulatory relaxes the approval process for plasma-based biopharmaceutical products or international trade restrictions. A change in our competitive
environment could adversely affect our profitability and prospects.
We are subject to intense competition. There are both local and overseas pharmaceutical enterprises that are engaged in the manufacture and sale of
potential substitute or similar biopharmaceutical products as our products in the PRC. These competitors may have more capital, better research and
development resources, more manufacturing and marketing capability and experience than we do. In addition, our continued ability to compete depends
on the development of the plasma-based biopharmaceutical manufacturing industry in China. The plasma-based biopharmaceutical manufacturing
industry in China is highly regulated by both provincial and central governments. Prior to engaging in the collection and production of plasma products,
companies such as ours are required to obtain collection permits from the central health department and production permits and certificates for each new
product formulation from the various provincial food and drug authorities. Although we believe that the regulatory requirements pose a competitive
barrier to entry into the biopharmaceutical industry, 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 profitability may be adversely affected if (i) competition intensifies; (ii) competitors
drastically reduce prices; or (iii) competitors develop new products having comparable medicinal applications or therapeutic effects which are more
effective or less costly than those produced by us.
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In addition, we also face competition from imported products. China became a member of the WTO in December 2001 and as a result imported
biopharmaceutical products enjoy lower tariffs. Since 2009, we have seen a substantial increase in volume of imported human albumin in China. If the
trend of importation of human albumin continues, we may face more fierce competition in domestic human albumin market. In addition, China becomes
more accessible to foreign biopharmaceutical manufacturers who may wish to set up production facilities in the PRC and compete directly with domestic
manufacturers. The increased supply of both domestic and foreign competitively priced biopharmaceutical products in the PRC will result in increased
competition. There is no assurance that our strategies to remain competitive can be implemented successfully as scheduled or at all. Our inability to
remain competitive may have an adverse effect on our profitability and prospects.
We depend heavily on key personnel, and turnover of key employees and senior management could harm our business.
Our success, to a certain extent, is attributable to the expertise and experience of our senior management and key research and technical personnel who
carry out key functions in our operation. If we lose the service of any of our senior management or key research or technical personnel or fail to attract
additional personnel with suitable experience and qualification, our business operations and research capability may be adversely affected.
Future acquisitions may have an adverse effect on our ability to manage our business.
Selective acquisitions form part of our strategy to further expand our business. If we are presented with appropriate opportunities, we may acquire
additional companies, products or technologies. Future acquisitions and the subsequent integration of new companies into ours would require significant
attention from our management. Potential problems encountered by each organization during mergers and acquisitions would be unique, posing additional
risks to the company. 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 assimilation of
new operations, technologies and personnel, unforeseen or hidden liabilities, the diversion of resources from our existing businesses and technologies, the
inability to generate sufficient revenue to offset the costs and expenses of acquisitions, and potential loss of, or harm to, relationships with employees,
customers and suppliers as a result of integration of new businesses.
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 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 December 31, 2012, we own 34 registered patents and have 10 pending patent applications in the PRC for certain manufacturing processes and
packaging designs. The patent application will be subject to approval from the relevant PRC authorities. We may not be able to successfully obtain the
approval of the PRC authorities for our patent applications. We also have one trademark “CTBB” registered in the PRC.
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While we are not aware of any infringement on our intellectual property and we have not been notified by any third party that we are infringing on their
intellectual property, our ability to compete successfully and to achieve future revenue growth will depend, in significant part, on our ability to protect our
proprietary technology and operate without infringing upon the intellectual property rights of others. Policing unauthorized use of proprietary technology
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 with a view to tightening up its regulation and protection of intellectual property rights,
private parties may not enjoy intellectual property rights in China to the same extent as they would in many Western countries, including the United
States, and enforcement of such laws and regulations in China have not achieved the levels reached in those countries. Both the administrative agencies
and the court system in China are not well-equipped to deal with violations or handle the nuances and complexities between compliant technological
innovation and noncompliant infringement.
We also rely on confidentiality agreements with our management and employees to protect our confidential proprietary information. However, the
protection of our intellectual properties may be compromised as a result of:
(cid:122) departure of any of our management members or employees in possession of our confidential proprietary information;
(cid:122) breach by such departing management member or employee of his or her confidentiality and non- disclosure undertaking to us;
(cid:122) infringement by others of our proprietary information and intellectual property rights; or
(cid:122) refusal by relevant regulatory authorities to approve our patent or trademark applications.
Any of these events or occurrences may have a material adverse effect on our operations.
There can be no assurance 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, there is no guarantee that we would be able to halt the unauthorized use of our intellectual
property through litigation in a timely manner.
Furthermore, there can be no assurance 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 affect on our
ability to market or sell our brands, and profitably exploit our products.
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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 the PRC. While we
have not in the past experienced any calamities which disrupted production, any disruption in the supply of utilities, in particular, electricity or power
supply, or any outbreak of fire, flood or other calamity resulting in significant damage at our facilities would severely affect our production and have a
material adverse effect on our business, financial condition and results of operations.
We maintain insurance policies covering losses with respect to damages to our properties and products. We do not have insurance coverage for
inventories of raw materials or business interruption. There is no assurance that our insurance would be sufficient to cover all of our potential losses.
If we do not maintain strong financial controls, investor confidence in us may decline and our stock price may decline as a result.
The SEC as required by Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, adopted rules requiring every public company to include a
management report on such company’s internal control over financial reporting in its annual report, which must also contain management’s assessment of
the effectiveness of the 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 the company’s internal controls.
A report of our management and attestation by our independent registered public accounting firm is included under Item 9A of this report. Our
management has concluded that our internal controls over financial reporting as of December 31, 2012 were effective. We have in the past 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 in form 10-K for fiscal year ended December 31,
2010, which were subsequently remediated in fiscal year 2011 as described under Item 9A of our annual report in form 10-K for the year ended
December 31, 2011. However, there is no guarantee that these remedies will continue to be effective. Failure to achieve and maintain an effective internal
control environment could result in us not being able to accurately report our financial results, prevent or detect fraud or provide timely and reliable
financial and other information pursuant to the reporting obligations we have as a public company, which could have a material adverse effect on our
business, financial condition and results of operations. This could reduce investors’ confidence in our reported financial information, which in turn could
result in lawsuits being filed against us by our stockholders, otherwise harm our reputation or negatively impact the trading price of our common stock.
RISKS RELATED TO DOING BUSINESS IN CHINA
Changes in China’s political or economic situation could harm us and our operating results.
Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country. 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:
(cid:122) Level of government involvement in the economy;
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(cid:122) Control of foreign exchange;
(cid:122) Methods of allocating resources;
(cid:122) International trade restrictions; and
(cid:122) International conflict.
The Chinese economy differs from the economies of most member countries of the Organization for Economic Cooperation and Development (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 Chinese economy was similar to those of the OECD member countries.
Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.
We conduct substantially all of our business through our operating subsidiaries in the PRC. Our operating subsidiaries are generally subject to laws and
regulations applicable to foreign investments in China and, in particular, laws applicable to FIEs. The PRC legal system is based on written statutes, and
prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have
significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to
evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform, and enforcement of these laws, regulations, and rules
involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in
substantial costs and diversion of resources and management attention. In addition, most of our executive officers and directors are residents of China and
not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors
to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and subsidiary.
You may have difficulty enforcing judgments against us.
Most of our assets are located outside of the United States and most of our current operations are conducted in the PRC. In addition, most of our directors
and officers are nationals and residents of countries other than the United States and substantially all the assets of these persons is located outside the
United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for
you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors.
There is also uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law has
advised us that although recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law, reorganization 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 U.S. that provide for the reciprocal recognition and enforcement of U.S. judgments. In addition,
according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide
that the judgment violates basic principles of PRC law or national sovereignty, security, or the public interest. So it is uncertain whether a PRC court
would enforce a judgment rendered by a court in the United States.
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The PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation
and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import
and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material
compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may
impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our
compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more
centrally planned economy 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 Chinese properties or joint
ventures.
Future inflation in China may inhibit our ability to conduct business in China.
In recent years, the Chinese economy experienced rapid expansion but also highly fluctuating rates of inflation. During the past ten years, the rate of
inflation in China has been as high as 5.9% and as low as -0.8% . The fluctuating rates of inflation have led to the adoption by the Chinese government,
from time to time, of various corrective measures designed to restrict the availability of credit or to regulate growth and contain inflation. High inflation
may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other actions, which could inhibit economic activity
in China, and thereby adversely affect the market for our products and consequently our profitability and operating results.
Restrictions on currency exchange may limit our ability to receive and use our sales effectively.
The majority of our sales will be settled in RMB, and any future restrictions on currency exchanges may limit our ability to use revenue generated in
RMB to fund any future business activities outside China or other payments in U.S. dollars. Although the Chinese government introduced regulations in
1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction
that FIEs may only buy, sell or remit foreign currencies after providing valid commercial documents at those banks in China authorized to conduct
foreign exchange business. In addition, conversion of RMB for capital account items, including direct 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
Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.
Fluctuations in exchange rates could adversely affect our business and the value of our securities.
The value of our common stock will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between those currencies
and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect
our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in
the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars, as well as earnings from, and the
value of, any U.S. dollar-denominated investments we make in the future.
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Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign
exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against
the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB
exchange rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any
hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited,
and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange
control regulations that restrict our ability to convert RMB into foreign currencies.
Currently, some of our raw materials and major equipment are imported. In the event that the U.S. dollars appreciate against RMB, our costs will
increase. If we cannot pass the resulting cost increases on to our customers, our profitability and operating results will suffer. In addition, if our sales to
international customers grow, we will be increasingly subject to the risk of foreign currency depreciation.
Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our
ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you and otherwise fund and conduct our business.
Substantially all of our sales are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends
and other payments to their offshore parent companies. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their
accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required
under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC GAAP to a statutory general
reserve fund until the amounts in said fund reaches 50% of their registered capital. Allocations to these statutory reserve funds can only be used for
specific purposes and are not transferable to us in the form of loans, advances, or cash dividends. Any limitations on the ability of our PRC subsidiaries to
transfer funds to us could materially limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and
otherwise fund and conduct our business.
Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC
resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC
subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.
In October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special
Purpose Companies by Residents Inside China (the “Circular 75”) which required PRC residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity financing outside of China
on the strength of domestic PRC assets originally held by those residents. Amendments to registrations made under Circular 75 are required in connection
with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in any assets
located in China to guarantee offshore obligations. Failure to comply with the requirements of Circular 75 may result in fines and other penalties under
PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the SPV’s affiliates being impeded or prevented
from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers
of funds into or out of China.
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We have asked the beneficial holders of our stock who are PRC residents as defined in Circular 75 to register with the relevant branch of SAFE, as
currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries. However, we cannot
provide any assurances that they can obtain the above SAFE registrations required by Circular 75. Moreover, because of uncertainty over how Circular 75
will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future
strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends
and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our PRC resident beneficial holders.
In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 75. We also have little
control over either our present or prospective direct or indirect stockholders or the outcome of such registration procedures. A failure by our PRC resident
beneficial holders or future PRC resident stockholders to comply with Circular 75 could subject these PRC resident beneficial holders to fines or legal
sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our
ownership structure, which could adversely affect our business and prospects.
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 (“Circular 10”), which became effective in September, 2006. 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 will require the PRC parties to make a series of applications and supplemental applications to the government agencies. In
some instances, the application process may require the presentation of economic data concerning a transaction, including appraisals of the target business
and evaluations of the acquirer, which are designed to allow the government to assess the transaction. Government approvals will have expiration dates
by which a transaction must be completed and reported to the government agencies. Compliance with 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.
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Under the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable
tax consequences to us and our non-PRC stockholders.
The EIT Law and its implementing rules became effective on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de
facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise
for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and
control over the production and operations, personnel, accounting, and properties” of the enterprise.
On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment
Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies (the “Notice”) further
interpreting the application of the EIT Law and its implementation on non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice,
an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically
incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial
or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate chops,
board and shareholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management often resident in China. A
resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10%
when paying dividends to its non-PRC shareholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise
incorporated by a Chinese natural person. Nor are detailed measures on imposition of tax from non-domestically incorporated resident enterprises are
available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.
We may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC
enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a
rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such
as interest on financing proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under
the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that
such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not
yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax
purposes. Finally, it is possible that future guidance issued with respect to the “resident enterprise” classification could result in a situation in which a
10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from
transferring our shares. 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 for the
2012 tax year and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.
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We face uncertainty from China’s Circular on Strengthening the Administration of Enterprise Income Tax on Non-Resident Enterprises’ Share
Transfer that was released in December 2009 with retroactive effect from January 1, 2008.
The Chinese State Administration of Taxation, or SAT, released a circular on December 15, 2009 that addresses the transfer of shares by nonresident
companies, generally referred to as Circular 698. Circular 698, which is effective retroactively to January 1, 2008, may have a significant impact on many
companies that use offshore holding companies to invest in China. Circular 698, which provides parties with a short period of time to comply with its
requirements, indirectly taxes foreign companies on gains derived from the indirect sale of a Chinese company. Where a foreign investor indirectly
transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country or
jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of his, her, or its residents is not taxable, the foreign investor
is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers.
Moreover, where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through an abuse of form of organization and there
are no reasonable commercial purposes such that the corporate income tax liability is avoided, the PRC tax authority will have the power to re-assess the
nature of the equity transfer in accordance with PRC’s “substance-over-form” principle and deny the existence of the offshore holding company that is
used for tax planning purposes.
The SAT released the Announcement on Several Issues concerning the Administration of Income Tax of Non-tax-resident Enterprises (“Public Notice
24”), which went into effect on April 1, 2011, to clarify several issues related to Circular 698. Under Public Notice 24, the term “effective tax” refers to
the effective tax on the gain derived from the disposition of equity interests of an overseas holding company; and the term “does not impose income tax”
refers to cases where the gain derived from disposition of the equity interests of an overseas holding company is not subject to income tax in the country
or region where the overseas holding company is a resident.
There is uncertainty as to the application of Circular 698. For example, while the term “indirectly transfer” is not defined, it is understood that the relevant
PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct link with China. Moreover,
the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the country or
jurisdiction and to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise. In addition, there are not
any formal declarations with regard to how to decide “abuse of form of organization” and “reasonable commercial purpose,” which can be utilized by us
to balance if our Company complies with the Circular 698.
As a result, we may become at risk of being taxed under Circular 698 and we may be required to expend valuable resources to comply with Circular 698
or to establish that we should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of
operations.
We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated
these laws could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act (the “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 of our Company, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage
these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees,
consultants, sales agents, or distributors of our Company may engage in conduct for which we might be held responsible. Particularly, most of the
hospitals and inoculation centers in China are state-owned entities, which 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 the 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 our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
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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 of your 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
so-called reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and
regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities
and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and,
in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese
companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder
lawsuits, SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide
scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject of any unfavorable
allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or
defend our company. This situation will be costly and time consuming and distract our management from growing our company. If such allegations are
not proven to be groundless, our company and business operations will be severely impacted and your investment in our stock could be rendered
worthless.
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory
bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China
where substantially all of our operations and business are located have conducted any due diligence on our operations or reviewed or cleared any of
our disclosure.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations
promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily in the
United States, however, substantially all of our operations are located in China. Since substantially all of our operations and business takes place in China,
it may be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosure. These
same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our
SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the
disclosure in our SEC reports and other filings are not subject to the review of the CSRC, a PRC regulator that is tasked with oversight of the capital
markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local
regulator has done any due diligence on our company and with the understanding that none of our SEC reports, other filings or any of our other public
pronouncements has been reviewed or otherwise been scrutinized by any local regulator.
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Our independent registered public accounting firm’s audit documentation related to their audit reports included in our annual report may include
audit documentation located in the Peoples’ Republic of China. The Public Company Accounting Oversight Board (“PCAOB”) currently cannot
inspect audit documentation located in China and, as such, you may be deprived of the benefits of such inspection.
Our independent registered public accounting firm issued an audit opinion in the financial statements included in our annual report filed with the U.S.
Securities and Exchange Commission, or SEC. As auditors of companies that are traded publicly in the United States and a firm registered with the
PCAOB, our auditor is required by the laws of the United States to undergo regular inspections by the PCAOB. However, the significant portion of the
audit conducted in China and the relevant 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 Chinese 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 PCAOB’s oversight of our auditors through such inspections.
The inability of the PCAOB to conduct inspections of our auditors’ work papers in China makes it more difficult to evaluate the effectiveness of our
auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may
consequently lose confidence in our reported financial information and procedures and the quality of our financial statements.
RISKS RELATED TO THE MARKET FOR OUR STOCK
Although publicly traded, the trading market in our common stock has been substantially less liquid than the average trading market for a stock
quoted on the NASDAQ Stock Market and this low trading volume may adversely affect the price of our common stock.
Our common stock is traded on the NASDAQ Global Select Market under the symbol “CBPO.” The trading market in our common stock has been
substantially less liquid than the average trading market for companies trading on the NASDAQ Stock Market. Reported average daily trading volume in
our common stock for the three months immediately prior to March 1, 2013, was approximately 40,047 shares. Limited trading volume will subject our
shares of common stock to greater price volatility and may make it difficult for you to sell your shares of common stock at a price that is attractive to you.
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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:
(cid:122) 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;
(cid:122) changes in financial estimates by us or by any securities analysts who might cover our stock;
(cid:122) speculation about our business in the press or the investment community;
(cid:122) significant developments relating to our relationships with our customers or suppliers;
(cid:122) stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the our industry;
(cid:122) customer demand for our products;
(cid:122) investor perceptions of the our industry in general and our company in particular;
(cid:122) the operating and stock performance of comparable companies;
(cid:122) general economic conditions and trends;
(cid:122) major catastrophic events;
(cid:122) announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;
(cid:122) changes in accounting standards, policies, guidance, interpretation or principles;
(cid:122) loss of external funding sources;
(cid:122) sales of our common stock, including sales by our directors, officers or significant stockholders;
(cid:122) additions or departures of key personnel; and
(cid:122) investor perception of litigation, investigation or other legal proceedings involving certain of our individual shareholders 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.
Our shareholder rights plan and Provisions in our amended and restated certificate of incorporation and bylaws or of Delaware law might
discourage, delay or prevent a change of control of our company or changes in our management and, therefore depress the trading price of the
common stock.
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 rather than to attempt a hostile takeover.
These provisions include, among others:
(cid:122) the right of our Board to issue preferred stock without stockholder approval;
(cid:122) a Board of Directors that is divided into three classes with staggered terms;
(cid:122) elimination of the right of our stockholders to act by written consent;
(cid:122) prohibiting stockholders from calling a special meeting of the stockholders;
43
(cid:122) rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings; and
(cid:122) requiring super majority stockholder vote to amend certain provisions of the amended and restated certificate of incorporation and bylaws.
In addition, Section 203 of the Delaware General Corporation Law generally limits our ability to engage in any business combination with certain persons
who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or
more of our outstanding voting stock.
On November 19, 2012, our Board adopted a stockholder rights plan, which provides, among other things, that when specified events occur, our
stockholders will be entitled to purchase from us a newly created series of preferred stock. The preferred stock purchase rights are triggered by the earlier
to occur of (i) ten 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 10% or more of our outstanding
common stock or (ii) ten business days (or a later date determined by our Board 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 the stockholder rights plan would cause substantial dilution to a person or group that attempts to acquire us on terms not approved by
our Board.
We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with
our Board and by providing our Board with more time to assess any acquisition proposal. These provisions, however, may have the effect of entrenching
our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential
inability to obtain a control premium could reduce the price of our common stock.
We do not intend to pay dividends for the foreseeable future.
For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying
any cash dividends on our common stock. Accordingly, investors must be prepared to rely on sales of their common stock after price appreciation to earn
an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock. Any determination to pay
dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial condition,
contractual restrictions, restrictions imposed by applicable law and other factors our board deems relevant.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
We have no outstanding or unresolved comments from the SEC staff.
ITEM 2. PROPERTIES.
All land in China is owned by the government. Individuals and companies are permitted to acquire land use rights for specific purposes. Industrial land
use rights are granted for a period of 50 years. This period may be renewed at the expiration of the initial and any subsequent terms. Granted land use
rights are transferable and may be used as security for borrowings and other obligations.
44
In July 2003, Shandong Taibang obtained certain land use rights of 43,663 square meters from the PRC municipal government consisting of
manufacturing facilities, warehouses and office buildings in Tai’an City, Shandong Province. Shandong Taibang is required to make payments totaling
approximately $22,035 (RMB138,848) per year to Shandong Institute, for 50 year or until the Shandong Institute completes its privatization process. We
recorded “land use rights” asset and a corresponding liability, “other payable – land use rights”, at the inception of the transaction determined using
present value of annual payments over 50 years.
In October 2007, Guizhou Taibang obtained certain land use rights of 34,556 square meters from the PRC municipal government consisting of
manufacturing facilities, warehouses and office buildings in Guiyang City, Guizhou Province.
We believe that all of our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings arising in the ordinary course of business. However, litigation is
subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. Other than the
legal proceedings set forth below, we are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect
on our business, financial condition or operating results.
