UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K /A
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2008
OR
¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
COMMISSION
FILE NO: 001-32569
AMERICAN
ORIENTAL BIOENGINEERING, INC.
(Exact
name of registrant as specified in its charter)
NEVADA
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84-0605867
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(State or other jurisdiction
of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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25th
Floor, Great China International Exchange Square, No. 1 Fuhua 1 Rd, Futian
District,
Shenzhen,
518034, People’s Republic of China
(Address
of principal executive offices) (Zip Code)
86-451-8666-6601
(Registrant’s
telephone number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act:
Common
Stock, Par Value $0.001 Per Share
|
New
York Stock Exchange
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(Title
of Class)
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(Name
of exchange on which registered)
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Securities
Registered Pursuant to Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
¨
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes
¨
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
x
No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of 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 has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§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
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
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Accelerated filer
x
|
|
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Non-accelerated
filer (Do not check if a smaller reporting
company)
¨
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Smaller reporting company
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
¨
No
x
The
aggregate market value of the voting stock held on June 30, 2008 by
non-affiliates of the registrant was $610,730,086 based on the closing price of
$9.87 per share as reported on the New York Stock Exchange on June 30,
2008, the last business day of the registrant’s most recently completed second
fiscal quarter (calculated by excluding all shares held by executive officers,
directors and holders known to the registrant of five percent or more of the
voting power of the registrant’s common stock, without conceding that such
persons are “affiliates” of the registrant for purposes of the federal
securities laws).
At
March 6, 2009, 78,249,264 shares of the registrant’s Class A Common
Stock, $0.001 par value and 1,000,000 shares of the registrant’s
Preferred Stock, $0.001 par value were outstanding.
TABLE OF
CONTENTS
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report includes forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements, other than statements of
historical fact, are statements that could be deemed forward-looking statements,
including, but not limited to, statements regarding our future financial
position, business strategy and plans and objectives of management for future
operations. When used in this prospectus, the words “believe,” “may,” “will,”
“estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions
are intended to identify forward-looking statements.
We have
based these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect
our financial condition, results of operations, business strategy, short-term
and long-term business operations and objectives, and financial needs. These
forward-looking statements are subject to certain risks and uncertainties that
could cause our actual results to differ materially from those reflected in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to the risks discussed under the
heading “Risk Factors”. Except as required by law, we assume no obligation to
update these forward-looking statements publicly or to update the reasons actual
results could differ materially from those anticipated in these forward-looking
statements, even if new information becomes available in the
future.
In light
of these risks, uncertainties and assumptions, the forward-looking events and
circumstances discussed in this Annual Report may not occur and actual results
could differ materially and adversely from those anticipated or implied in the
forward-looking statements. Accordingly, readers are cautioned not to place
undue reliance on such forward-looking statements.
This
Amendment No. 1 on Form 10-K/A (the “Form 10-K/A”) amends the Annual Report
on Form 10-K for the year ended December 31, 2008 filed by American Oriental
Bioengineering, Inc. (the “Company”), which was originally filed with the
Securities and Exchange Commission on March 9, 2009 (the “Original
Report”).
During
the review of its third quarter September 30, 2009 operating results, the
Company identified isolated historical accounting errors in: (i) the calculation
of stock based compensation, (ii) the recognition of deferred tax liabilities of
certain acquired assets and (iii) the provision of deferred tax liabilities on
undistributed earnings. The accounting errors have resulted in the misstatement
of certain balance sheet and income statement items and the cumulative net
earnings since the first quarter of 2007. The Company has no evidence that the
errors resulted from any fraud or intentional misconduct. The Company undertook
a review to determine the total amount of the errors and the accounting periods
in which the errors occurred. The impact of each individual error
identified or in aggregate was not material, c
onsidering the effects of prior year misstatements when
quantifying misstatements in current year financial statements, the Company
chose to restate its previously reported financial
statements.
The Form
10-K/A includes amended and restated consolidated financial statements and
related financial information for the years ended December 31, 2008, 2007
and 2006. It also includes amended and restated financial results for
each of the three interim quarterly periods in the years ended December 31, 2008
and 2007. The nature of the restatement is disclosed in Note 4 to the
consolidated financial statements and the amended and restated financial results
for each of the three interim quarterly periods is disclosed in Note 22 to the
consolidated financial statements. The effects of this restatement are reflected
in the Management’s Discussion and Analysis included in this Form
10-K/A.
Items 5,
6, 7, 8, 11 and 15 of the Original Report have been amended and restated in this
Amendment to reflect the restatement. This Amendment includes information
contained in the Original Report and, except as identified above, we have not
modified or updated any other disclosures presented in the Original Report. The
disclosures in this Amendment continue to reflect as of the date of the
Original Report and have not been updated to reflect subsequent events
identified after the filing of the Original Report. Accordingly, this Amendment
should be read in conjunction with our other filings issued subsequent to the
Original Report.
Overview
We are a
leading, fully integrated, pharmaceutical company dedicated to improving health
through the development, manufacture and commercialization of a broad range of
pharmaceutical and healthcare products. A majority of our current products are
offered and derived from Chinese based traditional medicines and are
manufactured using plant based materials. Our profitable and diversified
business is comprised of prescription pharmaceutical products, over-the-counter
pharmaceutical products and nutraceutical products. Our pharmaceutical products
are well recognized brands in China and have been approved by the Chinese State
Food and Drug Administration, or SFDA, based on demonstrated safety and
efficacy. We sell our products primarily to hospitals, clinics, pharmacies and
retail outlets at over 100,000 locations in all provinces, including rural areas
and major cities in China, through the efforts of our approximately 2,133 sales
and marketing professionals. We leverage our relationships with over 320
distributors to distribute our products to both urban and rural areas of China.
We have experienced substantial growth in recent years and intend to use our
established business as a platform for continued growth both organically and
through strategic acquisitions.
According
to a recent ISI Emerging Markets report, the pharmaceutical industry in China
was approximately $27.7 billion in 2005. We estimate the pharmaceutical market
size was around $47.8 billion in 2008 assuming a compound annual growth rate of
20% since 2005. China is forecast to become the world’s fifth largest
pharmaceutical market by 2010, which includes both western medicine and
Traditional Chinese Medicine, or TCM. Our pharmaceutical products are modernized
versions of TCM. Plant based TCM products have been widely used in China for
thousands of years and are deeply ingrained in the Chinese culture. The market
for TCM pharmaceutical products in China was approximately $5.8 billion in 2005,
accounting for approximately 20.9% of all expenditures on medicine in China.
According to a 2006 Frost & Sullivan report, the market for
nutraceutical products in China was approximately $12.5 billion in 2005.
Currently, the TCM market in China is highly fragmented, and we believe there
are over 1,200 companies currently engaged in the development, manufacture and
sale of TCM products, providing significant opportunities to acquire additional
businesses, products and technologies.
Our
revenues increased from $160.5 million in 2007 to $264.6 million in 2008,
representing an increase of 64.90% year over year. The following table
represents the manufacturing revenues realized from the sale of our
Pharmaceutical and Nutraceutical products, as well as our distribution revenue
from our newly acquired distribution business for the periods
indicated:
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For the Year Ended
December 31,
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Percent
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2008
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2007
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Change
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Manufacturing
revenue
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$
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259,171,087
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$
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160,482,383
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61.50
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%
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Pharmaceutical
products
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224,904,348
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127,823,297
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75.95
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%
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Nutraceutical
products
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34,266,739
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32,659,086
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4.92
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%
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Distribution
revenue
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5,471,971
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—
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—
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Total
sales
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$
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264,643,058
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$
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160,482,383
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64.90
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%
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Each of
our Pharmaceutical products has certain medicinal functions and has demonstrated
safety and efficacy in accordance with SFDA requirements for the treatment of at
least one or more therapeutic indications. A majority of our pharmaceutical
products are based on non-synthetic medicinal compounds that are extracted from
various parts of one or more plants. We apply modern production techniques to
TCM to produce a variety of pharmaceutical products in different formulations,
such as tablets, capsules and powders.
We
currently market over 60 pharmaceutical products in China. Two flagship
prescription pharmaceutical products currently marketed in China are
Shuanghuanglian Lyophilized Injection Powder, or SHL Injection Powder, and Cease
Enuresis Soft Gel, or CE Gel. SHL Injection Power is an anti-viral injection
effective in treating respiratory infections, bronchitis and tonsillitis, and CE
Gel is indicated to alleviate bedwetting. We market our SHL Injection Powder
through our brand name SHJ, and our CE Gel through Harbin Three Happiness
Bioengineering Co., Ltd, or Three Happiness, which are both well-recognized
brand names in China. These products are detailed to physicians at hospitals and
clinics through the efforts of our sales force and through educational physician
conferences and seminars.