Dispute among Guizhou Taibang Shareholders over Raising Additional Capital
In May 2007, a 91% majority of Guizhou Taibang’s shareholders approved a plan to raise additional capital from private strategic investors through the
issuance of an additional 20,000,000 shares of Guizhou Taibang at RMB2.80 per share. The plan required all existing Guizhou Taibang shareholders to
waive their rights of first refusal to subscribe for the additional shares. The remaining 9% minority holder of Guizhou Taibang’s shares, Guizhou Jie’an
Company, or Jie’an, did not support the plan and did not waive its right of first refusal. In May 2007, the majority shareholders caused Guizhou Taibang
to sign an Equity Purchase Agreement with certain investors, pursuant to which the investors agreed to invest an aggregate of $7,475,832 (or
RMB50,960,000) in exchange for 18,200,000 shares, or 21.4%, of Guizhou Taibang’s equity interests. At the same time, Jie’an also subscribed for
1,800,000 shares, representing its 9% share of the 20,000,000 shares being offered. The proceeds from all parties were received by Guizhou Taibang in
accordance with the agreement.
In June 2007, Jie’an brought suit in the High Court of Guizhou province, China, against Guizhou Taibang and the three other original shareholders of
Guizhou Taibang, alleging the illegality of the Equity Purchase Agreement. In its complaint, Jie’an claimed that it had a right to acquire the 18,200,000
shares offered to the strategic investors under the Equity Purchase Agreement. In September 2008, the Guizhou High Court ruled against Jie’an and
sustained the Equity Purchase Agreement. In November 2008, Jie’an appealed the Guizhou High Court judgment to the People’s Supreme Court in
Beijing. In May 2009, the People’s Supreme Court sustained the original ruling and denied the rights of first refusal of Jie’an over the 18,200,000 shares.
As a result of this dispute, the strategic investors’ equity ownership in Guizhou Taibang and the related increase in registered capital of Guizhou Taibang
have not been registered with the local Administration for Industry and Commerce, or AIC. In January 2010, the strategic investors brought suit in the
High Court of Guizhou Province against Guizhou Taibang alleging Guizhou Taibang’s failure to register their equity interest in Guizhou Taibang with the
local AIC and requesting the distribution of their share of Guizhou Taibang’s dividends declared since 2007. Dalin was also joined as a co-defendant as it
is the majority shareholder and exercises control over Guizhou Taibang’s day-to-day operations.
45
On October 14, 2010, the High Court of Guizhou ruled in favor of the Company and denied the strategic investors’ right as shareholders of Guizhou
Taibang, as well as their entitlement to the dividends. In light of the Guizhou ruling, in November 2010 the Company returned the proceeds in the amount
of $1,699,040 (or RMB11,200,000) to one of the strategic investors. In October 2010, the other strategic investors appealed to the PRC Supreme Court in
Beijing on the ruling of the High Court of Guizhou. The PRC Supreme Court overruled the decision of the High Court of Guizhou and remanded the case
to the High Court of Guizhou for retrial. On January 5, 2012, the strategic investors re-filed their case to the High Court of Guizhou requesting, in
addition to the share distribution, the distribution of dividends and interest in the amount of RMB18,349,345 (approximately $2,912,041) and
RMB2,847,000 (approximately $451,819), respectively. On December 11, 2012, the High Court of Guizhou affirmed the judgment against the strategic
investors. In January 2013, the strategic investors appealed to the PRC Supreme Court in Beijing on the ruling again. The PRC Supreme Court accepted
the case for retrial. The Company is awaiting the hearing as of the date of this report. We do not expect the strategic investors to prevail because, upon
evaluation of the Equity Purchase Agreement, we believe that the Equity Purchase Agreement is void due to certain invalid pre-conditions and the
absence of shareholder authorization of the initial investment. As of December 31, 2012, Guizhou Taibang has set aside the strategic investors’ fund
along with RMB14,729,565 (approximately $2,337,582) in accrued interests, and RMB509,600 (approximately $80,874) for the 1% penalty imposed by
the agreement for any breach in the event that Guizhou Taibang is required to return their original investment amount to the strategic investors. If
strategic investors prevail in their suit, Dalin’s interests in Guizhou Taibang may be reduced to approximately 41.3%.
During the second quarter of 2010, Jie’an requested that Guizhou Taibang register its 1.8 million shares of additional capital infusion with the local AIC,
pursuant to the Equity Purchase Agreement, and such request was approved by the majority shareholders of Guizhou Taibang in a shareholders meeting
held in the second quarter of 2010. However, the board of directors of the Company is withholding its required ratification of the shareholders’ approval
of Jie’an’s request, pending the outcome of the ongoing litigation. If the Company decides to ratify the approval, Dalin’s ownership in Guizhou Taibang
will be diluted from 54% to 52.54% and Jie’an may be entitled to receive its pro rata share of Guizhou Taibang’s profits from the prior 4.5 years.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
46
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
PART II
Market Information
Our common stock is traded on the Nasdaq Global Select Market under the symbol “CBPO.”
The following table sets forth, for the periods indicated, the high and low closing prices of our common stock. These prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual transactions.
Year Ended December 31, 2012
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Year Ended December 31, 2011
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Closing Prices(1)
High
Low
$
$
10.78 $
10.16
11.00
16.85
17.87 $
16.47
10.83
11.82
8.44
7.90
8.85
9.41
15.02
9.41
6.81
6.17
(1)
The above table sets forth the range of high and low closing prices per share of our common stock as reported by www.quotemedia.com for the
periods indicated.
Approximate Number of Holders of Our Common Stock
As of March 12, 2013, there were approximately 443 holders of record of our common stock. This number excludes the shares of our common stock
owned by stockholders holding stock under nominee security position listings.
Dividend Policy
We have never declared dividends or paid cash dividends. Any future decisions regarding dividends will be made by our board of directors. We currently
intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors has complete discretion on whether to pay dividends. Even if our board of directors decides to pay dividends,
the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition,
contractual restrictions and other factors that the board of directors may deem relevant.
47
Securities Authorized for Issuance Under Equity Compensation Plans
The following table includes the information as of December 31, 2012 for each category of our equity compensation plan:
Plan category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a) (1)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
-
2,648,609
2,648,609
-
$9.39
$9.39
-
1,940,771
1,940,771
(1)
Excludes shares of restricted stock granted pursuant to our 2008 Equity Incentive Plan. The 120,000 shares of restricted stocked granted in 2012
are issuable without the payment of any cash consideration by the grantee.
Effective May 9, 2008, our Board of Directors adopted the China Biologic Products, Inc. 2008 Equity Incentive Plan, or the 2008 Plan. The 2008 Plan
provides for grants of stock options, stock appreciation rights, performance units, restricted stock, restricted stock units and performance shares. A total of
five million shares of our common stock may be issued pursuant to the 2008 Plan. The exercise price per share for the shares to be issued pursuant to an
exercise of a stock option will be no less than the fair market value per share on the grant date, except that, in the case of an incentive stock option granted
to a person who holds more than 10% of the total combined voting power of all classes of our stock or any of our subsidiaries, the exercise price will be
no less than 110% of the fair market value per share on the grant date. As of December 31, 2012, 120,000 shares of restricted stock and option to
purchase 2,648,609 share of our common stock are outstanding. No awards may be granted under the 2008 Plan after May 9, 2018, except that any award
granted before then may extend beyond that date.
Recent Sales of Unregistered Securities
We have not sold any equity securities during the 2012 fiscal year that were not previously disclosed in a quarterly report on Form 10-Q or a current
report on Form 8-K that was filed during the 2012 fiscal year.
Purchases of Equity Securities
No repurchases of our common stock were made during 2012.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated statement of comprehensive income data for the years ended December 31, 2012, 2011 and 2010 and the selected balance sheet
data as of December 31, 2012 and 2011 are derived from our audited consolidated financial statements included elsewhere in this report. The selected
consolidated financial data for the years ended December 31, 2009 and 2008 and the selected balance sheet data as of December 31, 2010, 2009 and 2008
are derived from our audited consolidated financial statements not included in this report.
48
The following selected historical financial information should be read in conjunction with our consolidated financial statements and related notes and the
information contained in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Revenues
Income From Operations
Net Income
Total Assets
Total Current Liabilities
Total Long Term Liabilities
Total Stockholders' equity attributable to China Biologic Products,
Inc.
Total Equity
Capital Stock (excluding long term debt)
Number of Shares Issued and Outstanding
Net Income Per Share
Basic
Diluted
2012
184,813,495
74,489,160
45,222,189
311,047,150
47,719,092
5,908,894
195,469,716
257,419,164
2,663
26,629,615
1.73
1.62
$
$
$
$
$
$
$
$
$
$
$
2011
153,092,289
32,217,468
18,181,710
248,892,575
67,822,285
2,029,249
135,512,364
179,041,041
2,560
25,601,125
0.73
0.37
$
$
$
$
$
$
$
$
$
$
$
2010
139,695,417
68,568,299
31,542,883
220,921,794
71,445,819
4,431,842
99,199,796
145,044,133
2,435
24,351,125
1.34
1.30
2009
$ 118,998,155
$
60,477,367
$
2,208,126
$ 172,611,483
$
51,118,179
$
37,350,149
$
$
$
$
$
49,696,661
84,143,155
2,305
23,056,442
0.10
0.10
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2008
46,751,160
20,335,771
11,985,671
67,169,392
18,927,094
6,193,390
37,243,527
42,048,908
2,143
21,434,942
0.56
0.56
ITEM 7. 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 and the other
financial information appearing elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking
information. See “Special Note Regarding Forward Looking Statements” above for certain information concerning those forward looking statements.
Our financial statements are prepared in U.S. dollars and in accordance with United States generally accepted accounting principles.
Overview
We are a biopharmaceutical company principally engaged in the research, development, manufacturing and sales of human plasma-based pharmaceutical
products in China. We have two majority owned subsidiaries, Shandong Taibang, a company based in Tai’an, Shandong Province and Guizhou Taibang,
a company based in Guiyang, Guizhou Province. We also hold a minority equity interest in Huitian, a company based in Xi’an, Shaanxi Province. The
human plasma-based biopharmaceutical manufacturing industry in China is highly regulated by both provincial and central governments. Accordingly,
the manufacturing process of our products is strictly monitored from the initial collection of plasma from human donors to finished products.
Our principal products are human albumin and immunoglobulin products. Albumin has been used for almost 50 years to treat critically ill patients by
replacing lost fluid and maintaining adequate blood volume and pressure. Immunoglobulin is used for certain disease prevention and treatment by
enhancing specific immunity. These products use human plasma as the principal raw material. Human albumin and human immunoglobulin for
intravenous injection, or IVIG products, are our top-selling products. Sales of human albumin products represented approximately 44.6%, 54.5% and
48.0% of our total sales for each of the years ended December 31, 2012, 2011 and 2010, respectively. Sales of IVIG products represented approximately
39.0%, 32.3% and 34.3% of our total sales for each of the years ended December 31, 2012, 2011 and 2010, respectively. All of our products are
prescription medicines administered in the form of injections.
49
We sell our products primarily to hospitals and inoculation centers in the PRC directly or through approved distributors. We usually sign short-term
contracts with customers and therefore our largest customers have changed over the years. For the years ended December 31, 2012, 2011 and 2010, our
top 5 customers accounted for approximately 10.8%, 13.2% and 12.3%, respectively, of our total sales. As we continue to diversify our geographic
presence, customer base and product mix, we expect that our largest customers will continue to change from year to year.
We operate and manage our business as a single segment. We do not account for the results of our operations on a geographic or other basis.
Recent Development
In June 2012, we received the manufacturing approval certificate from SFDA for FVIII. In October 2012, we obtained the GMP certification for our
production facility of FVIII from SFDA and commenced the commercial production of FVIII shortly thereafter. FVIII is widely used in the treatment of
hemophilia A.
In an announcement published in September 2012 (the “2012 Adjustment”), NDRC adjusted retail price ceilings for 95 oncology, immunology and
hematology drug products, which came into effect on October 8, 2012. Two of our approved products, IVIG and FVIII are affected by the 2012
Adjustment. The new retail price ceilings for IVIG products are lower than the current prevailing market prices in some of our regional markets while
those for FVIII are close to the current prevailing market prices. As a result, some of local governments revised tender price ceilings for IVIG products.
We have appealed to local governments for favorable pricing policy in selective regional markets and have successfully gained support from Guizhou and
Shandong provincial governments in lifting the tender price ceilings for IVIG products.
In January 2013, NDRC further adjusted retail price ceilings for certain drug products, which came into effect on February 1, 2013 (the “2013
Adjustment”). Three of our approved products, human albumin, human rabies immunoglobulin and human tetanus immunoglobulin are affected by the
2013 Adjustment. The 2013 Adjustment slightly increased retail price ceilings for both human albumin and human tetanus immunoglobulin products and
subject human rabies immunoglobulin products to a retail price ceiling for the first time. The retail price ceiling imposed on human rabies
immunoglobulin products by the 2013 Adjustment is close to the prevailing market retail price.
In January 2013, Shandong Taibang obtained the approval from relevant PRC authorities to establish a wholly-owned subsidiary, Cao Xian Plasma
Company, to operate a plasma collection station in Shandong Province. We expect to obtain the operating permits and commence plasma collection by
the end of June 2013.
The New GMP Standard, which has significantly increased standards for quality control, documentation, and overall manufacturing processes, will
become applicable to all of our production facilities by the end of year 2013. We had planned to construct a new production facility for Guizhou Taibang
at a new site to meet the New GMP Standard. However, due to delays in government approval procedures with respect to the land use rights, the
construction of the new production facility may not be completed as planned. In order to minimize operation disruption, we plan to upgrade the current
production facility at Guizhou Taibang to meet the New GMP Standard. Such upgrade is expected to commence in June or July 2013 and complete in six
to nine months. Guizhou Taibang’s production will be suspended during this process. To mitigate the negative impact of production suspension of
Guizhou Taibang on our business operation, we have been increasing inventory level in the past few quarters, adjusted product shipment plans for 2013
and have been and will continue to increase production volume during the first half of 2013. We will also work closely with local authorities to speed up
the approval procedures of the land use rights for the new manufacturing facility to ensure the production expansion in the long run. See Item 1A “Risk
Factors – Risk related to our business – One of our production facilities will suspend production for technical upgrade in order to meet the New GMP
Standard, which may materially and adversely affect our business, financial condition and result of operations.”
50
Financial Performance Highlights
The following are some financial highlights for the fiscal year ended December 31, 2012:
(cid:122) Sales: Sales increased by $31,721,206, or 20.7%, to $184,813,495 for the year ended December 31, 2012, from $153,092,289 for the year ended
December 31, 2011.
(cid:122) Gross Profit: Gross profit increased by $18,902,869, or 17.7%, to $125,977,497 for the year ended December 31, 2012, from $107,074,628 for the
year ended December 31, 2011. As a percentage of sales, gross profit decreased by 1.7% to 68.2% for 2012 from 69.9% for 2011.
(cid:122) Income from operations: Income from operations increased by $42,271,692, or 131.2%, to $74,489,160 for the year ended December 31, 2012,
from $32,217,468 for the year ended December 31, 2011.
(cid:122) Net income attributable to Company: Net income attributable to Company increased by $27,040,479, or 148.7%, to $45,222,189 for the year
ended December 31, 2012, from $18,181,710 for the year ended December 31, 2011.
(cid:122) Fully diluted net income per share: Fully diluted net income per share was $1.62 for the year ended December 31, 2012, as compared to $0.37 for
the year ended December 31, 2011.
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. As of December 31, 2012, we operate nine plasma collection stations through Shandong Taibang and
two plasma stations through Guizhou Taibang. These plasma stations provide us with a stable source of plasma supply. Due to current market conditions,
we have generally been able to pass substantially all cost increases in recent years on to our customers.
Prices of and Demand for Our Products
The demand for our products is largely affected by the general economic conditions in China because 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.
51
Production Capacity
Our sales volume is limited by our annual production capacity. As we grow our business in the future, our ability to fulfill additional and larger orders
will depend on our ability to increase our production capacity. Our plan to expand our production capacity will depend on, inter alia, the availability of
capital to meet our needs of expansion or upgrading of production lines, and the availability of stable plasma supply.
As of December 31, 2012, the aggregate production capacity of Shandong Taibang and Guizhou Taibang was 1,100 metric tons per annum. We estimate
that the production capacity of our major competitors ranges from 300 tons to 1,000 tons per annum. Due to the upgrade of the current production facility
starting June or July 2013 as mentioned above, our production at Guizhou Taibang will be suspended for six to nine months. As a result, we expect our
total production capacity to decrease in 2013 and 2014.
Competition
We are subject to intense competition. There are both local and overseas pharmaceutical enterprises that are engaged in the manufacture and sale of
potential substitute or similar biopharmaceutical products as our products in the PRC. These competitors may have more capital, better research and
development resources, manufacturing and marketing capability and experience than we do. In our industry, we compete based upon product quality,
product cost, ability to produce a diverse range of products and logistical capabilities.
We believe that we have a strong position in the marketplace with our 82.76% majority-owned operating subsidiary, Shandong Taibang, 54% majority-
owned operating subsidiary, Guizhou Taibang, and 35% equity interest in Huitian.
Our profitability may be adversely affected if (i) competition intensifies; (ii) competitors drastically reduce prices; (iii) PRC government’s interference on
prices of our products; or (iv) competitors develop new products or product substitutes with comparable medicinal applications or therapeutic effects
which are more effective or less costly than those produced by us. Please refer to Item 1, “Business - Competition” for more information regarding this
factor.
Taxation
China Biologic is subject to United States tax at a tax rate of 34%. No provision for income taxes in the United States has been made as China Biologic
has no taxable income.
Taibang Biological was incorporated in the BVI, but is not subject to taxation in that jurisdiction.
Taibang Holdings was incorporated in Hong Kong and under the current laws of Hong Kong, are subject to a Profits Tax of 16.5% . However, no
provision for Hong Kong Profits Tax has been made as Taibang Holdings has no taxable income.
According to the PRC’s central government policy, new or high technology companies will enjoy preferential tax treatment of 15%, instead of 25% under
the EIT Law. In February 2009, Shandong Taibang was recognized by the Chinese government as a “High and New Technology Enterprise” (“HNTE”)
under the EIT law, which entitled it to the preferential income tax rate of 15% from 2008 to 2010. In 2011, Shandong Taibang renewed its HNTE
qualification, which entitled it to the preferential income tax rate of 15% from 2011 to 2013. According to CaiShui [2011] No. 58 dated July 27, 2011,
Guizhou Taibang, being a qualified enterprise located in the western region of PRC, enjoys a preferential income tax rate of 15% effective retroactively
from January 1, 2011 to December 31, 2020. See Item 1 “Business – Regulation – Taxation” for a detailed description of the EIT Law and tax regulations
applicable to our PRC subsidiaries. All other subsidiaries of the Company are subjected to the regular 25% tax rate.
52
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.
2012
Year Ended December 31
2011
2010
$
184,813,495
58,835,998
125,977,497
14,421,258
34,034,360
3,032,719
-
-
51,488,337
74,489,160
SALES
COST OF SALES
GROSS MARGIN
OPERATING EXPENSES:
Selling expenses
General and administrative expenses
Research and development expenses
Impairment loss of goodwill
Loss on abandonment and write off of long-lived
assets
Total operating expenses
INCOME FROM OPERATIONS
OTHER INCOME (EXPENSES):
Equity in income of equity method investee
2,665,881
Change in fair value of derivative liabilities
1,769,140
(1,269,850)
Interest expense
2,910,297
Interest income
570,511
Other (expenses)/income, net
6,645,979
Total other income/(expenses), net
EARNINGS BEFORE INCOME TAX EXPENSE 81,135,139
15,163,147
INCOME TAX EXPENSES
NET INCOME
65,971,992
Less: Net income attributable to non- controlling
20,749,803
interest
NET INCOME ATTRIBUTABLE TO COMPANY 45,222,189
NET INCOME PER SHARE OF COMMON
STOCK
BASIC
DILUTED
1.73
1.62
53
% of
Total
Sales
100.0
31.8
68.2
7.8
18.4
1.6
-
-
27.9
40.3
1.4
1.0
(0.7)
1.6
0.3
3.6
43.9
8.2
35.7
11.2
24.5
$
153,092,289
46,017,661
107,074,628
14,595,794
31,519,824
3,978,233
18,160,281
6,603,028
74,857,160
32,217,468
1,858,171
11,974,834
(4,670,606)
1,356,950
(453,949)
10,065,400
42,282,868
10,899,513
31,383,355
13,201,645
18,181,710
0.73
0.37
% of
Total
Sales
100.0
30.1
69.9
9.5
20.6
2.6
11.9
4.3
48.9
21.0
1.2
7.8
(3.1)
0.9
(0.3)
6.6
27.6
7.1
20.5
$
139,695,417
36,951,149
102,744,268
7,372,348
24,467,495
2,336,126
-
-
34,175,969
68,568,299
1,070,241
(3,233,288)
(2,682,482)
752,317
1,125,972
(2,967,240)
65,601,059
13,608,755
51,992,304
8.6
11.9
20,449,421
31,542,883
1.34
1.30
% of
Total
Sales
100.0
26.5
73.5
5.3
17.5
1.7
-
-
24.5
49.1
0.8
(2.3)
(1.9)
0.5
0.8
(2.1)
47.0
9.7
37.2
14.6
22.6
Comparison of Fiscal Years Ended December 31, 2012 and 2011
Sales
Our total sales increased by 20.7%, or $31,721,206, to $184,813,495 for the year ended December 31, 2012, compared to $153,092,289 for the fiscal year
ended December 31, 2011. The increase in sales during 2012 was primarily attributable to a mix of price and volume increases in certain of our plasma
based products as well as substantial increase in sales of placenta polypeptide products. In addition, foreign exchange translation accounted for 2.8% of
the sales increase.
The following table summarizes the breakdown of sales by significant types of product
Human albumin
Immunoglobulin products:
Human hepatitis B immunoglobulin
IVIG
Other immunoglobulin products
Placenta polypeptide
Others
Totals
For the Years Ended December 31,
2012
$
82,450,825
5,710,978
72,005,196
13,666,625
10,088,754
891,117
184,813,495
%
44.6
3.1
39.0
7.4
5.5
0.4
100.0
2011
$
83,433,691
7,298,062
49,482,514
9,371,007
1,935,428
1,571,587
153,092,289
%
Change in
Amount
Change
in %
54.5
(982,866)
4.8
32.3
6.1
1.3
1.0
100.0
(1,587,084)
22,522,682
4,295,618
8,153,326
(680,470)
31,721,206
(1.2)
(21.7)
45.5
45.8
421.3
(43.3)
20.7
All of our approved plasma based products recorded price increases ranging from approximately 8.9% to 30.7%, except for human hepatitis B
immunoglobulin products, which decreased by approximately 45.0% . For 2012 as compared to 2011, the average price for our approved human albumin
products, which contributed 44.6% to our total sales, increased by approximately 8.9% and, excluding the foreign exchange translation effect, their
average price in RMB term increased by approximately 6.3%; the average price for our approved IVIG products, which contributed 39.0% to our total
sales, increased by approximately 8.9%, and excluding the foreign exchange translation effect, their average price in RMB term increased by
approximately 6.4% . The general price increase of our human albumin products and immunoglobulin products other than human hepatitis B
immunoglobulin products was primarily attributable to the shortage in supply of such products in 2012 as a result of the closure of several plasma
collection stations in Guizhou in 2011. The price decrease of human hepatitis B immunoglobulin products was mainly due to the government program
sponsored by PRC Ministry of Health with respect to these products in late 2011. The sales prices of participating products in this program are generally
lower than normal retail prices for public interest purposes.
The sales volumes of our products in general depend on market demands and our production volumes. The production volumes of our IVIG and human
albumin products depend primarily on general plasma supply. The production volumes of our hyper-immune products, which include human rabies
immunoglobulin, human hepatitis B immunoglobulin and human tetanus immunoglobulin products, are subject to the availabilities of the specific
vaccinated plasma and our production capacity. The supply of vaccinated plasma in general requires several months of lead time. Each of 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.
54
Sales volume for our human albumin products decreased by 9.2% in 2012 as compared to 2011. The decrease in sales volumes of human albumin
products was primarily due to the decrease of its production volumes caused by the reduced raw material supply as a result of the closure of several
plasma collection stations in Guizhou. Sales volume for our IVIG products increased by 33.6% in 2012 as compared to 2011. The increase in sales
volumes of IVIG products was primarily due to the increased market demand in 2012 and our increased inventory level in the later part of 2011 in
anticipation of such demand increase. The market demand for IVIG products increased due to its wide utilization for the prevention and treatment of more
diseases in 2012, which is in line with the medical practice in Europe and the United States.
Sales of placenta polypeptide products increased substantially in 2012 as compared to 2011. We began manufacturing and selling placenta polypeptide
products in December 2011. Prior to December 2011, we provided processing service for Guizhou Eakan Co., Ltd. (“Eakan”), an affiliate of one of
Guizhou Taibang’s non-controlling interest holders, for placenta polypeptide products. The revenue we derived from the sales of placenta polypeptide
products is substantially higher than the processing fees we used to charge for these products.
Cost of sales & gross profit
Cost of sales
as a percentage of total sales
Gross Profit
Gross Margin
For the Years Ended December 31,
Change
$
$
2012
58,835,998 $
31.8%
125,977,497 $
68.2%
2011
46,017,661 $
30.1%
107,074,628 $
69.9%
Amount
12,818,337
18,902,869
%
27.9%
1.7%
17.7%
(1.7%)
Our total cost of sales was $58,835,998, or 31.8% of our sales, for the year ended December 31, 2012, as compared to $46,017,661, or 30.1% of our sales
for the year ended December 31, 2011. Our gross profit was $125,977,497 and $107,074,628 for the years ended December 31, 2012 and 2011,
respectively, representing gross margins of 68.2% and 69.9%, respectively. In general, our cost of sales and gross margin are impacted by the volume and
pricing of our finished products, our raw material costs, production mix and respective yields, inventory provisions, production cycles and routine
maintenance costs.
The increase in cost of sales was largely in line with the increase of sales. The increase in cost of sales as a percentage of sales and the decrease of gross
margin were mainly due to the increase in cost of plasma paid to donors, which is the largest component of our cost of sales. In an effort to increase
plasma collection volume and expand our donor base, we increased the nutrition fees paid to donors in 2012 as compared to 2011, which was in line with
the industry practice. We expected the nutrition fees paid to donors continue to increase as a result of improving living standards and the increasing trend
of urbanization in China. Consequently, future improvements on margins will need to be derived from increases in product pricing and volumes, product
mix, yields and manufacturing efficiency. Recent NDRC announcement on retail price ceiling of our products limits the opportunities for us to increase
product selling price. As such, the combination of the factors mentioned above will most likely result in lower gross margins in future periods.
55
Operating expenses
Operating expenses
as a percentage of total sales
For the Years Ended December 31,
$
2012
51,488,337 $
27.9%
2011
74,857,160 $
48.9%
Change
Amount
(23,368,823)
%
(31.2%)
(21.0%)
Our total operating expenses decreased by $23,368,823, or 31.2%, to $51,488,337 for the year ended December 31, 2012, from $74,857,160 for the year
ended December 31, 2011. We incurred an impairment loss of $24,763,309 in 2011, including both goodwill impairment and abandonment of long-lived
assets as a result of the closure of several plasma collection stations in Guizhou in August 2011. No impairment loss was recorded for the year ended
December 31, 2012. As a percentage of total sales, total expenses decreased by 21.0% to 27.9% for the year ended December 31, 2012 from 48.9% for
the year ended December 31, 2011.
Selling expenses
Selling expenses
as a percentage of total sales
For the Years Ended December 31,
$
2012
14,421,258 $
7.8%
2011
14,595,794 $
9.5%
Change
Amount
(174,536)
%
(1.2%)
(1.7%)
For the year ended December 31, 2012, our selling expenses decreased by $174,536, or 1.2%, to $14,421,258, from $14,595,794 for the year ended
December 31, 2011. As a percentage of total sales, our selling expenses for the year ended December 31, 2012 decreased by 1.7%, to 7.8%, from 9.5%
for the year ended December 31, 2011. We took initiative to further control the selling expenses for the year ended December 31, 2012. The
aforementioned factors contributed to the decrease in selling expenses as a percentage of sales for the year ended December 31, 2012.
General and administrative expenses
General and administrative expenses
as a percentage of total sales
For the Years Ended December 31,
$
2012
34,034,360
18.4%
$
2011
31,519,824 $
20.6%
Change
Amount
2,514,536
%
8.0%
(2.2%)
For the year ended December 31, 2012, our general and administrative expenses increased by $2,514,536, or 8.0%, to $34,034,360, from $31,519,824 for
the year ended December 31, 2011. General and administrative expenses as a percentage of total sales decreased by 2.2% to 18.4% for the year ended
December 31, 2012 from 20.6% for the year ended December 31, 2011. The increase in general and administrative expenses was mainly due to an
increase in expenses related to payroll and employee benefits as a result of general salary increases and an increase in legal expenses relating to the
disputes among Guizhou Taibang shareholders. The decrease in general and administrative expenses as a percentage of sales was primarily due to
improvement of cost efficiency as a result of the economies of the scale.
56
Research and development expenses
Research and development expenses
as a percentage of total sales
For the Years Ended December 31,
Change
$
2012
3,032,719
1.6%
$
2011
3,978,233 $
2.6%
Amount
(945,514)
%
(23.8%)
(1.0%)
For the years ended December 31, 2012 and 2011, our research and development expenses were $3,032,719 and $3,978,233, respectively, a decrease of
$945,514, or 23.8%. As a percentage of total sales, our research and development expenses for the years ended December 31, 2012 and 2011 were 1.6%
and 2.6%, respectively. The decrease in research and development expenses was primarily due to the completion of the R&D tests on FVIII in early 2012.
Impairment loss of goodwill
Impairment loss of goodwill
as a percentage of total sales
For the Years Ended December 31,
Change
2012
$
- $
-
2011
18,160,281 $
11.9%
Amount
(18,160,281)
%
(100.0%)
(11.9%)
Following the closure of plasma collection stations of Guizhou Taibang due to the regulatory notice, we revised our earnings guidance for the year of
2011 and experienced incremental decline in our stock price and market capitalization in the third quarter of 2011. The occurrence of these events caused
us to believe that the fair value of our reporting unit would more likely than not be below its book value. Therefore, we performed a two-step goodwill
impairment test and concluded that, for the year ended December 31, 2011, a goodwill impairment loss of $18,160,281 was recognized in our single
reporting unit since the carrying amount of the reporting unit was greater than the fair value of the reporting unit (as determined based on the quoted
market price) and the carrying amount of the reporting unit goodwill exceeded the implied fair value of that goodwill. No impairment of goodwill has
been recorded in the year ended December 31, 2012.
Loss on abandonment and write-off of long-lived assets
Loss on abandonment and write off of long-lived assets
as a percentage of total sales
For the Years Ended December 31,
Change
2012
$
$
-
-
2011
6,603,028 $
4.3%
Amount
(6,603,028)
%
(100.0%)
(4.3%)
As a result of the closure of the plasma stations of Guizhou Taibang, certain equipment, office furniture, building improvement and plasma collection
permits were abandoned or written off during the third quarter of 2011. Loss on abandonment of Guizhou Taibang’s long-lived assets of $6,603,028 was
recognized for the year ended December 31, 2011. No loss on abandonment was recorded in the year ended December 31, 2012.
57
Change in fair value of derivative liabilities
Change in fair value of derivative liabilities
as a percentage of total sales
For the Years Ended December 31,
Change
$
2012
1,769,140 $
1.0%
2011
11,974,834 $
7.8%
Amount
(10,205,694)
%
(85.2%)
(6.8%)
Our warrants issued in June 2009 are classified as derivative liabilities carried at fair value. For the year ended December 31, 2012, we recognized a gain
of $1,769,140 from the change in the fair value of derivative liabilities, as compared to a gain of $11,974,834 for the year ended December 31, 2011. The
gain from the change in the fair value of derivative liabilities in 2012 was mainly due to a decrease in the price of our common stock from $10.46 per
share as of December 31, 2011 to $9.22 per share upon the exercise of the warrants on June 6, 2012. All warrants have been exercised by the end of 2012.
Interest expense
Interest expense
as a percentage of total sales
For the Years Ended December 31,
Change
$
2012
(1,269,850) $
(0.7%)
2011
(4,670,606) $
(3.1%)
Amount
3,400,756
%
(72.8%)
2.4%
Our interest expense decreased by $3,400,756, or 72.8%, to $1,269,850 for the year ended December 31, 2012, from $4,670,606 for the year ended
December 31, 2011. The decrease in interest expense was primarily due to the decrease of the average loan balances for 2012 as compared to 2011.
Interest income
Interest income
as a percentage of total sales
For the Years Ended December 31,
Change
$
2012
2,910,297 $
1.6%
2011
1,356,950 $
0.9%
Amount
1,553,347
%
114.5%
0.7%
Our interest income increased by $1,553,347, or 114.5%, to $2,910,297 for the year ended December 31, 2012, from $1,356,950 for the year ended
December 31, 2011. The increase in interest income is primarily due to our investment in certain short-term financial products with higher interest rates as
well as the increase in our total cash deposit.
Income tax expense
Income tax expense
Effective income tax rate
For the Years Ended December 31,
$
2012
15,163,147 $
18.7%
2011
10,899,513 $
25.8%
Change
Amount
4,263,634
%
39.1%
(7.1%)
Our provision for income taxes increased by $4,263,634, or 39.1%, to $15,163,147 for the year ended December 31, 2012, from $10,899,513 for the year
ended December 31, 2011. Our effective income tax rates were 18.7% and 25.8% for the years ended December 31, 2012 and 2011, respectively. The
decrease of the effective income tax rate was mainly attributable to the effect of the non-deductible impairment loss of goodwill and loss on abandonment
and write-off of long-lived assets recorded in the year ended December 31, 2011.
58
Net income attributable to Company
Net income attributable to Company
as a percentage of total sales
For the Years Ended December 31,
$
2012
45,222,189
24.5%
$
2011
18,181,710 $
11.9%
Change
Amount
27,040,479
%
148.7%
12.6%
Our net income attributable to Company increased by $27,040,479, or 148.7%, to $45,222,189 for the year ended December 31, 2012 from $18,181,710
for the year ended December 31, 2011. Net income attributable to Company as a percentage of total sales was 24.5% and 11.9% for the years ended
December 31, 2012 and 2011, respectively, as a result of the cumulative effect of the foregoing factors.
Comparison of Fiscal Years Ended December 31, 2011 and 2010
Sales
Our total sales increased by 9.6%, or $13,396,872, to $153,092,289 for the year ended December 31, 2011, compared to $139,695,417 for the year ended
December 31, 2010. The increase in sales during 2011 was primarily attributable to a mix of price and volume increases in certain of our plasma based
products. In addition, foreign exchange translation accounted for 5.0% of the sales increase.
The following table summarizes the breakdown of sales by significant types of product
Human albumin
Immunoglobulin products:
Human hepatitis B immunoglobulin
IVIG
Other immunoglobulin products
Placenta polypeptide
Others
Totals
For the Years Ended December 31,
2011
2010
$
83,433,691
7,298,062
49,482,514
9,371,007
1,935,428
1,571,587
153,092,289
%
54.5
4.8
32.3
6.1
1.3
1.0
100.0
$
67,069,080
10,622,455
47,952,716
12,547,115
-
1,504,051
139,695,417
%
48.0
7.6
34.3
9.0
-
1.1
100.0
Change in
Amount
16,364,611
(3,324,393)
1,529,798
(3,176,108)
1,935,428
67,536
13,396,872
Change
in %
24.4
(31.3)
3.2
(25.3)
-
4.5
9.6
Most of our approved products recorded price increases ranging from approximately 1.4% to 10.6%, except for human tetanus immunoglobulin products,
which decreased by approximately 3.4% . For 2011 as compared to 2010, the average price for our approved human albumin products, which contributed
54.5% to our total sales, increased by approximately 1.4% and, excluding the foreign exchange translation effect, their average price in RMB term
decreased by approximately 3.2%; the average price for our IVIG products, which contributed 32.3% to our total sales, increased by approximately 7.2%,
and excluding the foreign exchange translation effect, their average price in RMB term increased by approximately 2.3% . The general price increase of
our immunoglobulin product was primarily attributable to the continuing shortage in supply of such products, while the average price decrease in human
albumin products in RMB term was mainly due to the continuous increase in the imported volume of this product during 2011. The price decrease in
human tetanus immunoglobulin products was primarily the result of the increasingly saturated market.
59
Sales volume for our human albumin increased by 22.7% for 2011 as compared to 2010. Sales volume for our IVIG decreased by 3.7% for 2011 as
compared to 2010. As the Hand-Foot-and-Mouth Disease, or HFMD, which outburst took place between April and August in 2010, was not as severe in
2011 as in 2010, the sales volume of IVIG decreased slightly during 2011 as compared to 2010.
Cost of sales & gross profit
Cost of sales
as a percentage of total sales
Gross Profit
Gross Margin
For the Years Ended December 31,
Change
$
$
2011
46,017,661 $
30.1%
107,074,628 $
69.9%
2010
36,951,149 $
26.5%
102,744,268 $
73.5%
Amount
9,066,512
4,330,360
%
24.5%
3.6%
4.2%
(3.6%)
Our total cost of sales was $46,017,661, or 30.1% of our sales, for the year ended December 31, 2011, as compared to $36,951,149, or 26.5% of our sales
for the year ended December 31, 2010. Our gross profit was $107,074,628 and $102,744,268 for the years ended December 31, 2011 and 2010,
respectively, representing gross margins of 69.9% and 73.5%, respectively. In general, our gross margin and cost of sales are impacted by the volume and
pricing of our finished products, our raw material costs, production mix and respective yields, inventory provisions, production cycles and routine
maintenance costs.
The increase in cost of sales was mainly in line with the sales. The increase in cost of sales as a percentage of sales and the decrease of gross margin were
mainly due to the increase in cost of plasma paid to donors, which is the largest component of our cost of sales. In an effort to increase plasma collection
volume and expand our donor base, we increased the nutrition fees paid to donors, which was in line with the industry practice.
Operating expenses
Operating expenses
as a percentage of total sales
For the Years Ended December 31,
$
2011
74,857,160 $
48.9%
2010
34,175,969 $
24.5%
Change
Amount
40,681,191
%
119.0%
24.4%
Our total operating expenses increased by $40,681,191, or 119.0%, to $74,857,160 for the year ended December 31, 2011, from $34,175,969 for the year
ended December 31, 2010. The increase was primarily attributable to a goodwill impairment loss of $18,160,281, a loss on abandonment of long-lived
assets of $6,603,028, as well as a 98.0% increase in our selling expenses and a 28.8% increase in our general and administrative expenses during 2011. As
a percentage of total sales, total expenses increased by 24.4% to 48.9% for the year ended December 31, 2011 from 24.5% for the year ended December
31, 2010. Excluding the non-cash charge for impairment of goodwill and loss on abandonment of long-lived asset, the total operating expenses was
$50,093,851, an increase of $15,917,882, or 46.6%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010.
Selling expenses
Selling expenses
as a percentage of total sales
For the Years Ended December 31,
Change
$
2011
14,595,794 $
9.5%
2010
7,372,348 $
5.3%
Amount
7,223,446
%
98.0%
4.2%
60
For the year ended December 31, 2011, our selling expenses increased to $14,595,794, from $7,372,348 for the year ended December 31, 2010, an
increase of $7,223,446, or 98.0%. As a percentage of total sales, our selling expenses for the year ended December 31, 2011 increased by 4.2%, to 9.5%,
from 5.3% for the year ended December 31, 2010. The increase in selling expenses was primarily due to our increased promotional and conference
activities as we continued our efforts in expanding our customer base into hospitals and inoculation centers throughout the PRC.
General and administrative expenses
General and administrative expenses
as a percentage of total sales
For the Years Ended December 31,
$
2011
31,519,824
20.6%
$
2010
24,467,495 $
17.5%
Change
Amount
7,052,329
%
28.8%
3.1%
For the year ended December 31, 2011, our general and administrative expenses increased to $31,519,824, from $24,467,495 for the year ended
December 31, 2010, a $7,052,329, or 28.8% increase. General and administrative expenses as a percentage of total sales increased by 3.1% to 20.6% for
the year ended December 31, 2011 from 17.5% for the year ended December 31, 2010. The increase in general and administrative expenses was mainly
due to an increase in expenses related to payroll and employee benefits, as well as an increase of approximately $2.6 million in non-cash employee stock
compensation, which was offset by the $1.0 million decrease in legal expenses. The increase in payroll was mainly due to general salary increases in the
operating subsidiaries and the addition of our new corporate offices in Beijing.
Research and development expenses
Research and development expenses
as a percentage of total sales
For the Years Ended December 31,
Change
$
2011
3,978,233
2.6%
$
2010
2,336,126 $
1.7%
Amount
1,642,107
%
70.3%
0.9%
For the years ended December 31, 2011 and 2010, our research and development expenses were $3,978,233 and $2,336,126, respectively, an increase of
$1,642,107, or 70.3%. As a percentage of total sales, our research and development expenses for the years ended December 31, 2011 and 2010 were 2.6%
and 1.7%, respectively. The increase in research and development expenses was primarily due to the increased cost of plasma used in research and the
cost in applying for the SFDA approval of our two new products.
Impairment loss of goodwill
Impairment loss of goodwill
as a percentage of total sales
For the Years Ended December 31,
Change
$
2011
18,160,281 $
11.9%
2010
- $
-
Amount
18,160,281
%
-
11.9%
61
Following the closure of plasma collection stations of Guizhou Taibang due to the regulatory notice, we revised our earnings guidance for the year of
2011 and experienced incremental decline in our stock price and market capitalization in the third quarter of 2011. The occurrence of these events caused
us to believe that the fair value of our reporting unit would more likely than not be below its book value. Therefore, we performed a two-step goodwill
impairment test and concluded that, for the year ended December 31, 2011, a goodwill impairment loss of $18,160,281 was recognized in our single
reporting unit since the carrying amount of the reporting unit was greater than the fair value of the reporting unit (as determined based on the quoted
market price) and the carrying amount of the reporting unit goodwill exceeded the implied fair value of that goodwill.