Over-the-counter
pharmaceutical products are similar to our prescription pharmaceutical products
in that they are approved by the SFDA, but are sold over-the-counter direct to
consumers in pharmacies and other retail outlets. We currently market over 30
over-the-counter pharmaceutical products including our Jinji Series, Cease
Enuresis Patch, or CE Patch, and Boke Series. Jinji Series is a line of products
approved for the treatment of various women’s health indications including
endometritis, annexitis, pelvic inflammation, premenstrual and menopausal
symptoms. CE Patch is a product indicated to alleviate bedwetting and for the
treatment of incontinence. Boke Series is a line of nasal products indicated to
alleviate sinus infections and nasal congestions. Our Jinji line of products,
our CE Patch and our Boke Series are proprietary branded products and have
leading market positions in the over-the-counter segments in which they compete
and are marketed through our extensive direct-to-consumer advertising campaign.
We highlight the quality and benefits of these products through television,
newspaper and print advertisements.
Nutraceutical
products, also frequently referred to as functional foods, functional beverages,
dietary supplements and general nutritional supplements, are intended to be used
to improve overall health and well-being. We market several nutraceutical
products as general nutritional supplements in China, including our popular
soybean peptide based drinks, tablets, powder and instant coffee. General
nutritional supplements are generally not regulated by the SFDA; however, local
government agencies may impose certain manufacturing requirements on those
products aimed at protecting their hygiene. We promote our nutraceutical
products through print advertising campaigns in magazines and newspapers, and
distribute these products to supermarkets, fitness centers, healthcare specialty
stores and other retail outlets in China.
In
October 2008, through the acquisition of Nuo Hua Investment Company Ltd. (“Nuo
Hua”), distribution form part of our businesses. Nuo Hua is a holding company
with a subsidiary and affiliated company that maintain a significant presence in
pharmaceutical wholesale and retail distribution in China. We now distribute
more than 6,000 pharmaceutical products.
In
addition to our marketed products, we have a portfolio of over 400 prescription
and over-the-counter pharmaceutical products that are approved by SFDA, but have
not been commercially launched.
We own
and operate five manufacturing facilities through which we manufacture all of
our products. Each facility is Good Manufacturing Practices, or GMP,
International Organization for Standardization, or ISO, and Export Product
certified.
Industry
Background and Market Opportunities
The
Chinese pharmaceutical and nutraceutical markets are highly fragmented,
comprising a large number of small enterprises. We believe that this
fragmentation provides opportunities for better managed and more financially
sound companies to gain market share by using comparatively strong technical,
manufacturing and marketing abilities. Moreover, China’s regulatory agencies
have introduced a series of new regulations to control the standards and quality
of manufacture and distribution in the pharmaceutical industry. These new
regulations require companies to obtain government recognized manufacturing and
distribution licenses, GMP and good sales practice certificates, and have
resulted in the elimination of many small or poorly managed companies. We
believe that this new legislation will precipitate consolidation opportunities
and a generally more favorable competitive environment.
Pharmaceutical
Market
The
pharmaceutical industry in China was approximately $27.7 billion in 2005 and
China is expected to become the world’s fifth largest pharmaceutical market by
2010, which includes western medicine and TCM. This growth is being driven by
several factors including improving standards of living and an increase in
disposable income fueled by the growing economy, the aging population, the
increasing participation in the State Basic Medical Insurance System and the
increase in government spending on public health care. In January 2009, the
Chinese government approved a healthcare reform plan and has budgeted for RMB850
billion, or $124 billion, over the next three years to make medical services and
products more affordable and accessible to the whole population.
Traditional
Chinese Medicine Market
The TCM
market for pharmaceutical products in China was approximately $5.8 billion in
2005, accounting for approximately 20.9% of all expenditures on medicine in
China. TCM, including prescription and over-the-counter pharmaceuticals, have
been widely used in China for thousands of years and are deeply ingrained in the
Chinese culture. Historically, TCM consisted primarily of mixtures of dried
herbs and, in some cases, animal parts and minerals. These mixtures would be
boiled and simmered at home to create a medicinal tea or soup. These liquid
concoctions were inconvenient to prepare and take, and their dosage and quality
were inconsistent due to varied methods of preparation and differences in the
quality of ingredients. Despite these characteristics, we believe that consumers
perceive TCM products to have a superior safety profile compared to western
pharmaceuticals and TCM are more effective in treating chronic and frequently
occurred illnesses. In recent decades, Chinese pharmaceutical manufacturers have
applied modern production technologies to produce TCM with consistent quality
and a variety of formulations, such as tablets, capsules and powders, which we
refer to as modernized TCM.
We
believe the People’s Republic of China (“PRC”) is committed to supporting and
promoting the development of modernized TCM, as evidenced by the government
formulating an industry development plan for the modernized TCM sector and
adding more modernized TCMs to the national medicine catalog of the National
Medical Insurance Program. We believe TCMs will be a major component, in the
national medicine catalog. Additionally, in the PRC pharmaceutical industry
five-year plan released in June 2006 by the National Development and Reform
Commission, or the NDRC, the NDRC identified TCMs, particularly TCMs used for
the treatment of diseases prevalent among middle-aged and elderly people, as a
priority area that will receive governmental support. The State Administration
of Traditional Chinese Medicine, a national government agency, formulates TCM
industry policies for the development of TCM and provides research grants for
TCM research and development.
We
believe that TCM will remain mainstream medicines in China and will continue to
grow as a result of:
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China’s
longstanding preference for TCM
remedies;
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•
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government
support for modernized TCM as a key component of increasing quality of
healthcare;
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•
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existence
of well-recognized brands supported by a long
history;
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•
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the
rapidly growing over-the-counter market, in which TCM makes up more than
half; and
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•
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lower
pricing as compared to western
medicine.
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Nutraceutical
Market
According
to a 2006 Frost & Sullivan report, the market size of the Chinese
nutraceutical market, comprised of functional foods, functional beverages and
dietary supplements, was $12.5 billion in 2005. While there are no official
definitions of the functional food and beverage categories in China, this is
generally accepted to mean conventional food and beverages with added
ingredients beneficial to the human body. Functional foods are most commonly
fortified with nutritional ingredients such as calcium, soy products or dairy
products. Functional beverages are typified by sports drinks, energy drinks,
vitamin-enhanced water and other similar nutritional drinks. Dietary supplements
are products that are intended to supplement the diet with vitamins, minerals,
herbs, amino acids or other plant-based products. These types of supplements are
typically ingested in the form of a pill, capsule, tablet or in liquid form. The
main channels for distributing nutraceutical products, including health foods,
in China are supermarkets and retail outlets. According to the 2006
Frost & Sullivan report, in 2005, the functional beverage market was
estimated to be $5.0 billion and the dietary supplement market was estimated to
be $4.5 billion.
The
nutraceutical market in China has been growing rapidly over the past decade.
This growth is driven primarily by the convenience associated with taking these
products and the marketing investments that early entrants have made. As China’s
population is increasingly influenced by western culture, Chinese men and women
have begun to pay more attention to body image and weight.
Some
nutraceuticals may be registered as health foods in China and are subject to
approval by the SFDA. Health foods are generally defined as products that are
suitable for a specific group of people and that are able to adjust body
functions while not aiming at curing a disease. These substances, however, only
need to demonstrate safety rather than meet clinical endpoints for efficacy. The
SFDA has a list of 27 approved health and beauty benefits that health foods may
claim on their packaging or in advertisements. These direct-to-consumer
advertisements typically highlight one or more of the approved benefits while
focusing on the style and fashion of healthy living. General nutritional
supplements are generally not regulated by the SFDA; however, local government
agencies may impose certain manufacturing requirements on these products aimed
at protecting their hygiene.
Financial
Information about Industry Segments
Since
October 2008, we have two operating segments based on our major lines of
businesses: manufacturing and distribution. For additional information please
refer to Note 3 to the consolidated financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2008.
Our
Strengths
We
believe we have the following competitive strengths that could enable us to
capitalize on the large, fragmented and growing market for our pharmaceutical
and nutraceutical products.
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Fully
Integrated Platform for Sustainable Growth.
We are a
vertically integrated pharmaceutical and nutraceutical company with our
own development, manufacturing, commercialization and distribution
capabilities for the prescription pharmaceutical, over-the-counter
pharmaceutical and nutraceutical markets. Our nationally recognized
branded products are distributed to over 100,000 locations in all
provinces, including rural areas and major cities in China. We believe
these capabilities can be leveraged to provide substantial organic growth
across all of our product categories and can serve as a platform for
integrating additional
acquisitions.
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•
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Diverse
Product Categories That Provide Operating Flexibility
.
Our business
consists of three product categories including prescription pharmaceutical
products, over-the-counter pharmaceutical products and nutraceutical
products. Our pharmaceutical products treat different therapeutic areas
including women’s health, nasal, bedwetting and anti viral. Each of these
competes in a market segment with differentiated regulatory, economic and
general market characteristics. We believe this diversification reduces
our dependence on any one market segment and enables us to react quickly
to evolving market conditions in China in order to optimize our business
operations.
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•
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Well-Recognized
Brand Names That Can be Leveraged for Additional Growth. We have
nationally recognized brand names in China, including, Jinji, SHJ, Boke
and Three Happiness. We believe these brand names will allow continued
sales growth for our existing products and can be leveraged further with
product line extensions and by establishing brand families for related
products.
For
instance, our Jinji product line enjoys particularly strong brand
recognition in the women’s health market. We believe we can significantly
capitalize on this strength for future product introductions to treat
other women’s health indications and as we expand into other therapeutic
categories.
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Demonstrated
Ability to Identify and Integrate Acquisitions. We have completed and
integrated seven acquisitions in the last five years, each of which has
contributed to our revenue and earnings growth. These acquisitions also
added value to our brands, enhanced our products development capabilities,
expanded our distribution networks and broadened our products offering.
Our disciplined approach to acquisitions is based on well-defined criteria
and is supported by a 14-person multi-disciplinary team dedicated to these
business development activities, which we believe positions us well to
participate in further consolidation in our
industries.
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Experienced
and Results-Oriented Management Team. Several members of our senior
management team have worked together for over 15 years and have
contributed significantly to the growth of our business. Our revenues have
grown at a CAGR of 69% over the past five years from $32.0 million in 2004
to $264.6 million in 2008. Our management team has extensive experience
with the People’s Republic of China, or PRC, government and the market for
pharmaceutical and nutraceutical products. Our management team encourages
a strong corporate culture, which we believe contributes to our overall
results.
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Our
Strategy
Our
objective is to become the market leader for the development, manufacture and
commercialization of pharmaceutical products. We intend to achieve this
objective by:
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Promoting
Our Existing Brands to Maintain National Recognition.
We
intend to support and grow the existing recognition and reputation of our
brands and to maintain our branded pricing strategy through continued
sales and marketing efforts. To achieve this goal, we plan
to:
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•
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detail
the efficacy and safety profile of our established prescription
pharmaceutical products to physicians at hospitals and clinics in all
provinces in China through the efforts of our sales force and through
educational physician conferences and
seminars;
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•
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expand
our extensive direct-to-consumer advertising campaign highlighting the
quality and benefits of our fast growing over-the-counter pharmaceutical
products through television, newspaper and print advertisements;
and
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Developing
and Introducing Additional Products to Expand or Strengthen Our
Existing Portfolio.
We plan to focus our research and
development capabilities towards expanding our existing portfolio of
approved products. We have over 400 prescription and over-the-counter
pharmaceutical products in our portfolio that are currently approved but
have not been commercially launched. In addition, we intend to conduct
clinical trials for new modernized products and product line extensions
for our existing products. We plan to introduce new modernized products to
leverage our branded market leadership position, particularly in the
therapeutic areas we already have an establishment to develop product line
extensions for our existing
products.
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Expanding
Our Distribution Network For Further Market Penetration.
We
intend to expand our reach beyond the current approximately 100,000
distribution points in China to drive additional growth of our existing
and future products. We currently contract with over 320 distributors in
China and plan to expand upon these relationships to target new markets.
In addition, we plan to continue to broaden our marketing efforts outside
of major cities in China and increase our market penetration in cities and
rural areas where we already have a presence.
We
also intend to expand our presence beyond China to international markets.
We plan to work with other international pharmaceutical companies in cross
selling of our products.
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•
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Acquiring
Complementary Products Lines, Technologies, Distribution Networks and
Companies
.
We intend to
selectively pursue strategic acquisition opportunities that we believe
would grow our customer base, expand our product lines and distribution
network, enhance our manufacturing and technical expertise or otherwise
complement our business or further our strategic goals. Pursuing
additional acquisitions is a significant component of our growth
strategy.
|
Our
Products
Our
business consists of three main product categories, including prescription
pharmaceutical products, over-the-counter pharmaceutical products and
nutraceutical products. Majority of our pharmaceutical products are based on
non-synthetic medicinal compounds that are extracted from leaves and roots of
one or more plants. All of our pharmaceutical products have demonstrated safety
and efficacy in clinical trials that has been sufficient to obtain approval by
the SFDA. Nutraceutical products, also frequently referred to as functional
foods, functional beverages, dietary supplements or general nutritional
supplements, are intended to promote overall health and well-being. Our
nutraceutical products are generally considered general nutritional supplements
and are not subject to regulatory approval by the SFDA.
We
currently manufacture and sell over 60 products. The following table summarizes
our principal marketed pharmaceutical and nutraceutical products that comprised
the majority of our revenue in the year of 2008.
Product
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Distribution
Point
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Indication
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Year of AOB
Commercial
Launch
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Pharmaceutical
Products
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Shuanghuanglian
Lyophilized Injection Powder
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Rx
|
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Respiratory
infections, bronchitis and tonsillitis
|
|
2004
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Cease
Enuresis Soft Gel
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Rx
|
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Bedwetting
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2004
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Cease
Enuresis Patch
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OTC
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Bedwetting
and incontinence
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2005
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Jinji
Capsule
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OTC
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Endometritis,
annexitis and pelvic inflammations
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2006
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Jinji
Yimucao
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OTC
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Premenstrual
syndrome, or PMS, and other PMS and menopause-related
symptoms
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2007
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Boke
Nasal Spray
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OTC
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Nasal
congestion and sinus infection
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2007
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Nutraceutical
Products
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Soy
Peptide Series
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OTC
|
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Nutritional
products for overall health and well-being
|
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2003
|
Prescription
Pharmaceutical Products
Shuanghuanglian
Lyophilized Injection Powder
Our SHL
Injection Powder is a prescription pharmaceutical product approved and marketed
for the treatment of flu symptoms, including high fever, cough and sore throat,
as well as upper respiratory infections, mild pneumonia and tonsillitis. Our SHL
Injection Powder, marketed under the brand name SHJ, is one of the only two
injection formulations of SHL approved by the SFDA. The approved dosage for our
SHL Injection Powder is 60 mg for every kilogram of a patient’s body weight. In
practice, a medical doctor will decide exactly how much SHL injection powder to
use for each patient. This product consists of two plant based ingredients
isolated from flowers and leaves.
Our SHL
Injection Powder was commercially launched in China in 1997 by HSPL, which we
acquired in 2004. We detail the safety and efficacy of this product to
physicians in hospitals and clinics primarily in rural China. We believe that
injectables are of higher quality and offer better bioavailability and efficacy
than oral formulations. We are one of the two companies approved by the Ministry
of Health to manufacture and commercialize SHL injection powder. This product is
manufactured at our Heilongjiang Songhuajiang Pharmaceutical, or HSPL, facility
in Harbin.
Phase 3
clinical trials for SHL Injection Powder were conducted on 489 patients at
Harbin University of Medical Sciences First Affiliated Hospital, Heilongjiang
TCM Research Institute and Harbin TCM Hospital. These trials demonstrated safety
and efficacy in accordance with SFDA requirements.
Cease
Enuresis Soft Gel
Our CE
Gel is a prescription pharmaceutical product approved and marketed to alleviate
pediatric bedwetting. This product consists of a formulation that is isolated
from the seed of a plant. Our CE Gel is the only SFDA approved Category 1 new
pharmaceutical product for this indication. Category 1 approval provides a
product with 12 year protection from other companies replicating the product and
can be granted when the product is considered to be the first product for a
specific indication.
Our CE
Gel was commercially launched in China in April 2004. We detail the clinical
benefits of this product to physicians in hospitals and clinics throughout
China. As prescription medications cannot be commercially advertised in China,
we rely on physicians to recommend the use of our CE Gel to patients. The Cease
Enuresis brand name, however, is well recognized by many patients as our CE
Patch is an over-the-counter pharmaceutical product that we promote through
direct-to-consumer advertising. This product is manufactured at our Three
Happiness facility in Harbin.
Phase 3
clinical trials for CE Gel were conducted on 437 pediatric patients at Beijing
Children’s Hospital, China University of Medical Sciences No. 2 Clinical
Hospital, Liaoning TCM Institute Affiliated Hospital and Liaoning TCM Research
Institute. These trials demonstrated safety and efficacy in accordance with SFDA
requirements.