Loss on abandonment and write-off of long-lived assets
Loss on abandonment and write off of long-lived assets
as a percentage of total sales
For the Years Ended December 31,
Change
$
2011
6,603,028
4.3%
$
2010
-
-
Amount
$
6,603,028
%
-
4.3%
As a result of the closure of the plasma stations of Guizhou Taibang, certain equipment, office furniture, building improvement and plasma collection
permits were abandoned or written off during the third quarter of 2011. Loss on abandonment of Guizhou Taibang’s long-lived assets of $6,603,028 was
recognized in the year ended December 31, 2011.
Change in fair value of derivative liabilities
Change in fair value of derivative liabilities
as a percentage of total sales
For the Years Ended December 31,
Change
$
2011
11,974,834
7.8%
$
2010
(3,233,288) $
(2.3%)
Amount
15,208,122
%
(470.4%)
10.1%
The embedded derivatives (including the conversion option) in our senior secured convertible notes and warrants that were issued in June 2009 are
classified as derivative liabilities carried at fair value. For the year ended December 31, 2011, we recognized a gain of $11,974,834 from the change in the
fair value of derivative liabilities, as compared to a loss of $3,233,288 for the year ended December 31, 2010. The gain from the change in the fair value
of derivative liabilities in 2011 is mainly due to a decrease in the price of our common stock from $16.39 per share as of December 31, 2010 to $10.46
per share as of December 31, 2011. The convertible notes have been fully converted as of December 31, 2011.
Interest expense
Interest expense
as a percentage of total sales
For the Years Ended December 31,
Change
$
2011
(4,670,606) $
(3.1%)
2010
(2,682,482) $
(1.9%)
Amount
(1,988,124)
%
74.1%
(1.2%)
Our interest expense increased by $1,988,124 to $4,670,606 for the year ended December 31, 2011, from $2,682,482 for the year ended December 31,
2010. The increase in interest expense was primarily due to the effective interest charges on our convertible notes of $3,580,167 and $1,849,493,
respectively, for the years ended December 31, 2011 and 2010.
62
Interest income
Interest income
as a percentage of total sales
For the Years Ended December 31,
Change
$
2011
1,356,950 $
0.9%
2010
752,317 $
0.5%
Amount
604,633
%
80.4%
0.4%
Our interest income increased by $604,633 to $1,356,950 for the year ended December 31, 2011, from $752,317 for the year ended December 31, 2010,
which was in line with the increase of the cash balances.
Income tax expense
Income tax expense
Effective income tax rate
For the Years Ended December 31,
$
2011
10,899,513 $
25.8%
2010
13,608,755 $
20.7%
Change
Amount
(2,709,242)
%
(19.9%)
5.1%
Our provision for income taxes decreased by $2,709,242, or 19.9%, to $10,899,513 for the year ended December 31, 2011, from $13,608,755 for the year
ended December 31, 2010. Our effective income tax rates were 25.8% and 20.7% for the years ended December 31, 2011 and 2010, respectively. The
increase of the effective income tax rate was mainly attributable to the non-deductible impairment loss of goodwill and loss on abandonment and write-
off of long-lived assets.
Net income attributable to Company
Net income attributable to Company
as a percentage of total sales
For the Years Ended December 31,
$
2011
18,181,710
11.9%
$
2010
31,542,883 $
22.6%
Change
Amount
(13,361,173)
%
(42.4%)
(10.7%)
Our net income attributable to Company decreased by $13,361,173, or 42.4%, to $18,181,710 for the year ended December 31, 2011 from $31,542,883
for the year ended December 31, 2010. Net income attributable to Company as a percentage of total sales was 11.9% and 22.6% for the years ended
December 31, 2011 and 2010, respectively, as a result of the cumulative effect of the foregoing factors.
Liquidity and Capital Resources
To date, we have financed our operations primarily through cash flows from operations, augmented by short-term bank borrowings and equity
contributions by our stockholders. As of December 31, 2012, we had $129,609,317 in cash and cash equivalents, primarily consisting of demand deposits.
The following table sets forth a summary of our cash flows for the periods indicated:
63
Cash Flow
(all amounts in U.S. dollars)
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Effects of exchange rate change in cash
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Operating Activities
2012
71,097,317
(26,753,193)
(5,104,076)
957,434
40,197,482
89,411,835
129,609,317
Year Ended December 31,
2011
38,469,919
(7,127,252)
(10,076,504)
3,204,304
24,470,467
64,941,368
89,411,835
2010
38,787,226
(15,851,475)
(14,278,870)
2,440,536
11,097,417
53,843,951
64,941,368
Net cash provided by operating activities was $71,097,317 for the year ended December 31, 2012, as compared to $38,469,919 and $38,787,226 for the
years ended December 31, 2011 and 2010, respectively. For the years ended December 31, 2012, 2011 and 2010, our net income was $65,971,992,
$31,383,355 and $51,992,304, respectively.
Our net non-cash operating expense was $11,054,592, $24,883,612 and $13,416,312, respectively, for the years ended December 31, 2012, 2011 and
2010, respectively. Among the non-cash operating items for the years ended December 31, 2012, 2011 and 2010, our depreciation and amortization
expense was $8,880,738, $7,648,469 and $7,173,453, respectively, our stock compensation expense was $4,544,927, $4,869,232 and $2,341,783,
respectively, the amortization of discount on convertible notes was nil, $3,503,767 and $1,590,740, respectively, and our income from change in fair
value of derivative liabilities was $1,769,140 and $11,974,834 for the year ended December 31, 2012 and 2011, respectively, and our expense from
change in fair value of derivative liabilities was $3,233,288 for the years ended December 31, 2010. Additionally, the impairment loss for goodwill and
loss on abandonment and write-off of long-lived assets totaled $24,763,309 for the year ended December 31, 2011.
We had a net cash outflow of working capital of $5,929,267, $17,797,048 and $26,621,390 for the years ended December 31, 2012, 2011 and 2010,
respectively. Among these cash outflows, the increase in inventory for the years ended December 31, 2012, 2011 and 2010 were $3,746,651, $17,079,263
and $16,026,215, respectively. The increase in inventory was in line with the expansion of the production during this period. The decrease in accounts
receivable for the year ended December 31, 2012 was $5,689,638, which was mainly due to the fact that we took measures to speed up the collection of
the accounts receivable. The increase in accounts receivable for the years ended December 31, 2011 and 2010 were $6,126,742 and $7,820,523,
respectively. As we increased our direct sales to hospitals and inoculation centers that have longer credit terms during the years ended December 31, 2011
and 2010, we experienced a slower turn-over with our accounts receivable during these periods.
Investing Activities
Our use of cash for investing activities is primarily for the acquisition of property, plant and equipment and intangibles, and advances on non-current
assets.
Net cash used in investing activities for the year ended December 31, 2012 was $26,753,193, as compared to $7,127,252 and $15,851,475 for the years
ended December 31, 2011 and 2010. During the year ended December 31, 2012, we made a refundable payment of $13,325,580 to the local government
in connection with our bid for the land use right for a parcel of land where we plan to build the new production facility for Guizhou Taibang. In addition,
we paid $11,383,574 and $3,236,288 for acquisition of property, plant and equipment, intangible assets and land use right for Shandong Taibang and
Guizhou Taibang, respectively during the year ended December 31, 2012. During the year ended December 31, 2011, we paid $7,968,870 for acquiring
equipment for Shandong Taibang and for buildings and construction in progress at Guizhou Taibang. During the year ended December 31, 2010, we paid
$1,476,781 to acquire a subsidiary, Ziguang Bio-tech Company, the final installment of $2,599,215 for the acquisition of 90% equity in Dalin, $5,344,040
for equipment for Shandong Taibang and $6,444,110 for construction cost for Guizhou Taibang.
64
Financing Activities
Net cash used in financing activities for the year ended December 31, 2012 totaled $5,104,076, as compared to $10,076,504 and $14,278,870 for the years
ended December 31, 2011 and 2010, respectively. The net cash used in financing activities in 2012 was mainly due to a $14,286,800 repayment of short-
term bank loans and a dividend payment of $7,120,693 paid by our subsidiaries to a non-controlling shareholder, partly offset by cash provided by new
short-term loans of $11,076,100 and proceeds from the exercises of stock option and warrants totaling $5,227,317. The cash used in financing activities in
2011 was mainly attributable to the $10,489,504 dividend paid by our subsidiaries to the non-controlling interest shareholders, repayment of a non-
controlling shareholder loan of $7,635,000, repayment of short-term bank loan of $10,847,200, partly offset by short-term bank loans of $18,595,200 and
proceeds of $300,000 from stock option exercises. The cash used in financing activities in 2010 was mainly attributable to the $10,446,179 dividend paid
by our subsidiaries to a non-controlling shareholder, repayment of a non-controlling shareholder loan of $3,683,377, repayment of short-term bank loan
of $7,397,000, partly offset by cash provided by new short-term loans of $5,917,600 and proceeds from exercise of stock option and warrants totaling
$1,330,086.
Management believes that the Company has sufficient cash on hand and continuing positive cash inflow from the sale of its plasma-based products in the
PRC market, for its operations.
Obligations Under Material Contracts
The following table sets forth our material contractual obligations as of December 31, 2012:
Contractual Obligations
Short-term bank loans
Operating lease commitment
Total
Seasonality of our Sales
Payments Due by Period
Total
7,935,000 $
1,481,840
9,416,840 $
$
$
Less than
1 year
7,935,000
410,831
8,345,831
1-3 years
3-5 years
More than
5 years
$
$
- $
902,126
902,126 $
$
-
81,038
81,038 $
-
87,845
87,845
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.
65
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.
Critical Accounting Policies
The preparation of financial statements in conformity with United States generally accepted accounting principles, or U.S. GAAP, requires our
management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and
related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant
judgments and estimates in the preparation of financial statements, including the following:
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such
estimates and assumptions include the useful lives of fixed assets; the allowance for doubtful accounts; the fair value determinations of financial and
equity instruments and the valuation of share-based compensation, assets acquired and liabilities assumed in a business combination, deferred tax assets
and inventories; the recoverability of goodwill, intangible asset, land use right and property, plant and equipment; and reserves for income tax
uncertainties and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and
assumptions.
Revenue Recognition
Revenue represents the invoiced value of products sold, net of value added taxes (VAT).
Revenue is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred and the customer takes ownership and
assumes risk of loss, the sales price is fixed or determinable and collection of the relevant receivable is probable. The Company mainly sells human
albumin and human immunoglobulin to hospitals, inoculation centers and pharmaceutical distributors. For all sales, the Company requires a signed
contract or purchase order which specify pricing, quantity and product specifications. Delivery of the product occurs when customer receives the product,
which is when the risks and rewards of ownership have been transferred. Delivery is evidenced by signed customer acknowledgement. The Company’s
sales agreements do not provide the customer the right of return, unless the product is defective in which case the Company allows for an exchange of
product or return. For the periods presented, defective product returns were immaterial.
Fair Value Measurements
We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We
determine fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market.
When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and
unobservable inputs, which are categorized in one of the following levels:
66
(cid:122) Level 1 Inputs: Unadjusted quoted prices for identical assets or liabilities in active markets accessible to the entity at the measurement date.
(cid:122) Level 2 Inputs: Other than quoted prices included in Level 1, inputs that are observable for the asset or liability, either directly or indirectly, for
substantially the full term of the asset or liability.
(cid:122) Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available,
thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
The fair value measurement level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the
fair value measurement.
The fair values of the warrants that were exercised on June 6 and June 4, 2012, and outstanding as of December 31, 2011 were determined based on the
Binominal option pricing model, using the following key assumptions:
Expected dividend yield
Risk-free interest rate
Time to maturity (in years)
Expected volatility
Fair value of underlying common shares (per share)
Accounts Receivable and Allowance for Doubtful Accounts
June 6, 2012
0%
0.05%
-
47.4%
9.22
$
June 4, 2012
0%
0.04%
-
37.3%
December 31, 2011
0%
0.05%
0.43
80.0%
10.46
$
8.55 $
Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash
provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated
losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses, the customers’
financial condition, the amount of accounts receivable in dispute, the accounts receivable aging and customers’ payment patterns. The Company reviews
its allowance for doubtful accounts monthly. Past due balances are reviewed individually for collectability. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-
balance-sheet credit exposure related to its customers.
We generally ask our distributors to pay in advance before we deliver products, with few exceptions for a credit period of no longer than 30 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 that we believe are credit worthy up to 6 months. Due to recovery of bad debt that we previously provided an allowance, the decrease in
valuation allowance of bad debt was $1,904, $19,611 and $57,624, respectively, for the years ended December 31, 2012, 2011 and 2010.
67
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the weighted average method. Cost of work in progress and finished goods
comprise direct materials, direct production costs and an allocation of production overheads based on normal operating capacity. 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. For
the year ended December 31, 2011 and 2010, we wrote off $270,929 and $451,761 relating to obsolete plasma that may not qualify for production due to
the 90-day quarantine period rules implemented by SFDA.
Share-based Payment
We measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and
recognizes the cost over the period during which an employee is required to provide service in exchange for the award, which generally is the vesting
period.
The fair value of options granted for the year ended December 31, 2012, 2011 and 2010 are estimated on the respective dates of grant using the Black-
Scholes option pricing model with the following major assumptions:
Expected volatility
Expected dividends yield
Expected term (in years)
Risk-free interest rate
Fair value of underlying common stock (per share)
December 31,
2012
104.00%
0%
6.01
0.82%
$
9.61 $
For the Years Ended
December 31,
2011
December 31,
2010
134.66%
0%
6.40
1.90%
12.25
$
69.43%
0%
5.00
1.92%
15.28
The volatility of our common stock was estimated by us based on the historical volatility of our common stock. The risk free interest rate was based on
Treasury Constant Maturity Rates published by the U.S. Federal Reserve for periods applicable to the estimated term of the options. The expected
dividend yield was based on our current and expected dividend policy.
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. We recognized a loss on abandonment and write
off of long-lived assets totaling $6,603,028 for the year ended December 31, 2011 as described in Note 5 and Note 6 to our consolidated financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our operations are carried out in the PRC and we are subject to specific considerations and significant risks not typically associated with companies in
North America and Western Europe. Accordingly, our business, financial condition and results of operations may be influenced by the political, economic
and legal environments in the PRC, and by the general state of the PRC economy. Our results may be adversely affected by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation,
among other things.
68
Interest Rate Risk
We are exposed to interest rate risk primarily with respect to our short-term bank loans. Although interest rates of our short-term loans are fixed for the
terms of the loans, the terms are typically three to twelve months for short-term bank loans and interest rates are subject to change upon renewal. There
were no material changes in interest rates for short-term bank loans renewed during the year ended December 31, 2012.
A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities under which we had outstanding borrowings as of December 31,
2012 would decrease net income before provision for income taxes by approximately $79,350 for the year ended December 31, 2012. Management
monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of
funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.
Foreign Exchange Risk
While our reporting currency is the U.S. Dollar, all of our consolidated revenues and consolidated costs and majority of expenses are denominated in
RMB. All of our assets are denominated in RMB, except certain cash balances. As a result, we are exposed to foreign exchange risk as our revenues and
results of operations may be affected by fluctuations in the exchange rate between U.S. Dollars and RMB. If RMB depreciates against the U.S. Dollar, the
value of our RMB revenues, earnings and assets as expressed in our U.S. Dollar financial statements will decline. Assets and liabilities are translated at
exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates during the period. Any resulting
translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of
stockholder’s equity. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic
conditions. Since July 2005, the RMB has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly involved in the foreign
exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against
the U.S. dollar or Euro in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in RMB
exchange rate and lessen involvement in the foreign exchange market.
Account Balances
We maintain balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks
located in the United States or may exceed Hong Kong Deposit Protection Board insured limits for the banks located in Hong Kong. Balances at financial
institutions or state-owned banks within the PRC are not covered by insurance. Total cash in banks as of December 31, 2012 and December 31, 2011
amounted to $129,609,317 and $88,957,826, respectively, $76,101 and $236,373 of which are covered by insurance, respectively. We have not
experienced any losses in such accounts and we do not believe that we are exposed to any significant risks on our cash in bank accounts.
69
Inflation
Inflationary factors such as increases in the cost of our sales and overhead costs may adversely affect our operating results. Although we do not believe
that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net sales if the selling
prices of our products do not increase with these increased costs.
Market for Human Albumin and IVIG
Our two major products, human albumin and IVIG, accounted for 44.6% and 39.0% of the total sales for the year ended December 31, 2012, respectively.
If the market demands for human albumin or IVIG cannot be sustained in the future or if there is substantial price decrease in either or both products, our
operating results could be materially and adversely affected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Financial Statements
The full text of our audited consolidated financial statements as of December 31, 2012, 2011 and 2010 begins on page F-1 of this report.
Quarterly Financial Results
The following table sets forth certain unaudited financial information for each of the eight quarters ended December 31, 2012. The consolidated financial
statements for each of these quarters have been prepared on the same basis as the audited consolidated financial statements included in this annual report
and, in the opinion of management, include all adjustments necessary for the fair presentation of the results of operations for these periods. This
information should be read together with our audited consolidated financial statements and the related notes included elsewhere in this annual report.
(All amounts in thousands of U.S. dollars)
Dec 31,
2012
Sep 30,
2012
Jun 30,
2012
Mar 31,
2012
Dec 31,
2011
Sep 30,
2011
Jun 30,
2011
Mar 31,
2011
Sales
Gross profit
Earnings before
$
33,996
23,928
$
53,124
36,203
$
income tax expenses
15,361
21,953
$
50,466
34,335
22,926
47,227
31,512
$
35,652
25,234
$
41,304
27,529
$
41,665
29,153
$
20,895
8,014
(5,814)
25,992
Net income
attributable to
Company
Basic earnings per
share
Diluted earnings per
share
5,810
0.22
0.21
13,617
12,838
12,957
0.51
0.50
0.50
0.46
0.51
0.44
70
4,635
0.18
0.18
(9,362)
16,600
(0.37)
(0.37)
0.67
0.28
34,471
25,159
14,091
6,309
0.26
0.23
Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly net earnings per share will not
necessarily equal the total for the year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that
would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s
rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) promulgated under the Securities Exchange Act, our management, with the participation of our CEO and CFO, evaluated
the design and operating effectiveness as of December 31, 2012 of our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated
under the Securities Exchange Act. Based on this evaluation our CEO and CFO concluded that, as of December 31, 2012, our disclosure controls and
procedures were effective at the reasonable assurance level to enable the Company to record, process, summarize and report information required under
the Securities and Exchange Commission’s rules in a timely manner.
Management’s Annual Report on Internal Control over Financial Reporting
Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) refers to the process designed by, or under
the supervision of, our Chief Executive Officer and Acting Chief Financial Officer, and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. Management is responsible for establishing and maintaining adequate internal control over
financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this evaluation, management
used the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control
environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on our evaluation we determined
that our internal control over financial reporting was effective as of December 31, 2012.
71
Our internal control over financial reporting as of December 31, 2012 has been audited by our registered public accounting firm as stated in their report
which is included in Part II, Item 9A of this form 10-K.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
China Biologic Products, Inc.:
We have audited China Biologic Products, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). China Biologic
Products, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, China Biologic Products, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31,
2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance
sheets of China Biologic Products, Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of comprehensive
income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2012, and our report dated March 13, 2013
expressed an unqualified opinion on those consolidated financial statements.
/S/ KPMG
Hong Kong, China
March 13, 2013
72
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(d) and 15d-15(f)) during the year ended
December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
We have no information to disclose that was required to be disclosed in a report on Form 8-K during the year ended December 31, 2012, but was not
reported.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
PART III
The information required by Item 10 of Part III is included in our Proxy Statement for our 2013 Annual Meeting of Stockholders and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Part III is included in our Proxy Statement for our 2013 Annual Meeting of Stockholders and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
The information required by Item 12 of Part III is included in our Proxy Statement for our 2013 Annual Meeting of Stockholders and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by Item 13 of Part III is included in our Proxy Statement for our 2013 Annual Meeting of Stockholders and is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by Item 14 of Part III is included in our Proxy Statement for our 2013 Annual Meeting of Stockholders and is incorporated
herein by reference.
73
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Financial Statements and Schedules
PART IV
The financial statements are set forth under Item 8 of this annual report on Form 10-K. Financial statement schedules have been omitted since they are
either not required, not applicable, or the information is otherwise included.
Exhibit List
The list of exhibits in the Exhibit Index to this Report is incorporated herein by reference.
74
In accordance with section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report on Form 10-K to be signed on its behalf
by the undersigned, thereto duly authorized individual.
SIGNATURES
Date: March 13, 2013
CHINA BIOLOGIC PRODUCTS, INC.