Over-the-Counter
Pharmaceutical Products
Cease
Enuresis Patch
Our CE
Patch is an over-the-counter pharmaceutical product approved and marketed for
the treatment of bedwetting and incontinence. Our CE Patch is formulated for
delivery by a patch and can be used in combination with our CE Gel. This product
consists of the same plant based ingredients as our CE Gel. Our CE Patch was
commercially launched in China in 2005. We promote our CE Patch through
direct-to-consumer advertising on television and in print media in China. This
product is manufactured at our Three Happiness facility.
Our CE
Patch was approved by the Food and Drug Administration Bureau of the
Heilongjiang Province, under the medical device regulatory pathway.
Jinji
Capsule
Our Jinji
Capsule is an over-the-counter pharmaceutical product approved and marketed for
the treatment of endometritis, annexitis and pelvic inflammations. This is our
company’s proprietary product with well recognized brand name. This product
consists of a combination of many parts of TCM plants, including roots, vines,
flowers and stems. We source the majority of our raw materials for our Jinji
product line from the Guangxi province, which we believe has a unique natural
environment to cultivate high quality plants. We believe the combination of
these quality ingredients, our manufacturing processes and our well-recognized
brand name position our Jinji products well to compete in the marketplace. A
course of treatment requires a dose of four capsules taken three times a
day.
Our Jinji
Capsule was commercially launched approximately 30 years ago in China by GLP,
which we acquired in April 2006. With its long history, the Jinji brand name is
well-recognized in the women’s health market in China. We promote our Jinji
Capsule through direct-to-consumer advertising, including an extensive
television commercial campaign featuring popular Chinese celebrity Ms. Ni
Ping. These commercials are televised nationally in China. We believe that these
advertisements continue to strengthen our brand loyalty, a major driver of the
historical popularity of the drug. This product is manufactured at our Guangxi
Lingfeng Pharmaceutical Co., or GLP, facility in Hezhou in the Guangxi Province
in Southwestern China.
Phase 3
clinical trials for Jinji Capsule were conducted on 421 female patients at
Wuzhou City People’s Hospital, Wuzhou City Workers’ Hospital and Hezhou TCM
Hospital. These trials demonstrated safety and efficacy in accordance with SFDA
requirements.
Jinji
Yimucao
Our Jinji
Yimucao is an over-the-counter pharmaceutical product approved and marketed for
the treatment of premenstrual syndrome, or PMS, and other PMS and
menopause-related symptoms. Jinji Yimucao is approved by the SFDA in China and
marketed as a branded generic drug. This product consists of a combination of
many parts of TCM plants, including roots, vines, flowers and stems. We source
the majority of our raw materials for our Jinji product line from the Guangxi
province, which we believe has a unique natural environment to cultivate high
quality plants. We believe the combination of these quality ingredients, our
manufacturing processes and our well-recognized brand name position our product
well to compete in the marketplace. Each treatment requires a dose of two
packets of powder for oral suspension taken two times a day.
In early
2007 we commercially launched Jinji Yimucao. We own this product as a result of
the acquisition of GLP, which we completed in April 2006. We promote Jinji
Yimucao through direct-to-consumer advertising, including an extensive
television commercial campaign. We believe that these advertisements continue to
strengthen our brand loyalty, a major driver of the historical popularity of the
drug. This product is manufactured at our GLP facility in Hezhou.
Boke
Nasal Spray
Our Boke
nasal spray is an over-the-counter pharmaceutical product approved and marketed
for the treatment of sinus congestion from common cold, stuffy nose, chronic
rhinitis, allergic rhinitis and nasosinusitis. The spray is marketed under the
product name of Ditong Biyanshui Penwuji (“Ditong”). Ditong is approved by the
SFDA in China and marketed as a branded drug. This product consists of a
combination of many parts of TCM plants, including roots, vines, flowers and
stems. Treatment dosage is three to four times a day and two sprays into each
nostril.
Ditong
was commercially launched by Boke in China approximately 10 years ago. We own
this product as a result of the acquisition of Boke, which we completed in
October 2007. We promote Boke nasal spray through direct-to-consumer
advertising, including an extensive television commercial campaign. We believe
that these advertisements continue to strengthen our brand loyalty, a major
driver of the historical popularity of the drug. This product is manufactured at
our Boke facility in Nanning.
Principal
Nutraceutical Products
Soy
Peptide Series
Our Soy
Peptide Series is our primary line of nutraceutical products, all of which are
available in supermarkets, fitness centers, specialty nutraceutical stores and
other retail outlets. These products include tablets, powders, drinks and
instant coffee that are non-genetically modified and derived from soybeans
through a biochemical process involving decomposition, conversion and synthesis
of soybean protein. They are used as food and beverage supplements and are
easily digested, increase metabolism and can replenish body strength. We have
four distinct formulations: anti-fatigue, menopause, immunoenhancer and balanced
formula. The benefit of our peptide formulation compared with the soybean itself
is that our formulation is more readily absorbable by the human body. We
manufacture these products at our Three Happiness facility in
Harbin.
Our Soy
Peptide Series was commercially launched in China in 2002. We do not have any
exclusivity under Chinese law for these products but we own trademarks and
market all of our nutraceutical products through print advertising campaigns.
While the nutraceutical market is highly fragmented with many competitors, we
believe that our product branding and multiple forms for delivery of the peptide
will continue to support additional growth.
Product
Pipeline
We have
our own research, development and laboratory facilities and retain our own
professional research and development team. We have also entered into joint
research and development agreements with outside research institutes in China.
We have a portfolio of over 400 approved prescription and over-the-counter
pharmaceutical products that have not been commercially launched. We continue to
strengthen our research and development efforts and we intend to continue
introducing new modernized products to leverage our branded market leadership
position, and to develop line extensions for our existing products.
We are
also exploring opportunities for acquisitions that may complement our existing
product lines and leverage our significant sales and distribution
capabilities.
Marketing
and Sales
In China,
we manufacture and market more than 60 products, consisting of prescription and
over-the-counter pharmaceuticals and nutraceutical. Our pharmaceutical and
nutraceutical products are marketed to hospitals, clinics, pharmacies and retail
stores at over 100,000 distribution points. We maintain 28 regional
representative offices throughout China and employ approximately 2,133 sales and
marketing professionals. Where appropriate, we leverage the synergies between
complementary products and distribution channels to accelerate the market
penetration of our new products. Our sales force markets to all provinces,
including rural areas and major cities in China.
Distributors
and Customers
We have
an extensive third-party distribution network with over 300 distributors that
provide us with widespread access to sell our products in all provinces,
including rural areas and major cities in China. The breadth of our distribution
channel allows us to target approximately 100,000 distribution points comprising
hospitals, clinics, pharmacies and retail stores. We select our distributors
based on their reputation and market coverage. Because we have our own extensive
sales and marketing team we rely on our distributors solely for the
transportation of our products to our distribution points and not for sales and
marketing services. As a result, we do not enter into exclusive distribution
agreements with these third party distributors. We review our distribution
agreements on an annual basis to specify designated distribution points, the
location and method for delivery of our products to certain distribution points
and targets for annual sales volume and receivable collections.
The
distribution industry in China is fragmented with over 2,000 distributors. Due
to the number of distributors, we do not rely on any one distributor for our
distribution needs. We estimate that our top 10 distributors account for only
approximately 15% of our total sales.
In
October 2008, through the acquisition of Nuo Hua, distribution form part of our
business. Through Nuo Hua’s subsidiary and affiliated company, we now distribute
more than 6,000 pharmaceutical products through an extensive sales network
covering major urban and rural areas in China.
Manufacturing
We have
five manufacturing facilities in China dedicated exclusively to the manufacture
of our products. Each facility is GMP certified. We have fully integrated
manufacturing support systems including quality assurance, quality control and
regulatory compliance. We have developed our own independent quality control
systems in accordance with SFDA regulations. Our quality assurance team devotes
significant attention to quality control for designing, manufacturing and
testing our products, and is also responsible for ensuring that we are in
compliance with all applicable national and local regulations and standards, as
well as our internal policies. Our senior management team is also actively
involved in setting quality assurance policies and managing internal and
external quality performance. These support systems enable us to maintain high
standards of quality for our products and deliver reliable products to our
customers on a timely basis.
The
details of our facilities are as follows:
|
•
|
Three
Happiness
. Our Three Happiness facility is located in Harbin,
the capital of Heilongjiang Province in northeast China. It is
approximately 1,532,775 square feet and manufactures both pharmaceutical
and nutraceutical products. The Three Happiness facility consists of one
pharmaceutical and one nutraceutical manufacturing plant, including a
dedicated building for soybean peptide
products.
|
|
•
|
HSPL
. Our
HSPL facility is also located in Harbin. It is approximately 532,339
square feet and manufactures our SHL Injection
Powder.
|
|
•
|
GLP
. Our
GLP facility is located in Hezhou, in the Guangxi Province in southwest
China. It is approximately 1,485,055 square feet and manufactures our
Jinji series of women’s health
products.
|
|
•
|
CCXA
. Our
CCXA facility is located in ChangChun, the capital of Jilin Province in
northeast China. It is approximately 1,077,467 square feet and
manufactures a variety of generic pharmaceutical products including
Zhitongfengshi tablets for the treatment of osteophyte and Yakangling
capsule for the treatment of
gingivitis.
|
|
•
|
Boke.
Our
Boke facility is located in Nanning, the capital of Guangxi Province in
southwest China. It is approximately 174,280 square feet and manufactures
our Boke series of nasal products.
|
We have
land use rights to the land on which our manufacturing facilities are located
that are granted and allocated to us by the government. According to Chinese
law, the government owns all the land in China and companies or individuals are
authorized to use the land only through land use rights granted or allocated by,
or leased from, the PRC government.
We
currently have adequate manufacturing capacity for our marketed
products.
Raw
Materials
We
require a supply of quality raw materials to manufacture our products.
Historically, we have not had difficulty obtaining raw materials from suppliers.
Currently, we rely on numerous suppliers to deliver our required raw materials.
Our products are mainly plant based and derived from flowers, plants and roots
which are locally grown by farmers in China. We enter into arrangements with
numerous suppliers in China to hedge against the risk of short supply due to
irregularities in seasonal temperatures. If we anticipate a shortage, we have
the capability and warehouse capacity to store such materials.
Intellectual
Property
We regard
our packaging designs, service marks, trademarks, trade secrets, patents and
similar intellectual property as part of our core competence that is critical to
our success. We rely on patent, trademark and trade secret law, as well as
confidentiality agreements with certain of our employees, distributors and
others to protect our intellectual property rights.
There are
three types of patents under the PRC patent law. The first type, an external
design patent, refers to a new design of a product’s shape, pattern or a
combination of shape and pattern and the combination of a product’s color and
its shape and pattern, where such a design is aesthetically appealing and
suitable for industrial application. The second type of patent is called an
invention patent and the third type of patent is referred to as a new model or
utility patent. Invention patents and utility patents are similar in that both
of them relate to scientific or technological inventions. A utility patent,
compared to an invention patent, requires a lower level of creativity and covers
a narrower scope. In addition, an invention patent can be a new technology
introduced in respect of an existing product, method or their improvements,
while a utility patent is restricted to a product’s shape, constitutions or a
combination of these two. Invention patents are valid for 20 years, whereas
utility patents and external design patents are each valid for 10
years.
To a
large extent, we rely on such State Protection law to protect our intellectual
property rights with respect to some of our products. As of February 28,
2009, we owned a total of 40 patents and have registered a total of 86
trademarks and the number of trademarks in the process of application is
161.
The
Company has the following invention patents related to material
products:
Application
No./Patent No.
|
Product
Covered
|
Purpose
|
Expiration
Date
|
00103392.1
|
Soybean
Peptides
|
the
equipment and method of producing small molecular peptides from protein
separated from soybean
|
3/01/2020
|
200410043925.0
|
SHL
|
the
production method of injection powder
|
10/11/2024
|
200510055523.7
|
Jinji
Capsule
|
a
drug for treatment of pelvic inflammatory disease and its production
method
|
3/16/2025
|
200510010531.X
|
CE
Gel
|
a
method for quality control of the production of WenGuanGuoZiRen
cream
|
11/11/2025
|
200610009619.4
|
CE
Patch
|
a
method for the extraction of effective portion of
WenGuanGuoZiRen
|
1/12/2026
|
144459.0
|
CE
Patch
|
the
extraction of WenGuanGuoZiRen, its method of extraction and
usage
|
1/12/2026
|
In
addition, the Company has the following external design patents related to
material products:
Application
No.
|
Purpose
|
Expiration
Date
|
01305739.1
|
packaging
label for Jinji Capsule
|
3/10/2011
|
200630157478.1
|
packaging
box for CE Patch
|
12/4/2016
|
200630157477.7
|
packaging
box CE Capsulel
|
12/4/2016
|
200630157479.6
|
packaging
box (frozen powder of SHL for injection, 1.2 gram)
|
12/4/2016
|
200730145294.8
|
packaging
box for Jinji Yimucao
|
4/30/2017
|
Competition
We
believe that we are well positioned to compete in the fast-developing Chinese
pharmaceutical and nutraceutical market with our strong brand, diverse product
portfolio, research and development capabilities, established sales and
marketing network and favorable cost structure. We believe that competition and
leadership in our industry are based on managerial and technological expertise,
and the ability to identify and exploit commercially viable products. Other
factors affecting our competitive position include time to market, patent
position, product efficacy, safety, convenience, reliability, availability and
pricing.
Our SHL
Injection Powder primarily competes with a similar injection powder product
produced by Harbin Pharmaceutical Group. Our marketing strategy with respect to
this product is broader than our competitor by focusing on rural markets as well
as major cities and continues to maintain high products quality. We believe this
strategy has been successful for us against our competition.
Our CE
Gel competes with several other products having similar functionality. Some of
these products include the Jianpizhiyi Tablet produced by Shangdong Zhiling
Pharmaceutical Company, Yeniaoying produced by Tianjin Zhongxin Company,
Shengjiyiniaokang produced by Shanxi Dingxing Healthcare Scientific Limited and
Suoquan Pill produced by Jilin Tianguang Pharmaceutical Limited. Despite the
similar products in the market, we believe our CE Gel is the leading product, as
currently it is the only SFDA approved first grade medicine for
bedwetting.
Our Jinji
Capsule competes with Huahong Pill produced by Huahong Pharmaceutical Group and
Qianjin Pill produced by Qianjin Pharmaceutical Group.
Our Boke
nasal spray competes with Dezhong Biyankang produced by Guangdong Foshan Dezhong
Pharmaceutical Co., Ltd; Zhonglian Rhinitis Tablets produced by Wuhan Zhonglian
Pharmaceutical Co., Ltd; and Qianbai Rhinitis Tablet produced by Guangzhou
Qixing Pharmaceutical Co., Ltd.
Our Soy
Peptide Series competes with Leneng Peptide Powder, produced by Leneng
Bioengineering Company and Soybean Protein Peptide, produced by Harbin High-Tech
Company Limited.
Environmental
Matters
We comply
with the Environmental Protection Law of China as well as the applicable local
regulations. In addition to statutory and regulatory compliance, we actively
ensure the environmental sustainability of our operations. Penalties would be
levied upon us if we fail to adhere to and maintain certain standards. Such
failure has not occurred in the past, and we generally do not anticipate that it
will occur in the future, but no assurance can be given in this
regard.
Employees
We had
4,076 employees as of December 31, 2008. Approximately 1,238 of these
employees are principally engaged in manufacturing and services activities,
2,133 in sales and marketing, 122 in research and development and 583 in
management and administration. In 2008 we increased our number of employees
through hiring and acquisition and retained the best talent during the process
of integration and performance review. We continue to monitor our headcount and
may add additional employees for sales and marketing, customer service and
manufacturing and assembly as our business grows. In general, we consider our
relationship with our employees to be good.
Insurance
We
currently carry insurance policies which are customary for enterprises in China
providing for total coverage of approximately $37.23 million. We have property
coverage of approximately $19.5 million, transport vehicle coverage of
approximately $0.75 million and workers’ medical and accident coverage of
approximately $1.98 million. We also maintain Director and Officer Insurance
coverage of $15 million. We paid aggregate insurance premiums of $1,164,742 in
the year of 2008.
Our
History
Three
Happiness had been conducting business in China since 1994. In June 2002,
through a share exchange with the stockholders of Three Happiness, Three
Happiness became our wholly-owned subsidiary and continued its business
operations in China. Prior to the share exchange we did not have any business
operations. At the time of the share exchange we changed our name to American
Oriental Bioengineering, Inc.
In
February 2003, we acquired the rights to a soybean protein peptide biochemical
engineering project, which provided us with the rights to manufacture and
commercialize our Soy Peptide Series of nutraceutical products. Also, since the
share exchange in 2002, we acquired seven companies in China. In November 2004,
we acquired HSPL, which manufactures and commercializes our SHL Injection
Powder. In April 2006, we acquired GLP, which manufactures and commercializes
our Jinji series. In July 2006, we acquired HQPL, a pharmaceutical distributor
that owns a license to distribute pharmaceutical products in China. In August
2007, we acquired CCXA, which manufactures and commercializes a board range of
generic pharmaceutical products. In October 2007, we acquired BOKE, which
manufactures and commercializes our Boke series of nasal products. In October
2008, we acquired Nuo Hua, a pharmaceutical wholesale and retail distribution
company, and GuangXi HuiKe Pharmaceutical Research and Development Co., Ltd.