By: /s/ David (Xiaoying) Gao
David (Xiaoying) Gao
Chief Executive Officer
By: /s/ Ming Yang
Ming Yang
Chief Financial Officer
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature
/s/ David (Xiaoying) Gao
David (Xiaoying) Gao
/s/ Ming Yang
Ming Yang
/s/ Sean Shao
Sean Shao
/s/ Zhijun Tong
Zhijun Tong
/s/ Yungang Lu
Yungang Lu
/s/ Bing Li
Bing Li
/s/ Wenfang Liu
Wenfang Liu
/s/ Albert (Wai Keung) Yeung
Albert (Wai Keung) Yeung
/s/ Charles (Le) Zhang
Charles (Le) Zhang
Title
Chairman and chief Executive Officer
(Principal Executive Officer)
Date
March 13, 2013
Chief Financial Officer
(Principal Financial and Accounting Officer )
March 13, 2013
Director
Director
Director
Director
Director
Director
Director
75
March 13, 2013
March 13, 2013
March 13, 2013
March 13, 2013
March 13, 2013
March 13, 2013
March 13, 2013
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONTENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F-1
F-2
F-3
F-4
F-5
F-7 - F-34
The Board of Directors and Stockholders
China Biologic Products, Inc.:
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of China Biologic Products, Inc. and subsidiaries (the “Company”) as of December 31,
2012 and 2011, and the related consolidated statements of comprehensive income, changes in equity and cash flows for each of the years in the three-year
period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Biologic
Products, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 19 to the consolidated financial statements, Guizhou Taibang Biological Products Co., Ltd. (“Guizhou Taibang”), a subsidiary of
China Biologic Products, Inc., is a defendant in a lawsuit brought by strategic investors with respect to Guizhou Taibang’s failure to register their capital
contributions in Guizhou Taibang with the local Administration for Industry and Commerce.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), China Biologic Products,
Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2013 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
/S/ KPMG
Hong Kong, China
March 13, 2013
F-1
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Note
December 31,
2012
December 31,
2011
ASSETS
Current Assets
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts
Inventories
Prepayments and other current assets
Total Current Assets
Property, plant and equipment, net
Intangible assets, net
Land use rights, net
Deposits related to land use rights
Restricted cash
Equity method investment
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Short-term bank loans
Accounts payable
Due to related parties
Other payables and accrued expenses
Advance from customers
Income tax payable
Derivative liabilities - warrants
Total Current Liabilities
Deferred income
Other liabilities
Total Liabilities
Stockholders’ Equity
Common stock: par value $0.0001; 100,000,000 shares authorized; 26,629,615 and
25,601,125 shares issued and outstanding at December 31, 2012 and 2011, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total equity attributable to China Biologic Products, Inc.
Noncontrolling interest
Total Stockholders’ Equity
Commitments and contingencies
3
4
5
6
7
9
10
11
20
12
14
9
$
129,609,317 $
11,206,244
75,679,173
5,664,919
222,159,653
51,325,177
3,541,582
5,818,709
14,752,574
2,912,145
10,537,310
311,047,150 $
89,411,835
16,757,368
71,338,590
6,185,720
183,693,513
43,329,463
6,520,671
5,487,343
1,504,568
-
8,357,017
248,892,575
$
$
$
7,935,000
2,908,624
4,081,624
25,423,349
2,857,420
4,513,075
-
47,719,092
2,912,145
2,996,749
53,627,986
11,018,000
4,996,463
3,319,938
32,851,707
4,852,125
5,373,633
5,410,419
67,822,285
-
2,029,249
69,851,534
2,663
62,251,731
119,143,000
14,072,322
195,469,716
2,560
48,838,311
73,920,811
12,750,682
135,512,364
61,949,448
43,528,677
257,419,164
179,041,041
19
-
-
Total Liabilities and Stockholders’ Equity
$
311,047,150 $
248,892,575
See accompanying notes to Consolidated Financial Statements.
F-2
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Sales
Cost of sales
Gross profit
Operating expenses
Selling expenses
General and administrative expenses
Research and development expenses
Impairment loss of goodwill
Loss on abandonment and write-off of long-lived assets
Income from operations
Other income (expenses)
Equity in income of an equity method investee
Change in fair value of derivative liabilities
Interest income
Interest expense
Other income (expense), net
Total other income (expenses), net
Note
18
$
December 31,
2012
For the Years Ended
December 31,
2011
184,813,495 $
58,835,998
125,977,497
153,092,289 $
46,017,661
107,074,628
December 31,
2010
139,695,417
36,951,149
102,744,268
8
5,6
10
14
14,421,258
34,034,360
3,032,719
-
-
74,489,160
2,665,881
1,769,140
2,910,297
(1,269,850)
570,511
6,645,979
14,595,794
31,519,824
3,978,233
18,160,281
6,603,028
32,217,468
1,858,171
11,974,834
1,356,950
(4,670,606)
(453,949)
10,065,400
7,372,348
24,467,495
2,336,126
-
-
68,568,299
1,070,241
(3,233,288)
752,317
(2,682,482)
1,125,972
(2,967,240)
Earnings before income tax expense
81,135,139
42,282,868
65,601,059
Income tax expense
Net income
13
15,163,147
10,899,513
13,608,755
65,971,992
31,383,355
51,992,304
Less: Net income attributable to noncontrolling interest
20,749,803
13,201,645
20,449,421
Net income attributable to China Biologic Products, Inc.
$
45,222,189 $
18,181,710 $
31,542,883
Net income per share of common stock:
Basic
Diluted
Weighted average shares used in computation:
Basic
Diluted
21
21
$
$
1.73 $
1.62 $
0.73
0.37
$
$
1.34
1.30
26,153,540
26,839,723
25,028,796
26,654,662
23,586,506
24,176,432
Net income
$
65,971,992 $
31,383,355 $
51,992,304
Other comprehensive income :
Foreign currency translation adjustment, net of nil income taxes
Comprehensive income
1,735,492
6,846,721
5,177,515
67,707,484
38,230,076
57,169,819
Less: Comprehensive income attributable to noncontrolling interest
21,163,655
15,320,805
21,831,352
Comprehensive income attributable to China Biologic Products, Inc.
$
46,543,829 $
22,909,271 $
35,338,467
See accompanying notes to Consolidated Financial Statements.
F-3
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Common stock
Shares
Par value
paid-in
capital
Retained
earnings
Additional
Accumulated
other
comprehensive
income
Equity
attributable
to China Biologic Noncontrolling
Products, Inc.
interest
Total equity
Balance as of January 1,
2010
23,056,442 $
2,305 $ 21,270,601 $ 24,196,218 $
4,227,537 $
49,696,661 $
34,446,494 $ 84,143,155
Net income
Other comprehensive
income
Dividend declared by
subsidiaries to
noncontrolling interest
Acquisition of
noncontrolling
interests
Share-based compensation
Common stock issued in
connection with:
- Exercise of warrants
- Exercise of stock
options
- Conversion of
convertible notes
Balance as of December
31, 2010
Net income
Other comprehensive
income
Dividend declared by
subsidiaries to
noncontrolling interest
Acquisition of
noncontrolling
interests
Share-based compensation
Common stock issued in
connection with:
- Exercise of stock
options
- Conversion of
convertible notes
Balance as of December
31, 2011
Net income
Other comprehensive
income
Dividend declared by
subsidiaries to
noncontrolling interest
Share-based compensation
Common stock issued in
connection with:
- Exercise of stock
options
- Exercise of warrants
Balance as of December
31, 2012
-
-
-
-
-
-
-
-
-
-
-
-
-
- 2,341,783
294,018
30 4,278,160
37,130
4
97,596
963,535
96 7,446,999
31,542,883
-
31,542,883
20,449,421
51,992,304
-
-
-
-
-
-
-
3,795,584
3,795,584
1,381,931
5,177,515
-
-
-
-
-
-
-
(10,446,179) (10,446,179)
-
2,341,783
12,670
-
12,670
2,341,783
4,278,190
97,600
7,447,095
-
-
-
4,278,190
97,600
7,447,095
24,351,125 $
2,435 $ 35,435,139 $ 55,739,101 $
8,023,121 $
99,199,796 $
45,844,337 $ 145,044,133
-
-
-
-
-
-
-
-
-
-
-
- (4,764,935)
- 4,896,232
75,000
8
299,992
1,175,000
117 12,971,883
18,181,710
-
18,181,710
13,201,645
31,383,355
-
-
-
-
-
-
4,727,561
4,727,561
2,119,160
6,846,721
-
-
-
-
-
-
(14,766,400) (14,766,400)
(4,764,935)
4,896,232
300,000
12,972,000
(2,870,065)
-
-
-
(7,635,000)
4,896,232
300,000
12,972,000
25,601,125 $
2,560 $ 48,838,311 $ 73,920,811 $
12,750,682 $
135,512,364 $
43,528,677 $ 179,041,041
-
-
-
-
-
-
-
-
-
-
- 4,544,927
90,990
937,500
9
727,308
94 8,141,185
45,222,189
-
45,222,189
20,749,803
65,971,992
-
-
-
-
-
1,321,640
1,321,640
413,852
1,735,492
-
-
-
-
-
4,544,927
727,317
8,141,279
(2,742,884)
-
-
-
(2,742,884)
4,544,927
727,317
8,141,279
26,629,615 $
2,663 $ 62,251,731 $ 119,143,000 $
14,072,322 $
195,469,716 $
61,949,448 $ 257,419,164
See accompanying notes to Consolidated Financial Statements.
F-4
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Impairment loss of goodwill
Loss on abandonment and write-off of long-lived assets
Amortization
Loss on sale of property, plant and equipment
Reversal of allowance for doubtful accounts, net
Provision for (reversal of) doubtful accounts - other receivables and prepayments
Write-down of obsolete inventories
Deferred tax expense (benefit)
Share-based compensation
Change in fair value of derivative liabilities
Amortization of deferred note issuance cost
Amortization of discount on convertible notes
Equity in income of an equity method investee
Change in operating assets and liabilities:
Accounts receivable
Prepayment and other current assets
Inventories
Accounts payable
Other payables and accrued expenses
Accrued interest - noncontrolling interest shareholders
Advance from customers
Due to related parties
Income tax payable
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends received
Acquisition of a subsidiary, net of cash acquired
Payment for property, plant and equipment
Payment for intangible assets and land use rights
Proceeds from sale of property, plant and equipment
Net cash used in investing activities
December 31,
2012
For the Years Ended
December 31,
2011
December 31,
2010
$
65,971,992 $
31,383,355 $
51,992,304
5,792,418
-
-
3,088,320
828,296
(1,904)
110,123
-
1,127,433
4,544,927
(1,769,140)
-
-
(2,665,881)
5,689,638
(268,498)
(3,750,200)
(2,184,674)
(3,210,777)
-
(2,034,138)
734,037
(904,655)
71,097,317
1,109,115
-
(13,886,045)
(14,059,397)
83,134
(26,753,193)
4,253,661
18,160,281
6,603,028
3,394,808
166,934
(19,611)
(10,254)
270,929
(2,595,103)
4,896,232
(11,974,834)
91,945
3,503,767
(1,858,171)
(6,126,742)
(711,740)
(17,079,263)
431,836
6,061,066
-
1,140,386
-
(1,512,591)
38,469,919
1,209,880
-
(7,968,870)
(424,971)
56,709
(7,127,252)
3,607,184
-
-
3,566,269
120,224
(57,624)
475,346
451,761
(1,101,171)
2,341,783
3,233,288
258,753
1,590,740
(1,070,241)
(7,820,523)
91,379
(16,026,215)
505,407
190,975
(2,086,010)
(429,497)
-
(1,046,906)
38,787,226
-
(4,063,325)
(10,313,432)
(1,474,718)
-
(15,851,475)
See accompanying notes to Consolidated Financial Statements.
F-5
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from warrants exercised
Proceeds from stock option exercised
Acquisition of noncontrolling interest
Proceeds from short term bank loans
Repayment of short term bank loans
Repayment of noncontrolling interest shareholder loan
Dividends paid by subsidiaries to noncontrolling interest shareholders
Net cash used in financing activities
December 31,
2012
For the Years Ended
December 31,
2011
December 31,
2010
4,500,000
727,317
-
11,076,100
(14,286,800)
-
(7,120,693)
(5,104,076)
-
300,000
(7,635,000)
18,595,200
(10,847,200)
-
(10,489,504)
(10,076,504)
1,232,486
97,600
-
5,917,600
(7,397,000)
(3,683,377)
(10,446,179)
(14,278,870)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH
957,434
3,204,304
2,440,536
NET INCREASE IN CASH
40,197,482
24,470,467
11,097,417
Cash and cash equivalents at beginning of year
89,411,835
64,941,368
53,843,951
Cash and cash equivalents at end of year
Supplemental cash flow information
Cash paid for income taxes
Cash paid for interest expense
Noncash investing and financing activities:
Convertible notes conversion
Transfer from prepayments and deposits to property, plant and equipment
Land use right acquired with prepayments made in prior periods
Acquisition of property, plant and equipment included in payables
Exercise of warrants that were liability classified
Restricted cash from government grants for property, plant and equipment
$
$
$
$
$
$
$
$
$
129,609,317 $
89,411,835 $
64,941,368
14,940,369 $
446,381 $
15,007,206 $
890,312 $
15,756,832
810,643
$
-
38,452 $
$
-
104,300 $
$
$
3,641,279
2,912,145
12,972,000 $
959,660 $
312,060 $
83,226 $
$
-
$
-
7,447,095
1,078,348
-
2,164,449
3,045,704
-
See accompanying notes to Consolidated Financial Statements.
F-6
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010
NOTE 1 – DESCRIPTION OF BUSINESS AND SIGNIFICANT CONCENTRATIONS AND RISKS
China Biologic Products, Inc. (“CBP”) and its subsidiaries (collectively, the “Company”), through its subsidiaries in the People’s Republic of China (the
“PRC”), is a biopharmaceutical company that is principally engaged in the research, development, manufacturing and sales of plasma-based
pharmaceutical products in the PRC. The PRC subsidiaries own and operate plasma stations that purchase and collect plasma from individual donors. The
plasma is processed into finished goods after passing through a series of fractionating processes. All of the Company’s plasma products are prescription
medicines that require government approval before the products are sold to customers. The Company primarily sells its products to hospitals and
inoculation centers directly or through distributors in the PRC.
Cash Concentration
The Company maintains cash balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured
limits for its bank accounts located in the United States. Cash balances maintained at financial institutions or state-owned banks in the PRC are not
covered by insurance. Total cash at banks as of December 31, 2012 and December 31, 2011 amounted to $129,289,461 and $88,957,826, respectively, of
which $76,101 and $236,373 are insured, respectively. The Company has not experienced any losses in uninsured bank deposits and does not believe that
it is exposed to any significant risks on cash held in bank accounts.
Sales Concentration
The Company’s two major products are human albumin and human immunoglobulin for intravenous injection (“IVIG”). Human albumin accounted for
44.6%, 54.5% and 48.0% of the total sales for the years ended December 31, 2012, 2011 and 2010, respectively. IVIG accounted for 39.0%, 32.3% and
34.3% of the total sales for the years ended December 31, 2012, 2011 and 2010, respectively. If the market demands for human albumin and IVIG cannot
be sustained in the future or the price of human albumin and IVIG decreases, the Company’s operating results could be adversely affected. All of the
Company's plasma products are prescription medicines that require government approval before the products are sold to customers, and all production
facilities of the Company are required to obtain Good Manufacturing Practice (“GMP”) certificates for their pharmaceutical production activities. The
Company needs to comply with the more stringent new GMP standard which takes effect by the end of 2013. The Company had planned to upgrade some
of the production facilities and/or construct new production facilities for one of its operating subsidiary in June or July 2013 (Note 7). The production of
the related facilities may be suspended and the total production capacity of the Company is expected to decrease in part of 2013 and 2014.
Substantially all of the Company’s customers are located in the PRC. There were no customers that individually comprised 10% or more of the sales
during the years ended December 31, 2012, 2011 and 2010. No individual customer represented 10% or more of trade receivables as at December 31,
2012 and 2011. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its
customers.
Purchase Concentration
There were no suppliers that comprised 10% or more of the total purchases during the year ended December 31, 2012. Two vendors and one vendor
individually comprised 10% or more of the Company’s total purchase during the year ended December 31, 2011 and 2010, respectively. Two vendors
individually represented more than 10% of accounts payables as at December 31, 2012. There was one vendor that represented more than 10% of
accounts payables as at December 31, 2011.
F-7
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in
the United States of America (“GAAP”), and include the financial statements of the Company and its majority owned subsidiaries. All significant
intercompany balances and transactions have been eliminated upon consolidation. The Company has no involvement with variable interest entities. The
Company accounts for investments over which it has significant influence but not a controlling financial interest using the equity method of accounting.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such
estimates and assumptions include the useful lives of fixed assets; the allowance for doubtful accounts; the fair value determinations of financial and
equity instruments and the valuation of share-based compensation, assets acquired and liabilities assumed in a business combination, deferred tax assets
and inventories; the recoverability of goodwill, intangible asset, land use right and property, plant and equipment; and reserves for income tax
uncertainties and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and
assumptions.
Foreign Currency Translation
The accompanying consolidated financial statements of the Company are reported in US dollar. The financial position and results of operations of the
Company’s subsidiaries in the PRC are measured using the Renminbi, which is the local and functional currency of these entities. Assets and liabilities of
the subsidiaries are translated at the prevailing exchange rate in effect at each period end. Revenues and expenses are translated at the average rate of
exchange during the period. Translation adjustments are included in other comprehensive income.
Revenue Recognition
Revenue represents the invoiced value of products sold, net of value added taxes (VAT).
Revenue is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred and the customer takes ownership and
assumes risk of loss, the sales price is fixed or determinable and collection of the relevant receivable is probable. The Company mainly sells human
albumin and human immunoglobulin to hospitals, inoculation centers and pharmaceutical distributors. For all sales, the Company requires a signed
contract or purchase order, which specify pricing, quantity and product specifications. Delivery of the product occurs when the customer receives the
product, which is when the risks and rewards of ownership have been transferred. Delivery is evidenced by signed customer acknowledgement. The
Company’s sales agreements do not provide the customer the right of return, unless the product is defective in which case the Company allows for an
exchange of product or return. For the periods presented, defective product returns were immaterial.
F-8
Fair Value Measurements
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent
possible.The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or
most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes
between observable and unobservable inputs, which are categorized in one of the following levels:
• Level 1 Inputs: Unadjusted quoted prices for identical assets or liabilities in active markets accessible to the entity at the measurement date.
• Level 2 Inputs: Other than quoted prices included in Level 1, inputs that are observable for the asset or liability, either directly or indirectly, for
substantially the full term of the asset or liability.
• Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby
allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
The fair value measurement level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the
fair value measurement.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRSs. The new standard does not extend the use of fair value but, rather, provides guidance about how fair
value should be applied where it is already required or permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of
existing guidance or wording changes to align with IFRS. The provisions of the ASU are effective for annual or interim reporting periods beginning after
December 15, 2011. The Company adopted the provisions of the ASU in 2012. The adoption of ASU 2011-04 did not have a material effect on the
Company’s consolidated financial statements.
See Note 17 to the Consolidated Financial Statements.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and demand deposits. The Company considers all highly liquid investments with original maturities of
three-month or less at the time of purchase to be cash equivalents. Cash and cash equivalents include $20,631,000 and nil of certificates of deposit with an
initial term of three months or less at December 31, 2012 and 2011.
As of December 31, 2012 and 2011, the Company maintained cash at banks in the following locations:
F-9
PRC, excluding Hong Kong
U.S.
Total
Accounts Receivable and Allowance for Doubtful Accounts
129,213,360 $
December 31, 2012 December 31, 2011
88,721,453
$
236,373
88,957,826
129,289,461 $
76,101
$
Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash
provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated
losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses, the customers’
financial condition, the amount of accounts receivables in dispute, the accounts receivables aging and customers’ payment patterns. The Company
reviews its allowance for doubtful accounts monthly. Past due balances are reviewed individually for collectability. Account balances are charged off
against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have
any off-balance-sheet credit exposure related to its customers.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the weighted average method. Cost of work in progress and finished goods
comprise direct materials, direct production costs and an allocation of production overheads based on normal operating capacity. 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.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Repair and maintenance costs are expensed as incurred.
Depreciation on property, plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets. Estimated useful
lives of the assets are as follows:
Buildings
Machinery and equipment
Furniture, fixtures, office equipment and vehicles
Equity Method Investment
30 years
10 years
5-10 years
Investment in an investee in which the Company has the ability to exercise significant influence, but does not have a controlling interest is accounted for
using the equity method. Significant influence is generally presumed to exist when the Company has an ownership interest in the voting stock between
20% and 50%, and other factors, such as representation on the board of directors and participation in policy-making processes, are considered in
determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the Company’s share of the investee’s
results of operations is included in other income (expense) in the Company’s consolidated statements of comprehensive income. Deferred taxes are
provided for the difference between the book and tax basis of the investment. The Company recognizes a loss if it is determined that other than temporary
decline in the value of the investment exists. The process of assessing and determining whether an impairment on a particular equity investment is other
than temporary requires a significant amount of judgment. To determine whether an impairment is other-than-temporary, management considers whether
the Company has the ability and intent to hold the investment until recovery and whether evidence indicating the carrying value of the investment is
recoverable outweighs evidence to the contrary. No impairment loss was recognized by the Company for the years ended December 31, 2012, 2011 and
2010.