(“GHK”), a company engaged in pharmaceutical research and product development
leading to SFDA approval to expedient product launches in China.
On July
18, 2005, our common stock commenced trading on the American Stock Exchange, or
AMEX, under the ticker symbol “AOB.” On November 14, 2005, our common stock
commenced trading on the Archipelago Exchange, or ArcaEx, a facility of the
Pacific Exchange.
On
December 18, 2006, we voluntary elected to delist our common stock from the AMEX
and ArcaEx. Our common stock commenced trading on the New York Stock Exchange
under the ticker symbol “AOB” on the same day.
Regulations
of Our Industry
Regulations
Relating to the Pharmaceutical Industry
The
pharmaceutical industry in China, including the TCM sector, is highly regulated.
The primary regulatory authority is the SFDA, including its provincial and local
branches. As a developer, producer and distributor of medicinal products, we are
subject to regulation and oversight by the SFDA and its provincial and local
branches. The Law of the PRC on the Administration of Pharmaceuticals provides
the basic legal framework for the administration of the production and sale of
pharmaceuticals in China and covers the manufacturing, distributing, packaging,
pricing and advertising of pharmaceutical products. Its implementing regulations
set forth detailed rules with respect to the administration of pharmaceuticals
in China. We are also subject to other PRC laws and regulations that are
applicable to business operators, manufacturers and distributors in
general.
Registration and
Approval of Medicine.
A medicine must be registered and approved by
the SFDA before it can be manufactured. The registration and approval process
requires the manufacturer to submit to the SFDA a registration application
containing detailed information concerning the efficacy and quality of the
medicine and the manufacturing process and the production facilities the
manufacturer expects to use. To obtain the SFDA registration and approval
necessary for commencing production, the manufacturer is also required to
conduct pre-clinical trials, apply to the SFDA for permission to conduct
clinical trials, and, after clinical trials are completed, file clinical data
with the SFDA for approval. Our pharmaceutical products are approved by the SFDA
and are being sold both as prescription and over-the-counter
medicines.
New
Medicine.
If a medicine is approved by the SFDA as a new medicine,
the SFDA will issue a new medicine certificate to the manufacturer and impose a
monitoring period which shall be calculated starting from the day of approval
for manufacturing of the new medicine and may not exceed five years. The length
of the monitoring period is specified in the new medicine certificate. During
the monitoring period, the SFDA will monitor the safety of the new medicine, and
will neither accept new medicine certificate applications for an identical
medicine by another pharmaceutical company, nor approve the production or import
of an identical medicine by other pharmaceutical companies. For new medicines
approved prior to September 2002, the monitoring period could be longer than
five years. As a result of these regulations, the holder of a new medicine
certificate effectively has the exclusive right to manufacture the new medicine
during the monitoring period.
Provisional
National Production Standard
. In connection with the SFDA’s approval
of a new medicine, the SFDA will normally direct the manufacturer to produce the
medicine according to a provisional national production standard, or a
provisional standard. A provisional standard is valid for two years, during
which the SFDA closely monitors the production process and quality consistency
of the medicine to develop a national final production standard for the
medicine, or a final standard. Three months before the expiration of the
two-year period, the manufacturer is required to apply to the SFDA to convert
the provisional standard to a final standard. Upon approval, the SFDA will
publish the final standard for the production of this medicine. In practice, the
approval for conversion to a final standard is a time-consuming process.
However, during the SFDA’s review period, the manufacturer may continue to
produce the medicine according to the provisional standard.
Transitional
Period
.
Prior to the latter of
(1) the expiration of a new medicine’s monitoring period or (2) the
date when the SFDA grants a final standard for a new medicine after the
expiration of the provisional standard, the SFDA will not accept applications
for an identical medicine nor will it approve the production of an identical
medicine by other pharmaceutical companies. Accordingly, the manufacturer will
continue to have an exclusive production right for the new medicine during this
transitional period.
Continuing SFDA
Regulation.
Pharmaceutical manufacturers in China are subject to
continuing regulation by the SFDA. If the labeling or manufacturing process of
an approved medicine is significantly modified, a new pre-market approval or
pre-market approval supplement will be required by the SFDA. A pharmaceutical
manufacturer is subject to periodic inspection and safety monitoring by the SFDA
to determine compliance with regulatory requirements. The SFDA has a variety of
enforcement actions available to enforce its regulations and rules, including
fines and injunctions, recall or seizure of products, the imposition of
operating restrictions, partial suspension or complete shutdown of production
and criminal prosecution.
Pharmaceutical
Product Manufacturing
Permits and
Licenses for Pharmaceutical Manufacturers
.
A pharmaceutical
manufacturer must obtain a pharmaceutical manufacturing permit from the SFDA’s
relevant provincial branch. This permit is valid for five years and is renewable
upon its expiration. Each of our manufacturing facilities has a pharmaceutical
manufacturing permit. We do not anticipate any difficulty in renewing our
pharmaceutical manufacturing permits upon expiration.
Good
Manufacturing Practice
.
A pharmaceutical
manufacturer must meet Good Manufacturing Practice standards, or GMP standards,
for each of its production facilities in China in respect of each form of
pharmaceutical products it produces. GMP standards include staff qualifications,
production premises and facilities, equipment, raw materials, environmental
hygiene, production management, quality control and customer complaint
administration. If a manufacturer meets the GMP standards, the SFDA will issue
to the manufacturer a Good Manufacturing Practice certificate, or a GMP
certificate, with a five-year validity period. However, for a newly established
pharmaceutical manufacturer that meets the GMP standards, the SFDA will issue a
GMP certificate with only a one-year validity period. We have obtained a GMP
certificate for all of our production facilities covering all of the products
that we produce.
Pharmaceutical
Distribution
. A distributor of pharmaceutical products in China must
obtain a pharmaceutical distribution permit from the relevant provincial or
local SFDA branches. The distribution permit is granted if the relevant SFDA
provincial branch receives satisfactory inspection results of the distributor’s
facilities, warehouse, hygiene environment, quality control systems, personnel
and equipment. A pharmaceutical distribution permit is valid for five
years.
Restrictions on
Foreign Ownership of Pharmaceutical Wholesale and Retail Businesses in
China
.
Chinese regulations on
foreign investment currently permit foreign companies to establish or invest in
wholly foreign-owned companies or joint ventures that engage in wholesale or
retail sales of pharmaceuticals in China. For retail sales, these regulations
restrict the number and size of retail pharmacy outlets that a foreign investor
may establish. Retail pharmacy chains with more than 30 outlets that sell a
variety of branded pharmaceutical products sourced from different suppliers are
limited to less than 50.0% foreign ownership unless the outlets are owned by a
third party and operated under a foreign franchise.
Good Supply
Practice Standards
.
The SFDA applies Good
Supply Practice standards, or GSP standards, to all pharmaceutical wholesale and
retail distributors to ensure the quality of distribution in China. The
currently applicable GSP standards require pharmaceutical distributors to
implement controls on the distribution of medicine, including standards
regarding staff qualifications, distribution premises, warehouses, inspection
equipment and facilities, management and quality control. A certificate for GSP
standards, or GSP certificate, is valid for five years, except for a newly
established pharmaceutical distribution company, for which the GSP certificate
is valid for only one year.
Price
Controls.
The retail prices of prescription and over-the-counter
medicines that are included in the national medicine catalog are subject to
price controls administered by the Price Control Office under the National
Development and Reform Commission, or the NDRC, and provincial price control
authorities, either in the form of fixed prices or price ceilings. The controls
over the retail price of a medicine effectively set the limits for the wholesale
price of that medicine. From time to time, the NDRC publishes and updates a
national list of medicines that are subject to price control. Fixed prices and
price ceilings on medicines are determined based on profit margins that the NDRC
deems reasonable, the type and quality of the medicine, its production costs,
the prices of substitute medicines and the extent of the manufacturer’s
compliance with the applicable GMP standards. The NDRC directly regulates the
price of some of the medicines on the list, and delegates the power to
provincial price control authorities to regulate the remainder on the list. For
those medicines under the authority of provincial price control authorities,
each provincial price control authority regulates medicines manufactured by
manufacturers registered in that province. Provincial price control authorities
have the discretion to authorize price adjustments based on the local conditions
and the level of local economic development. Only the manufacturer of a medicine
may apply for an increase in the retail price of the medicine and it must apply
either to the NDRC, if the price of the medicine is nationally regulated, or to
the provincial price control authorities in the province where it is registered,
if the price of the medicine is provincially regulated. For a provincially
regulated medicine, when provincial price control authorities approve an
application, they will file the new approved price with the NDRC for
confirmation and thereafter the newly approved price will become binding and
enforceable across China.
Tendering
Requirement for Hospital Purchases of Medicines.
Provincial and
municipal government agencies such as provincial or municipal health departments
also operate a mandatory tendering process for purchases by state-owned
hospitals of a medicine included in provincial medicine catalogs. These
government agencies organize a tendering process once every year in their
province or city and typically invite manufacturers of provincial catalog
medicines that are on the hospitals’ formularies and are in demand by these
hospitals to participate in the tendering process. A government-approved
committee consisting of physicians, experts and officials is delegated by these
government agencies the power to review bids and select one or more medicines
for the treatment of a particular medical condition. The selection is based on a
number of factors, including bid price, quality and manufacturer’s reputation
and service. The bidding price of a winning medicine will become the price
required for purchases of that medicine by all state-owned hospitals in that
province or city. The tendering requirement was first introduced in 2001 and has
since been implemented across China. We understand that the level of present
implementation of the tendering requirement varies among different provinces in
China.
Reimbursement
under the National Medical Insurance Program.
As of the end of 2006,
approximately 157.4 million people were enrolled into the National Medical
Insurance Program. The Ministry of Labor and Social Security, together with
other government authorities, determines which medicines are to be included in
or removed from the national medicine catalog for the National Medical Insurance
Program, and under which tier a medicine should fall, both of which affect the
amounts reimbursable to program participants for their purchases of those
medicines. These determinations are based on a number of factors, including
price and efficacy. A National Medical Insurance Program participant can be
reimbursed for the full cost of a Tier 1 medicine and 80 to 90% of the cost of a
Tier 2 medicine. Although it is designated as a national program, the
implementation of the National Medical Insurance Program is delegated to various
provincial governments, each of which has established its own medicine catalog.
A provincial government must include all Tier 1 medicines listed in the national
medicine catalog in its provincial medicine catalog, but may use its discretion
based on its own selection criteria to add other medicines to, or exclude Tier 2
medicines listed in the national medicine catalog from, its provincial medicine
catalog, so long as the combined numbers of the medicines added and excluded do
not exceed 15% of the number of the Tier 2 medicines listed in the national
catalog. In addition, provincial governments may use their discretion to upgrade
a nationally classified Tier 2 medicine to Tier 1 in their provincial medicine
catalogs, but may not downgrade a nationally classified Tier 1 medicine to Tier
2. The total amount of reimbursement for the cost of prescription and
over-the-counter medicines, in addition to other medical expenses, for an
individual program participant in a calendar year is capped at the amount in
that participant’s individual account. The amount in a participant’s account
varies, depending upon the amount of contributions from the participant and his
or her employer. Generally, program participants who are from relatively
wealthier eastern parts of China and relatively wealthier metropolitan centers
have greater amounts in their individual accounts than those from less developed
provinces.
Regulation
Relating to the Nutraceutical Industry
Some
nutraceuticals produced in China can be labeled as health food, which means the
product is aimed at a specific group of people and is able to adjust bodily
function but is not aimed at curing disease. Health foods are required to be
approved by the SFDA and are subject to its regulation. We currently have only
one product approved as a health food by the SFDA.
Registration
of Health Products
The
approval of nutraceuticals as health products requires (i) an applicant to
perform product research prior to submitting an application for registration of
health food; (ii) an applicant to submit the sample and relevant product
research materials to the examination institute appointed by the SFDA for
required trial and examination; and (iii) the issuance of a report by the
examination institute.
Provincial
food and drug authorities review the product research materials and sample and,
if found satisfactory, the food and drug authorities at the provincial level
conduct site inspections and sample examinations and thereafter submit their
opinion along with the application materials to the SFDA, and in the meantime,
send inspection notice together with the sample to be examined to the appointed
examination institute. The examination institute conducts examinations and
inspections and submits its report to the SFDA. If all the regulatory
requirements are satisfied, the SFDA will grant an Approval Certificate of
Homemade Health Food to the applicant. The Approval Certificate of Health Food
is effective for a period of five years.
Any
changes to the items stated in the Approval Certificate of Health Food as well
as its appendices must be approved by the SFDA. However, pursuant to the
Administration Rules for Registration of Health Food (Trial), the product name,
raw materials, manufacturing process, usage methods and other items stated in
the Approval Certificate of Health Food, which may affect the safety and
function of the health food, shall not be alternated.
In the
case of transfer of technology of the registered health products to be
manufactured in PRC, the transferee shall apply for new approval certificate of
homemade health food in accordance with the relevant provisions of the
Administration Rules for Registration of Health Food (Trial).
Permits
and Licenses for manufacturing of Health Foods
Those
enterprises engaging in manufacturing and operation of health food business must
also comply with the PRC Food Hygiene Law and the Administration Rules of Food
Hygiene Permit. Under the PRC Food Hygiene Law, enterprises engaging in
manufacturing and operation of food products in PRC are required to obtain
Hygiene Permit from the relevant PRC hygiene administrative authorities. In
order to manufacture health food in the PRC, the manufacturing enterprise shall
apply to the hygiene administration authorities at the provincial level for
approval. If it is qualified, the hygiene administrative authorities at the
provincial level will issue a Hygiene Permit with the approved health food
specified. Each Hygiene Permit issued to a food manufacturing enterprise is
effective for a period of four years. The enterprise is required to apply for
renewal of such permit within sixty days prior to its expiry.
Manufacturing
enterprise of health food shall organize its manufacture in accordance with the
approval and shall not change the ingredient, manufacturing process, quality
standard, name of the products, label, illustration and so on. The manufacturing
procedures and conditions shall be in compliance with hygiene requirements that
are applicable to the food manufacturing enterprise.
Compliance
with GMP
Pursuant
to the Notice of Circulating the Examination Methods and Assessment Guidelines
of Good Manufacturing Practices of Health Food promulgated by the MOH, the
Hygiene Permit shall only be issued to those enterprises in compliance with the
GMP upon examination of the hygiene administrative authorities at the provincial
level. For those enterprises failing to meet the GMP, the Hygiene Permit will be
revoked.
Label
of Health Food
The
Regulation for Label of Health Food as promulgated by the MOH provides for
requirements of the label of health food. According to this regulation, the
name, function, functional ingredient, applicable scope and file number of
approval of the health food labeled shall be consistent with those corresponding
items stated in the Approval Certificate of Health Food issued by the hygiene
administrative authorities at the provincial level.
Other
Regulations
In
addition to the regulations relating to pharmaceutical industry in China, our
operating subsidiaries are also subject to the regulations applicable to a
foreign invested enterprise, or FIE, in China.
Foreign Currency
Exchange.
Pursuant to the Foreign Currency Administration Rules
promulgated in 1996 and amended in 1997 and various regulations issued by State
Administration of Foreign Exchange, or the SAFE, and other relevant PRC
government authorities, the Renminbi is freely convertible only to the extent of
current account items, such as trade-related receipts and payments, interests
and dividends. Capital account items, such as direct equity investments, loans
and repatriation of investment, require the prior approval from the SAFE or its
local counterpart for conversion of Renminbi into a foreign currency, such as
U.S. dollars, and remittance of the foreign currency outside the PRC. Payments
for transactions that take place within the PRC must be made in Renminbi. Unless
otherwise approved, PRC companies other than FIEs must convert foreign currency
payments they receive from abroad into Renminbi. On the other hand, FIEs may
retain foreign exchange in accounts with designated foreign exchange banks,
subject to a cap set by the SAFE or its local counterpart.
Dividend
Distribution.
The principal regulations governing dividend
distributions by wholly foreign-owned enterprises and Sino-foreign equity joint
ventures include:
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Wholly
Foreign-Owned Enterprise Law (1986), as
amended;
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Wholly
Foreign-Owned Enterprise Law Implementing Rules (1990), as
amended;
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Sino-Foreign
Equity Joint Venture Enterprise Law (1979), as
amended;
|
•
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Sino-Foreign
Equity Joint Venture Enterprise Law Implementing Rules (1983), as amended;
and
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•
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Regulations
on the Administration of Foreign Exchange Settlement, Sale and
Payment.