F-10
Intangible Assets
Intangible assets are stated at cost less accumulated amortization. Amortization expense is recognized on the straight-line basis over the assets’ estimated
useful life, as the pattern in which the economic benefits of the intangible assets are used up cannot be reliably determined. The estimated useful life is the
period over which the intangible asset is expected to contribute directly or indirectly to the future cash flows of the Company. The Company has no
intangible assets with indefinite useful lives. The estimate useful lives of intangible assets are as follows:
Permits and licenses
GMP Certificate
Long-term customer-relationship
Land Use Rights
10 years
5 years
4 years
Land use rights represent the exclusive right to occupy and use a piece of land in the PRC for a specified contractual term. Land use rights are carried at
cost, less accumulated amortization. Amortization is calculated using the straight-line method over the contractual period of the rights ranging from 40 to
50 years.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses for the years ended December 31, 2012, 2011 and 2010
were $3,032,719, $3,978,233 and $2,336,126, respectively. These expenses include the costs of the Company’s internal research and development
activities.
Product Liability
The Company’s products are covered by two separate product liability insurances each with coverages of approximately $3,174,000 (or RMB20,000,000)
for the products sold by Shandong Taibang Biological Products Co., Ltd. (“Shandong Taibang”) and Guizhou Taibang Biological Products Co., Ltd.
(“Guizhou Taibang”), respectively. There were no product liability claims as of December 31, 2012.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in the consolidated statements of comprehensive income in the period that includes the enactment date. A valuation allowance is provided to reduce the
amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.
F-11
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax
positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs.The Company records interest related to unrecognized tax benefits in interest expense and penalties in
general and administrative expenses.
Share-based Payment
The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the
award and recognizes the cost over the period during which an employee is required to provide service in exchange for the award, which generally is the
vesting period.
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, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group
to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is
recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted
cash flow models, quoted market values and third-party independent appraisals, as considered necessary. The Company recognized a loss on
abandonment and write-off of long-lived assets totaling $6,603,028 for the year ended December 31, 2011 as described in Note 5 and Note 6.
Net Income per Share
Basic net income per share of common stock is computed by dividing net income attributable to common stockholders by the weighted average number
of common stock outstanding during the year using the two-class method. Under the two-class method, net income is allocated between common stock
and other participating securities based on their participating rights in undistributed earnings. The Company’s nonvested shares were considered
participating securities since the holders of these securities participate in dividends on the same basis as common stockholders. Diluted net income per
share is calculated by dividing net income attributable to common stockholders as adjusted for the effect of dilutive common stock equivalent, if any, by
the weighted average number of common stock and dilutive common stock equivalent outstanding during the year. Potential dilutive securities are not
included in the calculation of diluted earnings per share if the impact is anti-dilutive.
F-12
Segment Reporting
The Company has one operating segment, which is the manufacture and sales of human plasma products. Substantially all of the Company’s operations
and customers are located in the PRC, and therefore, no geographic information is presented.
Contingencies
In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover
a wide range of matters, including, among others, government investigations and tax matters. An accrual for a loss contingency is recognized when it is
probable that a liability has been incurred and the amount of loss can be reasonably estimated. Legal costs incurred in connection with loss contingencies
are expensed as incurred.
Reclassifications
Certain amounts in the audited consolidated balance sheet as of December 31, 2011, consolidated statements of comprehensive income for the years
ended December 31, 2011 and 2010, and related notes have been reclassified to conform to the presentation for the year ended December 31, 2012.
Specifically, (1) other receivables, prepayments and prepaid expenses, and deferred tax assets were combined to prepayments and other current assets; (2)
prepayment related to property, plant and equipment in prepayments and deposits for property, plant and equipment was reclassified to property, plant
and equipment, net, and the remaining balance in prepayments and deposits for property, plant was reported as deposits related to land use rights; (3)
other taxes payable was reclassified to other payables and accrued expenses; (4) advance from customers - a related party was reclassified to advance
from customers; (5) other payable and deferred tax liabilities were reclassified to other liabilities; (6) interest expense, net was divided into interest
income and interest expense.
There was no impact on total current assets, total assets, total current liabilities, total liabilities, net income, or cash flows.
NOTE 3 – ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2012 and 2011 consisted of the following:
Accounts receivable
Less: Allowance for doubtful accounts
Total
December 31, 2012 December 31, 2011
$
$
11,621,851 $
(415,607)
11,206,244 $
17,171,460
(414,092)
16,757,368
The activity in the allowance for doubtful accounts for the years ended December 31, 2012, 2011 and 2010 are as follows:
Beginning balance
Provisions
Recoveries
Write-offs
Foreign currency translation adjustment
Ending Balance
For the Years Ended
December 31, 2012 December 31, 2011 December 31, 2010
$
$
414,092 $
1,238,640 $
-
(1,904)
-
3,419
415,607 $
-
(19,611)
(837,975)
33,038
414,092 $
1,254,955
4,684
(62,308)
-
41,309
1,238,640
F-13
NOTE 4 – INVENTORIES
Inventories at December 31, 2012 and 2011 consisted of the following:
Raw materials
Work-in-process
Finished goods
Total
December 31, 2012 December 31, 2011
$
$
29,596,746 $
24,524,142
21,558,285
75,679,173 $
29,403,776
21,385,806
20,549,008
71,338,590
Raw materials mainly comprised of the human blood plasma collected from the Company’s plasma stations. Work-in-process represented the
intermediate products in the process of production. Finished goods mainly comprised human albumin and immunoglobulin products. Provisions to write-
down the carrying amount of obsolete inventory to its estimated net realizable value amounted to nil, $270,929 and $451,761 for the years ended
December 31, 2012, 2011 and 2010, respectively, and were recorded as cost of sales in the consolidated statements of comprehensive income.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2012 and 2011 consisted of the following:
Buildings
Machinery and equipment
Furniture, fixtures, office equipment and vehicles
Total property, plant and equipment, gross
Accumulated depreciation
Total property, plant and equipment, net
Construction in progress
Prepayment for property, plant and equipment
Property, plant and equipment, net
December 31, 2012 December 31, 2011
$
$
25,183,496 $
29,625,166
6,513,482
61,322,144
(24,356,752)
36,965,392
3,501,404
10,858,381
51,325,177 $
25,296,828
29,891,291
6,445,851
61,633,970
(21,744,060)
39,889,910
656,629
2,782,924
43,329,463
Depreciation expense for the years ended December 31, 2012, 2011 and 2010 was $5,792,418, $4,253,661 and $3,607,184, respectively. No interest
expenses were capitalized into construction in progress for the years ended December 31, 2012, 2011 and 2010.
F-14
On July 15, 2011, the Guizhou Provincial Health Department issued the revised “Plan for Guizhou Provincial Blood Collection Institution Setting (2011-
2014)”, which stipulates the number of counties that are permitted to set up plasma collection stations in Guizhou Province is limited to four counties (the
“Guizhou Plan”). As a result of the implementation of the Guizhou Plan, the licenses of four plasma collection stations and one inactive plasma collection
station with respect to Guizhou Taibang were not renewed upon their expiration on July 31, 2011. Therefore, the Company closed these plasma collection
stations and recognized a loss on abandonment of property, plant and equipment of $1,410,379 for the year ended December 31, 2011.
NOTE 6 – INTANGIBLE ASSETS, NET
Intangible assets at December 31, 2012 and 2011 consisted of the following:
Amortizing intangible assets:
Permits and licenses
GMP certificate
Long-term customer-relationship
Others
Total
Amortizing intangible assets:
Permits and licenses
GMP certificate
Long-term customer-relationship
Others
Total
Weighted
average
amortization
period
December 31, 2012
Gross
carrying
amount
Accumulated
amortization
10 years $
5 years
4 years
$
4,987,647
2,525,679
7,519,206
214,520
15,247,052
(2,119,622)
(1,955,360)
(7,519,206)
(111,282)
(11,705,470)
Weighted
average
amortization
period
December 31, 2011
Gross
carrying
amount
Accumulated
amortization
10 years $
5 years
4 years
$
4,946,791
2,504,990
7,457,612
233,030
15,142,423
(1,562,105)
(1,364,070)
(5,593,209)
(102,368)
(8,621,752)
Net
carrying
amount
2,868,025
570,319
-
103,238
3,541,582
Net
carrying
amount
3,384,686
1,140,920
1,864,403
130,662
6,520,671
Aggregate amortization expense for amortizing intangible assets was $3,011,560, $3,270,131 and $3,422,418, for the years ended December 31, 2012,
2011 and 2010, respectively. Estimated amortization expenses for the next five years are $949,880 in 2013, $486,791 in 2014, $485,029 in 2015,
$479,523 in 2016, and $445,760 in 2017. For the year ended December 31, 2011, the Company recognized loss on the write off of collection permits and
licenses totaling $5,192,649 as a result of the closure of the plasma collection stations of Guizhou Taibang, as disclosed in Note 5.
F-15
NOTE 7 – DEPOSITS RELATED TO LAND USE RIGHTS
As of December 31, 2012, the deposits mainly represented a $13,325,580 refundable payment made by Guizhou Taibang to the local government in
connection with the public bidding for a land use right in Guizhou Province. The payment will be refunded within one year following the completion of
the bidding process. If the Company is successful in the bid, the land use right will be used for the construction of a new manufacturing facility to comply
with the new GMP standard effective by the end of 2013. However, due to potential delays in government approval procedures with respect to the land
use right for such site, the Company may not be able to complete the construction of the new production facility as planned. In order to mitigate the
operation disruption at Guizhou Taibang, the Company plans to upgrade its existing production facility to meet the new GMP standard in June or July
2013. All the related assets in the existing manufacturing facility to be abandoned are depreciated over the shortened use period.
NOTE 8 – GOODWILL
The changes in the carrying amount of goodwill for the years ended December 31, 2012, 2011 and 2010 were as follows:
Balance as of January 1
Addition
Impairment loss
Foreign currency exchange difference
Balance as of December 31
December 31,
2012
For the Years ended
December 31,
2011
December 31,
2010
$
$
-
-
-
-
-
$
17,778,231 $
-
(18,160,281)
382,050
-
$
$
17,200,728
-
-
577,503
17,778,231
Four active plasma stations of the Company were closed on August 1, 2011 as a result of a regulatory order (Note 5). Following the closure, the Company
revised its earnings guidance for the year of 2011 and experienced incremental decline in its stock price and market capitalization in the third quarter of
2011. Therefore the Company performed goodwill impairment test as of September 30, 2011 to identify if goodwill should be impaired.
A two step process is used to test for goodwill impairment. The first step is to determine if there is an indication of impairment by comparing the
estimated fair value of the reporting unit to its carrying value including existing goodwill. Goodwill is considered impaired if the carrying value of a
reporting unit exceeds the estimated fair value. If an indication of impairment exists under the first step, a second step is performed to determine the
amount of the impairment. This involves calculating the implied fair value of goodwill by allocating the fair value of the reporting unit to all assets and
liabilities other than goodwill and comparing it to the carrying amount of goodwill.
The fair value of the reporting unit for step one was determined based on the quoted market price of the Company’s common stock. The first step of the
impairment test concluded that the carrying value of the Company’s reporting unit exceeded its fair value. As a result, the Company performed the second
step of the goodwill impairment test for its reporting unit. The Company determined that the implied fair value of goodwill was nil. Therefore, a goodwill
impairment loss of $18,160,281 was recognized for the year ended December 31, 2011.
F-16
NOTE 9 – RESTRICTED CASH
On November 1, 2012, Guizhou Taibang entered into an agreement with the Financial Bureau of Huaxi District, Guiyang City. Pursuant to the agreement,
the Financial Bureau of Huaxi District provided $2,912,145 (equivalent RMB 18,350,000) to Guizhou Taibang to subsidize the technical upgrade in
respect of the new GMP standard (see Note 7). The agreement is valid for a three-year period. The usage of this fund must be under the supervision of the
Financial Bureau of Huaxi District and cannot be used for other purposes.
NOTE 10 – EQUITY METHOD INVESTMENT
The Company’s equity method investment as of December 31, 2012 and 2011 represented 35% equity interest investment in Xi’an Huitian Blood
Products Co., Ltd. (“Huitian”).
In October 2008, Shandong Taibang entered into an equity purchase agreement with one of the equity owners of Huitian (“Seller”) to acquire 35% equity
interest in Huitian. In connection with this transaction, in October 2008, Taibang Biological Limited (“Taibang Biological”) entered into an entrust
agreement (the “Entrust Agreement”) with Shandong Taibang and the noncontrolling interest holder of Shandong Taibang, pursuant to which, Taibang
Biological would pay the cash consideration, including interest, of $6,502,901 (or RMB44,327,887) to the Seller, and would bear the risks and benefits as
a 35% equity owner in Huitian. In addition, Taibang Biological would pay Shandong Taibang RMB120,000 (approximately $19,044) per year as
compensation for the administrative costs of Shandong Taibang’s holding of the 35% equity interest in Huitian on behalf of Taibang Biological. Such
amount paid and received is eliminated upon consolidation. Taibang Biological agreed to indemnify the noncontrolling interest holder of Shandong
Taibang for any loss arising from the Entrust Agreement and has pledged the Company’s equity interest in Shandong Taibang as collateral against such
loss.
The excess of carrying amount over the Company’s share of net assets of equity method investees is $2,722,915 and $2,895,402 at December 31, 2012
and 2011, respectively, which comprises fair value adjustments for property, plant and equipment and land use right of $1,424,210 and $1,724,481 at
December 31, 2012 and 2011, respectively, and goodwill of $1,298,705 and $1,170,921 at December 31, 2012 and 2011, respectively. The fair value
adjustments are amortized over the remaining useful lives of related assets. The equity method goodwill is not amortized; however, the investment is
reviewed for impairment.
F-17
NOTE 11 – SHORT-TERM BANK LOANS
The Company’s bank loans at December 31, 2012 and 2011 consisted of the following:
Loans
Short-term bank loan, secured
Short-term bank loan, unsecured
Short-term bank loan, unsecured
Short-term bank loan, unsecured
Short-term bank loan, unsecured
Short-term bank loan, unsecured
Short-term bank loan, unsecured
Total
Maturity
date
Annual
interest rate
December 31,
2012
December 31,
2011
March 22, 2012
January 29, 2012
January 29, 2012
May 19, 2012
August 1, 2013
September 3, 2013
September 3, 2013
6.06% $
5.81%
6.06%
6.31%
6.00%
6.00%
6.00%
$
$
-
-
-
-
3,174,000
3,174,000
1,587,000
7,935,000 $
3,148,000
1,574,000
1,574,000
4,722,000
-
-
-
11,018,000
Interest expense amounted to $446,381, $705,426 and $291,725 for the years ended December 31, 2012, 2011 and 2010, respectively.
The Company did not have any revolving line of credit as of December 31, 2012 and 2011.
NOTE 12 – OTHER PAYABLES AND ACCRUED EXPENSES
Other payables and accrued expenses at December 31, 2012 and 2011 consisted of the following:
Payables to potential investors (1)
Salaries and bonuses payable
Accruals for selling commission and promotion fee
Dividends payable to noncontrolling interest shareholders
Payables for construction work
Other tax payables
Others
Total
December 31, 2012 December 31, 2011
$
$
8,728,368 $
6,868,908
3,476,215
-
347,877
2,180,643
3,821,338
25,423,349 $
8,259,232
7,259,978
7,999,892
4,344,240
429,564
2,189,913
2,368,888
32,851,707
(1)
The payables to potential investors comprise deposits received from potential strategic investors of $6,309,912 and $6,258,224 as of December
31, 2012 and 2011, respectively, and related interest on these deposits of $2,418,456 and $2,001,008 as of December 31, 2012 and 2011,
respectively.
In 2007, Guizhou Taibang received an aggregate amount of $7,506,408 (or RMB50,960,000) from certain potential strategic investors in
connection with their subscription to purchase shares in Guizhou Taibang. The registration of the new investors as Guizhou Taibang’s
shareholders and the related increase in registered capital of Guizhou Taibang with the Administration for Industry and Commerce are pending
due to shareholders dispute as described in the legal proceeding section (see Note 19). In 2010, the Company refunded $1,699,040 (or
RMB11,200,000) to one of the potential investors.
F-18
NOTE 13 – INCOME TAX
The Company and each of its subsidiaries file separate income tax returns.
The United States of America
The Company is incorporated in the State of Delaware in the U.S., and is subject to U.S. federal corporate income tax at gradual rates of up to 35%.
British Virgin Islands
Taibang Biological is incorporated in the British Virgin Islands. Under the current laws of the British Virgin Islands (BVI), Taibang Biological is not
subject to tax on income or capital gains. In addition, upon payments of dividends by Taibang Biological, no British Virgin Islands withholding tax is
imposed.
Hong Kong
Taibang Holdings (Hong Kong) Limited (“Taibang Holdings”, formerly known as “Logic Holdings (Hong Kong) Limited”) is incorporated in Hong
Kong and is subject to Hong Kong’s profits tax rate of 16.5% for the years ended December 31, 2012, 2011 and 2010. Taibang Holdings did not earn any
income that was derived in Hong Kong for the years ended December 31, 2012, 2011 and 2010. The payments of dividends by Hong Kong companies are
not subject to any Hong Kong withholding tax.
PRC
The PRC’s statutory income tax rate is 25%. The Company’s PRC subsidiaries are subject to income tax at 25% unless otherwise specified.
On February 12, 2009, Shandong Taibang received the High and New Technology Enterprise certificate from the Shandong provincial government. This
certificate entitled Shandong Taibang to pay income taxes at a 15% preferential income tax rate for a period of three years from 2008 to 2010. On October
31, 2011, Shandong Taibang obtained a notice from the Shandong provincial government that the High and New Technology Enterprise qualification has
been renewed for an additional three years from 2011 to 2013. Guizhou Taibang was entitled to the preferential income tax rate of 15% under the 10-year
Western Development Tax Concession, which ended in 2010. According to CaiShui [2011] No. 58 dated July 27, 2011, Guizhou Taibang, being a
qualified enterprise located in the western region of the PRC, enjoys a preferential income tax rate of 15% effective retroactively from January 1, 2011 to
December 31, 2020.
F-19
The components of earnings (losses) before income taxes by jurisdictions are as follows:
PRC, excluding Hong Kong
U.S.
BVI
Hong Kong
Total
December 31,
2012
For the Years Ended
December 31,
2011
December 31,
2010
$
$
84,980,477 $
(6,314,398)
2,538,030
(68,970)
81,135,139 $
42,616,865 $
(1,403,437)
1,645,364
(575,924)
42,282,868 $
78,868,026
(11,948,208)
(474,777)
(843,982)
65,601,059
Income tax expense for the years ended December 31, 2012, 2011 and 2010 represents current income tax expense and deferred tax expense (benefit):
Current income tax expense
Deferred tax expense (benefit)
December 31,
2012
For the Years Ended
December 31,
2011
December 31,
2010
$
$
14,035,714 $
1,127,433
15,163,147 $
13,494,616 $
(2,595,103)
10,899,513 $
14,709,926
(1,101,171)
13,608,755
The effective income tax rate based on income tax expense and earnings before income taxes reported in the consolidated statements of comprehensive
income differs from the PRC statutory income tax rate of 25% due to the following:
PRC statutory income tax rate
Non-taxable income
Non-deductible expenses:
Share-based compensation
Impairment loss on goodwill
Loss on write-off of long-lived assets
Others
Tax rate differential
Effect of change in tax rate on deferred tax
Effect of PRC preferential tax rate
Bonus deduction on research and development expenses
Change in valuation allowance
PRC dividend withholding tax
Tax effect of equity method investment
Effective income tax rate
December 31,
2012
For the Years Ended
December 31,
2011
(in percentage to earnings before income tax expense)
25.0%
(0.3)%
December 31,
2010
25.0%
(0.7)%
25.0%
(2.3)%
1.9%
-
-
0.4%
(1.2)%
-
(11.0)%
(1.3)%
0.7%
4.0%
0.9%
18.7%
3.9%
10.7%
0.8%
0.7%
1.6%
(1.8)%
(18.2)%
(1.2)%
2.0%
3.1%
1.5%
25.8%
1.2%
-
-
3.1%
(1.1)%
(1.1)%
(12.4)%
(0.3)%
4.3%
2.0%
0.3%
20.7%
F-20
The PRC tax rate has been used because the majority of the Company’s consolidated pre-tax earnings arise in the PRC.
As of December 31, 2012 and 2011, significant temporary differences between the tax basis and financial statement basis of assets and liabilities that gave
rise to deferred taxes were principally related to the following:
Deferred tax assets arising from:
-Accrued expenses
-Derivative liabilities
-Tax loss carryforwards
Gross deferred tax assets
Less: valuation allowance
Net deferred tax assets
Deferred tax liabilities arising from:
- Intangible assets
- Property, plant and equipment
- Equity method investment
- Dividend withholding tax
Deferred tax liabilities
Classification on consolidated balance sheets:
Deferred tax assets – current, net (included in prepayments and other current assets)
Deferred tax liabilities - non-current, net (included in other liabilities)
F-21
December 31, 2012 December 31, 2011
$
$
$
$
$
$
1,841,210 $
-
7,078,822
8,920,032
(5,887,981)
3,032,051 $
(498,987) $
(198,443)
(1,190,841)
(1,955,186)
(3,843,457) $
1,999,563
1,839,542
5,328,444
9,167,549
(7,167,986)
1,999,563
(924,527)
(292,111)
(469,134)
-
(1,685,772)
1,841,210 $
1,999,563
(2,652,616) $
(1,685,772)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible and tax loss carryforwards are utilized. Management considers the scheduled reversal of deferred
tax liabilities (including the impact of available carryforwards periods), projected future taxable income, and tax planning strategies in making this
assessment.
The deferred tax assets of $7,078,822 for tax loss carry forwards as of December 31, 2012, of which $3,300,089 and $3,778,733 relate to tax loss
carryforwards of certain PRC subsidiaries and CBP, respectively. For PRC income tax purposes, certain of the Company's PRC subsidiaries had tax loss
carryforwards of $13,200,354, of which $1,118,311, $5,121,302 and $6,960,741 would expire by 2015, 2016 and 2017, respectively, if unused. For
United States federal income tax purposes, CBP had tax loss carryforwards of approximately $11,113,921, of which $1,268,307, $614,982, $1,113,597,
$1,405,718, $2,350,326, $3,382,154 and $978,837 would expire by 2026, 2027, 2028, 2029, 2030, 2031 and 2032, respectively, if unused. In view of
their cumulative losses positions, management determined it is more likely than not that deferred tax assets of these PRC subsidiaries will not be realized,
and therefore full valuation allowances of $3,300,089 and $1,571,284 were provided as of December 31, 2012 and 2011, respectively. For deferred tax
assets of CBP, management determined it is more likely than not that some portion of the deferred tax assets of CBP will not be realized, and therefore
valuation allowances of $2,587,892 and $5,596,702 were provided as of December 31, 2012 and 2011, respectively. The change in valuation allowance
for the years ended December 31, 2012, 2011 and 2010 was a decrease of $1,280,005, an increase of $830,497 and an increase of $2,806,835,
respectively. Management believes it is more likely than not that the Company will realize the benefits of the deferred tax assets, net of the valuation
allowances, as of December 31, 2012 and December 31, 2011.
According to the prevailing PRC income tax law and relevant regulations, dividends relating to earnings accumulated beginning on January 1, 2008 that
are received by non-PRC-resident enterprises from PRC-resident enterprises are subject to withholding tax at 10%, unless reduced by tax treaties or
similar arrangement. Dividends relating to undistributed earnings generated prior to January 1, 2008 are exempt from such withholding tax. Further,
dividends received by the Company from its overseas subsidiaries are subject to the U.S. federal income tax at 34%, less any qualified foreign tax credits.
Based on the dividend policy of Shandong Taibang, Taibang Biological Ltd. has provided the deferred tax liabilities of $1,955,186 on undistributed
earnings of $20 million, approximately 40% of Shandong Taibang’s net income for the year ended December 31, 2012. Due to the Company’s plan and
intention of reinvesting its earnings in its PRC business, the Company has not provided for the related deferred tax liabilities on the remaining
undistributed earnings of Shandong Taibang and Guizhou Taibang totalling $99 million as of December 31, 2012.
As of January 1, 2010 and for each of the years ended December 31, 2010, 2011 and 2012, the Company and its subsidiaries did not have any
unrecognized tax benefits, and therefore no interest or penalties related to unrecognized tax benefits were accrued. The Company does not expect that the
amount of unrecognized tax benefits will change significantly within the next 12 months.
The Company and each of its PRC subsidiaries file income tax returns in the United States and the PRC, respectively. The Company is subject to U.S.
federal income tax examination by tax authorities for tax years beginning in 2007. According to the PRC Tax Administration and Collection Law, the
statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute
of limitations is extended to five years under special circumstances where the underpayment of taxes is more than RMB100,000 (approximately $15,000).
In the case of transfer pricing issues, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. The PRC tax
returns for the Company’s PRC subsidiaries are open to examination by the PRC tax authorities for the tax years beginning in 2007.
F-22
NOTE 14 – WARRANTS, OPTIONS AND NONVESTED SHARES
Warrants
In connection with the issuance of convertible notes in 2009, which were fully converted by December 31, 2011, the Company issued warrants to
purchase 1,194,268 and 93,750 shares of its common stock to the investors and placement agent, respectively.
The summary of warrant activities is as follows:
January 1, 2010
Granted
Exercised
Exercised-cashless
December 31, 2010
Granted
Exercised
December 31, 2011
Granted
Exercised
December 31, 2012
Warrants
Outstanding
Weighted
Average
Average
Remaining
Exercise Price Contractual Life
1,288,018
-
(256,768)
(93,750)
937,500
-
-
937,500
-
(937,500)
-
4.89
-
4.80
6.00
4.80
-
-
4.80
-
4.80
-
2.44
-
1.44
1.44
1.44
-
-
0.44
-
-
-
During the year ended December 31, 2010, the placement agents executed cashless exercise of all the 93,750 placement agent warrants and received
37,250 shares of the Company’s common stock.
In June 2012, the warrants to purchase 937,500 shares of common stock of the Company were exercised and the Company received proceeds of
$4,500,000. As of December 31, 2012, there were no warrants outstanding.
The fair values of the warrants that were exercised on June 6 and June 4, 2012, and outstanding as of December 31, 2011 were determined based on the
Binominal option pricing model, using the following key assumptions:
F-23
Expected dividend yield
Risk-free interest rate
Time to maturity (in years)
Expected volatility
Fair value of underlying common shares (per share)
June 6, 2012
June 4, 2012
December 31, 2011
0%
0.05%
-
47.4%
9.22
$
0%
0.04%
-
37.3%
$
8.55 $
0%
0.05%
0.43
80.0%
10.46
Change in fair value of derivative liabilities for the years ended December 31, 2010, 2011 and 2012 is set forth below:
Fair value
at January
1, 2010
Increase (decrease)
in fair value
for the year ended
December 31, 2010
Fair value at
Fair value at
date of warrants date of notes at December
conversion
Fair value
31, 2010
exercise
Embedded conversion option in the notes
Warrants issued to investors
Warrants issued to placement agent
Total
$ 19,960,145 $
11,804,252
897,010
$ 32,661,407 $
1,793,254 $
1,668,067
(228,033)
3,233,288 $
(2,376,727)
(668,977)
- $ (7,191,738) $ 14,561,661
11,095,592
-
-
-
(3,045,704) $ (7,191,738) $ 25,657,253
Fair value
at January
1, 2011
Decrease
in fair value
for the year ended
December 31, 2011
Fair value at
Fair value at
date of warrants date of notes at December
conversion
Fair value
31, 2011
exercise
Embedded conversion option in the notes
Warrants issued to investors
Total
$ 14,561,661 $
11,095,592
$ 25,657,253 $
(6,289,661) $
(5,685,173)
(11,974,834) $
- $ (8,272,000) $
-
- $ (8,272,000) $
-
-
5,410,419
5,410,419
Warrants issued to investors
Total
Options
Fair value
at January
1, 2012
Decrease
in fair value
Fair value at
for the year ended date of warrants
December 31, 2012
exercise
Fair value
at December
31, 2012
$
$
5,410,419 $
5,410,419 $
(1,769,140) $
(1,769,140) $
(3,641,279) $
(3,641,279) $
-
-
Effective May 9, 2008, the Board of Directors adopted the China Biologic Products, Inc. 2008 Equity Incentive Plan, (“the 2008 Plan”). The 2008 Plan
provides for grants of stock options, stock appreciation rights, performance units, restricted stock, restricted stock units and performance shares. A total of
five million shares of the Company’s common stock may be issued pursuant to the 2008 Plan. The exercise price per share for the shares to be issued
pursuant to an exercise of a stock option will be no less than the fair market value per share on the grant date, except that, in the case of an incentive stock
option granted to a person who holds more than 10% of the total combined voting power of all classes of the Company’s stock or any of its subsidiaries,
the exercise price will be no less than 110% of the fair market value per share on the grant date. No awards may be granted under the 2008 Plan after May
9, 2018, except that any award granted before then may extend beyond that date. All the options to be granted will have 10-year terms.
F-24
For the year ended December 31, 2010, stock options to purchase an aggregate of 1,041,000 common stock were granted to directors and employees at
exercise prices ranging from $10.66 to $12.60 per share that vested immediately or with vesting periods ranging from 1 year to 3 years.
For the year ended December 31, 2011, stock options to purchase an aggregate of 175,000 common stock were granted to directors and employees at
exercise prices ranging from $5.97 to $17.00 per share with vesting periods of 1 year.
For the year ended December 31, 2012, stock options to purchase an aggregate of 900,000 common stock were granted to directors and employees at
exercise prices ranging from $9.16 to $9.85 per share with vesting periods ranging from 1 year to 4 years.
A summary of stock options activity for the years ended December 31, 2010, 2011and 2012 is as follows:
Outstanding as of January 1, 2010
Granted
Exercised
Outstanding as of December 31, 2010
Granted
Exercised
Forfeited and expired
Outstanding as of December 31, 2011
Granted
Exercised
Forfeited and expired
Outstanding as of December 31, 2012
Vested and expected to vest as of December 31, 2012
Exercisable as of December 31, 2012
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term in years
Aggregate
Intrinsic Value
4.00
12.25
4.00
8.50
15.28
4.00
12.26
9.24
9.61
7.99
9.69
9.39
9.39
8.85
8.43 $
7,352,800
$
8.55 $
(386,322)
15,039,114
$
(635,250)
7.71 $
5,197,076
$
(468,322)
7.65 $
7.65 $
6.72 $
18,374,422
18,374,422
12,055,323
Number of
Options
910,000
1,041,000
(44,400)
1,906,600
175,000
(75,000)
(12,000)
1,994,600
900,000
(90,990)
(155,001)
2,648,609
2,648,609
1,611,770
$
$
$
$
$
$
The weighted average option fair value of $7.58 per share or an aggregate of $6,817,649 on the date of grant during the year ended December 31, 2012,
the weighted average option fair value of $8.95 per share or an aggregate of $1,566,250 on the date of grant during the year ended December 31, 2011,
and the weighted average option fair value of $10.70 per share or an aggregate of $11,138,700 on the date of grant during the year ended December 31,
2010, were determined based on the Black-Scholes option pricing model using the following weighted average assumptions:
Expected volatility
Expected dividends yield
Expected term (in years)
Risk-free interest rate
Fair value of underlying common stock (per share)
F-25
December 31,
2012
For the Years Ended
December 31,
2011
December 31,
2010
104.00%
0%
6.01
0.82%
$
9.61 $
69.43%
0%
5.00
1.92%
15.28
$
134.66%
0%
6.40
1.90%
12.25
The volatility of the Company’s common stock was estimated by management based on the historical volatility of the Company’s common stock. The
risk free interest rate was based on Treasury Constant Maturity Rates published by the U.S. Federal Reserve for periods applicable to the estimated term
of the options. The expected dividend yield was based on the Company’s current and expected dividend policy.
For the years ended December 31, 2012, 2011 and 2010, the Company recorded stock compensation expense of $4,335,595, $4,896,232 and $2,341,783,
respectively, in general and administrative expenses.
As of December 31, 2012, approximately $7,251,595 of stock compensation expense with respect to stock options is to be recognized over weighted
average period of approximately 2.72 years.
Nonvested shares
On August 31, 2012, the Company granted 45,000 nonvested shares to certain directors and 75,000 nonvested shares to certain employees (collectively,
the “Participant”). Pursuant to the nonvested share grant agreements between the Company and the Participant, the Participant will have all the rights of a
stockholder with respect to the nonvested shares. The nonvested shares granted to directors vest on August 31, 2013. The nonvested shares granted to
employees vest in four years with an initial vesting date of September 1, 2013. As of December 31, 2012, the nonvested shares are not yet vested and not
included in the Company’s common stock.
A summary of nonvested shares activity for the year ended December 31, 2012 is as follow:
Outstanding as of December 31, 2011
Granted
Vested
Forfeited
Outstanding as of December 31, 2012
Number of
nonvested shares
Grant date weighted
average fair value
-
9.85
-
-
9.85
- $
120,000
-
-
120,000 $
For the year ended December 31, 2012, the Company recorded stock compensation expense of $209,332 in general and administrative expenses.
As of December 31, 2012, approximately $972,668 of stock compensation expense with respect to nonvested shares is to be recognized over weighted
average period of approximately 2.76 years.
NOTE 15 – STOCKHOLDER RIGHTS PLAN
On November 19, 2012, the Board of Directors adopted a stockholder rights plan (the “Rights Agreement”). Pursuant to the Rights Agreement, the Board
of Directors declared a dividend distribution of one right for each share of common stock. Each right entitles the holder to purchase from the Company
one one-thousandth of a share of Series A Participating Preferred Stock at an initial exercise price of $60 per share. The Rights Agreement is intended to
assure that all of the Company’s stockholders receive fair and equal treatment in the event of any proposed takeover of the Company and to protect
stockholders’ interests in the event the Company is confronted with coercive or unfair takeover tactics. As of December 31, 2012, 1,000,000 shares of
Series A Participating Preferred Stock were authorized and none was issued or outstanding.
F-26
Rights become exercisable only upon the occurrence of certain events. More specifically, if a person or group acquires 10% or more of the Company
(including through derivatives) while the stockholder rights plan remains in place, then the rights will become exercisable by all rights holders (except the
acquiring person or group) for shares of the Company’s common stock having a then-current market value of twice the exercise price of a right. However,
if a stockholder’s beneficial ownership of the Company’s common stock as of the time of this announcement of the stockholder rights plan and associated
dividend declaration is at or above the 10% threshold, that stockholder’s existing ownership percentage would be grandfathered, but the rights would
become exercisable if at any time after this announcement the stockholder increases its ownership percentage by 2% or more without the prior approval of
the Company’s Board of Directors. In addition, if after a person or group acquires 10% or more of the Company’s outstanding common stock, the
Company merges into another company, an acquiring entity merges into the Company or the Company sells or transfers more than 50% of its assets, cash
flow or earning power, then each right will entitle its holder to purchase, for the exercise price, a number of shares of common stock of the person
engaging in the transaction having a then-current market value of twice the exercise price. The acquiring person will not be entitled to exercise these
rights. The Board of Directors may redeem the rights for $0.001 per right at any time before an event that causes the rights to become exercisable. If not
redeemed, the rights will expire on November 18, 2014.
NOTE 16 – STATUTORY RESERVES
The Company’s PRC subsidiaries are required to allocate at least 10% of its after tax profits as determined under generally accepted accounting principal
in the PRC to its statutory surplus reserve until the reserve balance reaches 50% of respective registered capital. The accumulated balance of the statutory
reserve as of December 31, 2012 and 2011 was $30,772,993 and $30,753,726, respectively.
NOTE 17 – FAIR VALUE MEASUREMENTS
Management used the following methods and assumptions to estimate the fair value of financial instruments at the relevant balance sheet dates:
(cid:122) Short-term financial instruments (including accounts receivables, other receivables, short-term loans, accounts payable, other payables and
accrued expenses, and amounts due to related parties) – The carrying amounts of the short-term financial instruments approximate their fair values
because of the short maturity of these instruments.
(cid:122) Derivative liabilities (the embedded conversion option in the Warrants) – The estimated fair values were determined by using Binominal option
pricing model with Level 2 inputs. The following table sets forth, by level within the fair value hierarchy, the Company’s financial instruments
that were measured at fair value on a recurring basis as of December 31, 2011. These derivative liabilities did not exist as of December 31, 2012.
F-27
Fair Value Measurements Using:
Quoted Prices
in Active Markets
for Identical
Financial Assets
and Liabilities
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
Total
Level 1
Level 2
Level 3
$
$
-
$
- $
-
$
Total
Level 1
Level 2
Level 3
5,410,419 $
- $
5,410,419 $
-
-
December 31, 2012
Liabilities at fair value:
Derivative liabilities—Warrants
December 31, 2011
Liabilities at fair value:
Derivative liabilities—Warrants
NOTE 18 – SALES
The Company’s sales are primarily derived from the manufacture and sale of Human Albumin and Immunoglobulin products. The Company’s sales by
significant types of product for the years ended December 31, 2012, 2011 and 2010 are as follows:
Human Albumin
Immunoglobulin products:
Human Hepatitis B Immunoglobulin
Human Immunoglobulin for Intravenous Injection
Other Immunoglobulin products
Placenta Polypeptide
Others
For the Years Ended
December 31, 2012 December 31, 2011 December 31, 2010
$
82,450,825 $
83,433,691 $
67,069,080
5,710,978
72,005,196
13,666,625
10,088,754
891,117
7,298,062
49,482,514
9,371,007
1,935,428
1,571,587
10,622,455
47,952,716
12,547,115
-
1,504,051
Total
$
184,813,495 $
153,092,289 $
139,695,417
NOTE 19 – COMMITMENTS AND CONTINGENCIES
Operating lease commitments
Total operating lease commitments for rental of offices and land use rights and buildings of the Company’s PRC subsidiaries as of December 31, 2012 is
as follows:
Year ending December 31,
2013
2014
2015
2016
2017
Years after
Total minimum payments required
$
$
410,831
454,118
448,008
77,167
3,871
87,845
1,481,840
For the years ended December 31, 2012, 2011 and 2010, total lease expense amounted to $363,815, $359,506 and $216,943, respectively.
F-28
Legal proceedings
Dispute among Guizhou Taibang Shareholders over Raising Additional Capital
On May 28, 2007, a 91% majority of Guizhou Taibang’s shareholders approved a plan to raise additional capital from private strategic investors through
the issuance of an additional 20,000,000 shares of Guizhou Taibang equity interests at RMB2.80 per share. The plan required all existing Guizhou
Taibang’s shareholders to waive their rights of first refusal to subscribe for the additional shares. The remaining 9% minority shareholder of Guizhou
Taibang’s shares, the Guizhou Jie’an Company (“Jie’an”), did not support the plan and did not agree to waive its right of first refusal. On May 29, 2007,
the majority shareholders caused Guizhou Taibang to sign an Equity Purchase Agreement with certain investors, pursuant to which the investors agreed to
invest an aggregate of $7,475,832 (or RMB50,960,000) in exchange for 18,200,000 shares, or 21.4%, of Guizhou Taibang’s equity interests. At the same
time, Jie’an also subscribed for 1,800,000 shares, representing its 9% pro rata share of the 20,000,000 shares being offered. The proceeds from all parties
were received by Guizhou Taibang in accordance with the agreement.
In June 2007, Jie’an brought suit in the High Court of Guizhou Province (“Guizhou High Court”), China, against Guizhou Taibang and the three other
original Guizhou Taibang’s shareholders, alleging the illegality of the Equity Purchase Agreement. In its complaint, Jie’an alleged that it had a right to
acquire the shares waived by the original Guizhou Taibang’s shareholders and offered to the investors in connection with the Equity Purchase Agreement.
On September 12, 2008, the Guizhou High Court ruled against Jie’an and sustained the Equity Purchase Agreement. In November 2008, Jie’an appealed
the Guizhou High Court judgment to the People’s Supreme Court in Beijing. On May 13, 2009, the People’s Supreme Court sustained the original ruling
and denied the rights of first refusal of Jie’an over the additional shares waived by the original Guizhou Taibang’s shareholders. The registration of the
new investors as Guizhou Taibang’s shareholders and the related increase in registered capital of Guizhou Taibang with the Administration for Industry
and Commerce (“AIC”) are still pending. On January 27, 2010, the strategic investors brought suit in the Guizhou High Court against Guizhou Taibang
alleging Guizhou Taibang’s failure to register their equity interest in Guizhou Taibang with the local AIC and requesting the distribution of their shares of
Guizhou Taibang’s dividends. Guiyang Dalin Biologic Technologies Co., Ltd. (“Dalin”) also joined as a co-defendant as it is the majority shareholder and
exercises control over Guizhou Taibang’s day-to-day operations. The Company does not expect the strategic investors to prevail because, upon evaluation
of the Equity Purchase Agreement, the Company believes that the Equity Purchase Agreement is void due to certain invalid preconditions and the absence
of shareholder authorization of the initial investment. In the event that Guizhou Taibang is required to return their original investment amount to the
strategic investors, Guizhou Taibang has set aside the strategic investors’ initial fund along with RMB14,729,565 (approximately $2,337,582) in accrued
interest, and RMB509,600 (approximately $80,874) for the 1% penalty imposed by the agreement for any breach as of December 31, 2012. If strategic
investors prevail in their suit, Dalin’s interests in Guizhou Taibang could be reduced to approximately 41.3% . The Guizhou High Court heard the case on
April 8, 2010 and encouraged, and accepted by both parties, to settle the dispute outside the court but both parties failed to reach a mutual agreeable term.
F-29
On October 14, 2010, the Guizhou High Court ruled in favor of the Company and denied the strategic investors’ right as shareholders of Guizhou
Taibang, as well as their entitlement to the dividends. In light of this ruling, in November 2010 the Company returned the proceeds in the amount of
$1,699,040 (or RMB11,200,000) to one of the strategic investors. On October 26, 2010, the other strategic investors appealed to, and subsequently
accepted by, the People’s Supreme Court in Beijing on the ruling. On October 9, 2011, the People’s Supreme Court overruled the decision of the Guizhou
High Court and remanded the suit to the Guizhou High Court for retrial. On December 29, 2011, Guizhou High Court accepted the case for retrial. On
January 5, 2012, the strategic investors re-filed their case to the Guizhou High Court requesting, in addition to the share distribution, the distribution of
dividends and interest in the amount of RMB18,349,345 (approximately $2,912,041) and RMB2,847,000 (approximately $451,819), respectively. On
December 11, 2012, the Guizhou High Court affirmed the judgment against the strategic investors. In January 2013, the strategic investors appealed to the
People’s Supreme Court in Beijing on the ruling again. The People’s Supreme Court accepted the case for retrial. The Company is awaiting the hearing as
of the date of this report.
During the second quarter of 2010, Jie’an requested that Guizhou Taibang register its 1.8 million shares of additional capital infusion with the local AIC,
pursuant to the Equity Purchase Agreement, and such request was approved unanimously by Guizhou Taibang’s shareholders in a shareholders meeting
held in the second quarter of 2010. However, the Board of Directors of the Company is withholding its required ratification of the shareholders’ approval
of Jie’an’s request until the outcome of the ongoing litigations. On March 20, 2012, the Company received a subpoena that Jie’an brought suit in the
People’s Court of Huaxi District, Guizhou Province, against Guizhou Taibang, alleging Guizhou Taibang’s withholding of its request. Jie’an requested
that Guizhou Taibang register its 1.8 million shares of capital infusion, pay dividends associated with these shares, as well as the related interest and
penalty from May 2007 to December 2011 amounting to RMB25,000,000 (approximately $3,967,500) in aggregate, and return the over-paid subscription
of RMB1,440,000 (approximately $228,528), as well as the interest and penalty, amounting to RMB10,000,000 (approximately $1,587,000) in aggregate.
The People’s Court of Huaxi District, Guizhou Province, has accepted Jie’an’s suit. If the Company decides to ratify the approval or the case is ruled in
Jie’an’s favor, Dalin’s ownership in Guizhou Taibang will be diluted from 54% to 52.54% and Jie’an may be entitled to receive its pro rata share of
Guizhou Taibang’s profits since the date of Jie’an’s capital contribution became effective. As this case is closely tied to the outcome of the strategic
investors’ dispute stated above, the Company does not expect Jie’an to prevail. As of December 31, 2012, the Company had recorded, in its balance sheet,
payables to Jie’an in the amounts of RMB5,040,000 (approximately $799,848) for the additional funds received in relation to the 1.8 million shares of
capital infusion, RMB1,440,000 (approximately $228,528) for the over-paid subscription and RMB2,538,953 (approximately $402,932) for the accrued
interest. On May 15 and May 29, 2012, Guizhou Taibang was informed by the court that the case was postponed upon the request from Jie’an and no
exact hearing date has been provided as of the date of this report.
F-30
NOTE 20 – RELATED PARTY TRANSACTIONS
The material related party transactions undertaken by the Company with related parties for the years ended December 31, 2012, 2011 and 2010 are
presented as follows:
Sales of products to related parties(1)
Commission expenses with related parties(1)
December 31,
2012
$
$
-
3,591,836
For the Years Ended
December 31,
2011
$ 243,563 $
747,372 $
$
December 31,
2010
1,020,434
-
The material related party balances as at December 31, 2012 and 2011 are presented as follows:
Liabilities
Purpose
December 31, 2012 December 31, 2011
Other payable – related parties(2)
Other payable – related parties(3)
Other payable – related parties(1)
Total other payable – related parties
Advance from customers – a related party(1)
Loan
$
Contribution $
Commission $
$
$
Sales
2,311,044 $
1,431,308 $
339,272 $
4,081,624 $
- $
2,277,603
1,042,335
-
3,319,938
486,602
(1)
During the year ended December 31, 2011, Guizhou Taibang signed an agency contract with Guizhou Eakan Co., Ltd. (“Guizhou Eakan”), an
affiliate of one of the Guizhou Taibang’s noncontrolling interest shareholders, pursuant to which Guizhou Taibang would pay commission to
Guizhou Eakan for the promotion of the product of Placenta Polypeptide. As of December 31, 2012, Guizhou Taibang accrued commission
payable of $339,272 for service rendered by Guizhou Eakan. The commission expense for service rendered by Guizhou Eakan amounted to
$3,591,836, $747,372, and nil for the years ended December 31, 2012, 2011 and 2010, respectively.
(2)
(3)
Prior to the signing of the agency contract with Guizhou Eakan, Guizhou Taibang provided processing services to Guizhou Eakan. Guizhou
Taibang’s total income from processing services to Guizhou Eakan amounted to nil, $243,563 and $499,128 for the years ended December 31,
2012, 2011 and 2010, respectively. In addition, Guizhou Taibang made sales to Guizhou Eakan, amounting to nil, nil and $521,306 for the years
ended December 31, 2012, 2011 and 2010, respectively.
As of December 31, 2011, Guizhou Taibang received $486,602 in advance from Guizhou Eakan for the product Placenta Polypeptide that has not
yet been delivered by Guizhou Taibang. The payment was made by Guizou Eakan on behalf of the customers.
Guizhou Taibang has payables to Guizhou Eakan Investing Corp., amounting to approximately $2,311,044 and $2,277,603 as of December 31,
2012 and 2011, respectively. Guizhou Eakan Investing Corp. is one of the noncontrolling interest shareholders of Guizhou Taibang. The
Company borrowed this interest free advance for working capital purpose for Guizhou Taibang. The balance is due on demand.
Guizhou Taibang has payables to Jie’an, a noncontrolling interest shareholder of Guizhou Taibang, amounting to approximately $1,431,308 and
$1,042,335 as of December 31, 2012 and 2011, respectively. In 2007, Guizhou Taibang received additional contributions from Jie’an of $962,853
(or RMB6,480,000) to maintain Jie’an’s equity interest in Guizhou Taibang at 9%. However, due to a legal dispute among shareholders over
raising additional capital as discussed in the legal proceeding section (see Note 19), the contribution is subject to be returned to Jie’an. During the
second quarter of 2010, Jie’an requested that Guizhou Taibang register its 1.8 million shares of additional capital contribution with the local AIC,
pursuant to the Equity Purchase Agreement, and such registration was approved by the majority shareholders of Guizhou Taibang in a
shareholders’ meeting held in the second quarter of 2010. However, the Board of Directors of the Company is withholding its required ratification
of the shareholders’ approval of Jie’an’s request until the completion of the ongoing litigations. If the Company decided to ratify the approval,
Dalin’s ownership in Guizhou Taibang will be diluted from 54% to 52.54% and Jie’an will be entitled to receive its pro rata share of Guizhou
Taibang’s profits since the date of Jie’an contribution became effective. As this case is closely tied to the outcome of the strategic investors’
dispute stated above, the Company has set aside Jie’an’s additional fund of RMB5,040,000 (approximately $799,848), the over-paid subscription
of RMB1,440,000 (approximately $228,528) along with RMB2,538,953 (approximately $402,932) in accrued interest and penalty as of December
31, 2012.
F-31
NOTE 21 - NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share of common stock for the periods indicated:
Net income attributable to China Biologic Products, Inc.
Earnings allocated to participating nonvested shares
Net income allocated to common stockholders used in computing basic net income per
common stock
Interest on the notes
Change in fair value of embedded conversion option in the notes
Change in fair value of warrants issued to investors and placement agent
Net income used in diluted net income per common stock
Weighted average shares used in computing basic net income per common stock
Diluted effect of the notes
Diluted effect of warrants issued to investors
Diluted effect of placement agent warrants
Diluted effect of stock option
Weighted average shares used in computing diluted net income per common stock
Net income per common stock – basic
Net income per common stock – diluted
$
$
$
$
$
$
$
$
$
$
$
$
$
F-32
December 31,
2012
For the Years Ended
December 31,
2011
December 31,
2010
45,222,189 $
(69,624)
18,181,710 $
-
31,542,883
-
45,152,565
-
-
$
$
(1,769,140) $
43,383,425 $
-
26,153,540 $
$
212,792 $
$
473,391 $
26,839,723 $
-
18,181,710
3,582,648
$
(6,289,661) $
(5,685,173) $
$
9,789,524
25,028,796 $
515,068 $
551,686 $
$
559,112 $
26,654,662 $
-
31,542,883
-
-
(228,033)
31,314,850
23,586,506
-
-
8,472
581,454
24,176,432
1.73 $
1.62 $
0.73
0.37
$
$
1.34
1.30
During the year ended December 31, 2012, 1,938,009 options with an average exercise price of $11.34, and rights issued pursuant to the stockholder
rights plan (see Note 15), were excluded from the calculation of diluted net income per common stock since they were antidilutive.
During the year ended December 31, 2011, 1,164,000 options with an average exercise price of $12.84 were excluded from the calculation of diluted net
income per share of common stock since they were antidilutive.
During the year ended December 31, 2010, the Subscribed Securities and 1,021,000 options at an average exercise price of $12.43 were excluded from
the calculation of diluted net income per share of common stock since they were antidilutive.
NOTE 22 – CHINA BIOLOGIC PRODUCTS, INC. (PARENT COMPANY)
The following represents condensed unconsolidated financial information of the Parent Company only:
Condensed Balance Sheets:
Cash
Prepayments and prepaid expenses
Property, plant and equipment, net
Investment in and amounts due from subsidiaries
Total Assets
Other payables and accrued expenses
Derivative liabilities- Warrants
Total Liabilities
Total Equity
Total Liabilities and Equity
Condensed Statements of Comprehensive Income:
Equity in income of subsidiaries
General and administrative expenses
Other expenses, net
Change in fair value of derivative liabilities
Earnings before income tax expense
Income tax benefit (expense)
Net Income
December 31, 2012 December 31, 2011
$
76,101 $
95,486
2,575
198,689,734
198,863,896
3,394,180
-
3,394,180
236,373
66,821
9,195
144,641,845
144,954,234
4,031,451
5,410,419
9,441,870
195,469,716
135,512,364
$
198,863,896 $
144,954,234
For the Years Ended
December 31, 2012 December 31, 2011 December 31, 2010
$
$
51,063,576 $
(8,048,993)
(34,543)
1,769,140
44,749,180
473,009
45,222,189 $
19,848,119 $
(9,669,494)
(3,708,776)
11,974,834
18,444,683
(262,973)
18,181,710 $
43,680,970
(6,667,836)
(2,047,084)
(3,233,288)
31,732,762
(189,879)
31,542,883
F-33
Condensed Statements of Cash Flows:
Net cash (used in) provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net (decrease) increase in cash
Cash at beginning of year
Cash at end of year
For the Years Ended
December 31, 2012 December 31, 2011 December 31, 2010
$
$
(160,272) $
-
-
(160,272)
236,373
76,101 $
(165,551) $
(1,970)
300,000
132,479
103,894
236,373 $
86,060
-
(12,441)
73,619
30,275
103,894
F-34
EXHIBIT INDEX
Exhibit No. Description
2.1
3.1
3.2
4.1
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
Share Exchange Agreement between the Company, Logic Express Limited and the selling stockholders signatory thereto, dated as of July
18, 2006 (incorporated by reference to Exhibit 2 of the registration statement on Form SB- 2 filed by the Company on September 5, 2007)
Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the quarterly report on
Form 10-Q filed by the Company on August 9, 2012)
Second Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.2 of the quarterly report on Form 10-Q
filed by the Company on August 9, 2012)
Form of Registration Rights Agreement, dated June 5, 2009 (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K
filed by the Company on June 5, 2009)
Form of 3.8% Convertible Senior Secured Note due 2011 (incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K
filed by the Company on June 5, 2009)
Form of Warrant (incorporated by reference to Exhibit 4.3 of the Current Report on Form 8-K filed by the Company on June 5, 2009)
Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of China Biologic Products, Inc.
(incorporated by reference to Exhibit 3.1 of the registration form on Form 8-A12B filed by the Company on November 21, 2012)
China Biologic Products, Inc. 2008 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 of the current report on Form 8-K
filed by the Company on May 13, 2008)
Form of Stock Option Award Agreement of China Biologic Products, Inc. (incorporated by reference to Exhibit 10.5 of the current report
on Form 8-K filed by the Company on May 13, 2008)
Group Secondment Agreement, dated October 28, 2002, between Shandong Taibang Biological Products Co., Ltd. and the Shandong
Institute (English Translation) (incorporated by reference to Exhibit 10.1 of the registration statement on Form SB-2/A filed by the
Company on December 3, 2007)
Amended and Restated Joint Venture Agreement, between Logic Express Limited and the Shandong Institute, dated as of March 12, 2006
(English Translation) (incorporated by reference to Exhibit 10.2 of the registration statement on Form SB-2 filed by the Company on
September 5, 2007)
Letter of Intent for Equity Transfer, between Logic Express Limited and the Shandong Institute, dated as of June 10, 2006 (English
Translation) (incorporated by reference to Exhibit 10.3 of the registration statement on Form SB- 2 filed by the Company on September 5,
2007)
Joint Venture and Cooperation Agreement between Mr. Fan Qingchun, Shandong Taibang Biological Products Co., Ltd. and Shaanxi
Power Construction Corporation, dated September 12, 2008 (incorporated by reference to Exhibit 10.2 of the current report on Form 8-K
filed by the Company on October 16, 2008)
Agreement on Equity Transfer, Acquisition, Joint Venture and Cooperation, among Shandong Taibang Biological Products Co., Ltd.,
Shaanxi Power Construction Corporation and Mr. Fan Qingchun, dated September 12, 2008 (incorporated by reference to Exhibit 10.3 of
the current report on Form 8-K filed by the Company on October 16, 2008)
(Shareholder) Agreement among Shandong Taibang Biological Products Co., Ltd., Logic Express Limited and Biological Institute dated
September 12, 2008 (incorporated by reference to Exhibit 10.4 of the current report on Form 8-K, filed by the Company on October 16,
2008)
Equity Transfer Agreement, dated September 26, 2008, among Logic Express Limited, Chongqing Dalin Biologic Technologies Co., Ltd.
and certain shareholders of Chongqing Dalin Biologic Technologies Co., Ltd. (incorporated by reference to Exhibit 10.1 of the current
report on Form 8-K filed by the Company on October 2, 2008)
Equity Transfer Agreement, between Shandong Taibang Biological Products Co., Ltd. and Mr. Fan Qingchun, dated October 10, 2008
(incorporated by reference to Exhibit 10.1 of the current report on Form 8-K filed by the Company on October 16, 2008)
Supplemental Agreement, dated November 3, 2008, among Logic Express Limited, Fan Shaowen, as representative of the shareholders of
Chongqing Dalin Biologic Technologies Co., Ltd. and Chongqing Dalin Biologic Technologies Co., Ltd. (English Translation)
(incorporated by reference to Exhibit 10.2 of the current report on Form 8-K filed by the Company on November 7, 2008)
Second Supplemental Agreement, dated November 14, 2008, among Logic Express Limited, Fan Shaowen as representative of the
shareholders of Chongqing Dalin Biologic Technologies Co., Ltd. and Chongqing Dalin Biologic Technologies Co., Ltd. (English
Translation) (incorporated by reference to exhibit 10.3 of the current report on Form 8-K filed by the Company on November 20, 2008)
76
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
Amended Equity Transfer Agreement, dated December 12, 2008, among Logic Express Limited, Chongqing Dalin Biologic Technologies
Co., Ltd., and certain shareholders of Chongqing Dalin Biologic Technologies Co., Ltd. (English Translation) (incorporated by reference
to exhibit 10.4 of the current report on Form 8-K filed by the Company on December 18, 2008)
Equity Transfer and Entrustment Agreement, dated April 6, 2009, among Logic Express, Shandong Taibang Biological Products Co., Ltd.
and the Shandong Institute of Biological Products (English Translation) (incorporated by reference to Exhibit 10.6 of the current report on
Form 8-K filed by the Company on April 13, 2009)
Asset Purchase Agreement, between Xia Jin An Tai Plasma Collection Co., Ltd. and Xia Jin County Plasma Collection Station, dated as of
October 20, 2006 (English Translation) (incorporated by reference to Exhibit 10.15 of the registration statement on Form SB-2/A filed by
the Company on December 3, 2007)
Asset Purchase Agreement, between Liao Cheng An Tai Plasma Collection Co., Ltd. and Yang Gu County Plasma Collection Station,
dated as of November 3, 2006 (English Translation) (incorporated by reference to Exhibit 10.16 of the registration statement on Form SB-
2/A filed by the Company on December 3, 2007)
Asset Purchase Agreement, between Qi He An Tai Plasma Collection Co., Ltd. and Qi He County Plasma Collection Station, dated as of
November 9, 2006 (English Translation) (incorporated by reference to Exhibit 10.14 of the registration statement on Form SB-2/A filed by
the Company on December 3, 2007)
Asset Purchase Agreement, between He Ze An Tai Plasma Collection Co., Ltd and Yun Cheng County Plasma Collection Station, dated as
of December 15, 2006 (English Translation) (incorporated by reference to Exhibit 10.22 of the registration statement on Form SB-2/A
filed by the Company on December 3, 2007)
Asset Purchase Agreement, between Zhang Qiu An Tai Plasma Collection Co., Ltd. and Zhang Qiu Plasma Collection Station, dated as of
December 31, 2006 (English Translation) (incorporated by reference to Exhibit 10.12 of the registration statement on Form SB-2/A filed
by the Company on December 3, 2007)
Asset Purchase Agreement, between Guang Xi Huan Jiang Missile Plasma Collection Co., Ltd. and Huan Jiang Maonan Autonomous
County Plasma Collection Station, dated as of April 24, 2007 (English Translation) (incorporated by reference to Exhibit 10.13 of the
registration statement on Form SB-2/A filed by the Company on December 3, 2007)
Asset Purchase Agreement, between Fang Cheng Plasma Collection Co., Ltd. and Fang Cheng Plasma Company, dated as of April 30,
2007 (English Translation) (incorporated by reference to Exhibit 10.21 of the registration statement on Form SB-2/A filed by the
Company on December 3, 2007)
Asset Purchase Agreement, between Guang Xi Huan Jiang Missile Plasma Collection Co., Ltd. and Huan Jiang Maonan Autonomous
County Plasma Collection Station, dated as of August 5, 2007 (English Translation) (incorporated by reference to Exhibit 10.13 of the
registration statement on Form SB-2/A filed by the Company on December 3, 2007)
Trademark Licensing Agreement, dated as of February 27, 2007 (English Translation) (incorporated by reference to Exhibit 10.17 of the
registration statement on Form SB-2/A filed by the Company on December 3, 2007)
Loan Agreement, dated as of November 30, 2006, among Shandong Taibang and the Shandong Institute and Logic Express (English
Translation) (incorporated by reference to Exhibit 10.18 of the registration statement on Form SB-2/A filed by the Company on December
3, 2007)
Supplementary Agreement, dated as of September 1, 2007, among Shandong Taibang Biological Products Co., Ltd., the Shandong
Institute and Logic Express Limited (English Translation) (incorporated by reference to Exhibit 10.19 of the registration statement on
Form SB-2/A filed by the Company on December 3, 2007)
Employment Agreement, between David (Xiaoying) Gao and the Company, dated as of May 11, 2012 (incorporated by reference to
Exhibit 10.1 of the current report on Form 8-K filed by the Company on May 11, 2012)
Employment Agreement, between Ming Yang and the Company, dated August 31, 2012 (incorporated by reference to Exhibit 10.1 of the
current report on Form 8-K filed by the Company on September 7, 2012)
Form of Director’s Employment Agreement (incorporated by reference to Exhibit 10.8 of the registration statement on Form SB-2 filed by
the Company on September 5, 2007)
Form of Independent Director Agreement (incorporated by reference to Exhibit 10.1 of the current report on Form 8-K filed by the
Company on July 30, 2008)
Form of Indemnity Agreement (incorporated by reference to Exhibit 10.2 of the current report on Form 8-K filed by the Company on July
30, 2008)
77
10.31
10.32
10.33
14
21
23.1*
31.1*
31.2*
32.1*
32.2*
101*
Form of Guarantee and Pledge Agreement, dated June 10, 2009 (incorporated by reference to Exhibit 10.2 of the current report on Form 8-
K filed by the Company on June 5, 2009).
Form of Indemnification Agreement, dated June 10, 2009 (incorporated by reference to Exhibit 10.3 of the current report on Form 8-K
filed by the Company on June 5, 2009).
Preferred Shares Rights Agreement, dated as of November 20, 2012 (incorporate by reference to Exhibit 4.1 of the registration form on
Form 8-A12B filed by the Company on November 21, 2012).
Code of Ethics (incorporated by reference to Exhibit 14 of the annual report on Form 10-KSB filed by the Company on March 28, 2008)
Subsidiaries of the Company (incorporated by reference to Exhibit 21 of the annual report on Form 10-K, filed by the Company on March
31, 2011)
Consent of KPMG, an independent registered public accounting firm
Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Interactive data files pursuant to Rule 405 of Regulation S-T (furnished herewith).
*Filed herewith.
78