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Under
these regulations, wholly foreign-owned enterprises and Sino-foreign equity
joint ventures in the PRC may pay dividends only out of their accumulated
profits, if any, determined in accordance with PRC accounting standards and
regulations. Additionally, these foreign-invested enterprises are required to
set aside certain amounts of their accumulated profits each year, if any, to
fund certain reserve funds. These reserves are not distributable as cash
dividends.
Additional
Available Information
We can
make available free of charge on or through our Internet website,
www.bioaobo.com, our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and all amendments to those
reports, if any, filed or furnished pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 as soon as reasonably practicable after they
are electronically filed with, or furnished to, the Securities and Exchange
Commission. We also can make available free of charge on at www.bioaobo.com our
website our Business Code of Conduct and Ethics, Nominating and Corporate
Governance Committee Charter, Compensation Committee Charter and Audit Committee
Charter. The information contained on our website is not intended to be
incorporated into this Annual Report on Form 10-K.
Our
business, financial condition, operating results and prospects are subject to
the risks listed below. Additional risks and uncertainties not presently
foreseeable to us may also impair our business operations. If any of the
following risks actually occurs, our business, financial condition or operating
results could be materially adversely affected. In such case, the trading price
of our common stock could decline, and our stockholders may lose all or part of
their investment in the shares of our common stock.
Risks
Related to Our Business and Industry
A
disproportionate amount of our sales revenue is derived from six of our products
and a disruption in, or a compromise of, our manufacturing or sales operations,
or distribution channels related to any of these six products could materially
and adversely affect our financial condition and results of
operations.
Our top
six products, which comprise Shuanghuanglian Lyophilized Injection Powder, or
SHL Injection Powder, CE Gel, Jinji Capsule, Jinji Yimucao, Soybean Peptide
Tablets and Boke Nose Spray, constituted approximately 71% of our total revenues
in 2008 and 81.1% of our total revenues in 2007. We expect that these six
products will continue to account for a majority of our sales in the near
future. Because of our dependence on a few products, any disruption in, or
compromise of, our manufacturing operations, sales operations or distribution
channels, relating to any of these products could result in our failure to meet
shipping and delivery deadlines or meet quality standards, which in turn could
result in the cancellation of purchase orders, refusal to accept deliveries or a
reduction in purchase prices, any of which could have a material adverse effect
on our financial condition and results of operations.
A
general economic downturn, a recession in China or sudden disruption in business
conditions may affect consumer purchases of discretionary items, including
pharmaceutical and nutraceutical products, which could adversely affect our
business.
Consumer
spending is generally affected by a number of factors, including general
economic conditions, the level of unemployment, inflation, interest rates,
energy costs, gasoline prices and consumer confidence generally, all of which
are beyond our control. Consumer purchases of discretionary items tend to
decline during recessionary periods, when disposable income is lower, and may
impact sales of our products. In addition, sudden disruptions in business
conditions as a result of a terrorist attack, retaliation and the threat of
further attacks or retaliation, war, adverse weather conditions and climate
changes or other natural disasters, pandemic situations or large scale power
outages can have a short or, sometimes, long-term impact on consumer spending. A
downturn in the economy in China, including any recession or a sudden disruption
of business conditions in those economies, could adversely affect our business,
financial condition, and results of operation.
Intense
competition from existing and new companies may adversely affect our revenues
and profitability.
We
compete with other companies, many of whom are developing, or can be expected to
develop, products similar to ours. Some of our competitors are more established
than we are, have greater brand recognition of products that compete with ours,
have more financial, technical, marketing and other resources than we presently
possess and a larger customer base. These competitors may be able to respond
more quickly to new or changing opportunities and customer requirements and may
be able to undertake more extensive promotional activities, offer more
attractive terms to customers or adopt more aggressive pricing policies. Our
commercial opportunity will be reduced or eliminated if our competitors develop
and commercialize products that are safer, more effective, have fewer side
effects, are less expensive or have more attractive product characteristics than
our current products or products that we may develop in the future. We cannot
assure you that we will be able to compete effectively with current or future
competitors or that the competitive pressures we face will not harm our
business.
We
depend on our key management personnel and the loss of their services could
adversely affect our business.
Our
success depends in part on our continued ability to attract, retain and motivate
highly qualified management. We place substantial reliance upon the efforts and
abilities of our executive officers, including Tony Liu, Yanchun Li, Jun Min and
Binsheng Li. The loss of services of any of these individuals or one or more
other members of our senior management could delay or prevent the successful
execution of our business objectives and could have a material adverse effect on
our operations.
Replacing
key employees may be difficult and costly and may take an extended period of
time because of the limited number of individuals in our industry with the
breadth of skills and experience required to develop and commercialize products
successfully. We do not maintain “key person” insurance policies on the lives of
these individuals or the lives of any of our other employees. We have entered
into employment agreements with these individuals. We may need to hire
additional personnel as we expand our commercial activities. We may not be able
to attract or retain qualified management on acceptable terms in the future due
to the intense competition for qualified personnel in our industry. If we are
not able to attract and retain the necessary personnel to accomplish our
business objectives, we may experience constraints that will impede these
objectives.
We
cannot assure you that we will be able to complete acquisitions or successfully
integrate new businesses into our own.
We intend
to pursue opportunities to grow our business by acquiring businesses, products
and technologies that are complementary or related to our existing product
lines. Successful completion of an acquisition depends on a number of factors
that are not entirely within our control, including our ability to negotiate
acceptable terms, conclude satisfactory agreements and obtain all necessary
regulatory approvals. We may not be able to locate suitable acquisition
candidates at prices that we consider appropriate. If we do identify an
appropriate acquisition candidate, we may face competition from other companies
interested in acquiring the target company that have greater financial and other
resources than we have. Acquisitions of businesses, products, technologies or
other material operations may require debt financing or additional equity
financing, resulting in leverage or dilution of ownership.
Even if
we complete one or more strategic transactions, we may be unable to integrate or
coordinate successfully the personnel and operations of a business. Integration
of acquired business operations could disrupt our business by diverting
management away from day-to-day operations. The difficulties of integration may
be increased by the necessity of coordinating geographically dispersed
organizations, integrating personnel with disparate business backgrounds and
combining different corporate cultures. We also may not be able to maintain key
employees or customers of an acquired business or realize cost efficiencies or
synergies or other benefits we anticipated when selecting our acquisition
candidates. In addition, we may incur non-recurring severance expenses,
restructuring charges and change of control payments and may need to record
write-downs from future impairments of intangible assets, which could reduce our
future reported earnings. At times, acquisition candidates may have liabilities
or adverse operating issues that we fail to discover through due diligence prior
to the acquisition.
In
addition to the above, acquisitions in China, including of state owned
businesses, will be required to comply with laws of the PRC, to the extent
applicable. There can be no assurance that any proposed acquisition will be able
to comply with PRC requirements, rules and/or regulations, or that we will
successfully obtain governmental approvals to the extent required, which may be
necessary to consummate such acquisitions.
We
may face difficulties in implementing our organic growth strategy.
Many
obstacles to entering new markets exist, such as the costs associated with
entering new markets, recruiting and retaining adequate numbers of effective
sales and marketing personnel, developing and implementing effective marketing
efforts abroad, establishing and maintaining the appropriate regulatory
compliance and maintaining attractive foreign exchange ratios. However, there is
no assurance that we will be successful in implementing our strategies or that
our strategies, even if implemented, will lead to the successful achievement of
our objectives. Our business plan and growth strategy is based on currently
prevailing circumstances and the assumption that certain circumstances will or
will not occur, as well as the inherent risks and uncertainties involved in
various stages of development. We cannot, therefore, assure you that we will be
able to successfully overcome such difficulties and continue to grow our
business.
If
we fail to manage our growth and current operations, we may not achieve future
growth or our expected revenues.
In order
to maximize potential growth in our current and potential markets, we believe
that we must expand our manufacturing and marketing operations. To this end, we
are and expect to continue to substantially increase our employee headcount
which will place a significant strain on our management and on our operational,
accounting, and information systems. Our need to manage our operations and
growth effectively requires us to continue to expend funds to improve our
financial controls, operating procedures, management information systems,
reporting systems and procedures to manage our increased operations. If we are
unable to implement improvements to our management information and control
systems successfully in an efficient or timely manner, or if we encounter
deficiencies in our existing systems and controls, then management may receive
inadequate information to manage our day-to-day operations. We will also need to
effectively train, motivate and manage our employees. Our failure to manage our
growth could disrupt our operations and ultimately prevent us from generating
the revenues we expect.
We
may have difficulty defending our intellectual property rights from infringement
which may undermine our competitive position.
We regard
our service marks, trademarks, trade secrets, patents and similar intellectual
property as critical to our success. We rely on trademark, patent and trade
secret law, as well as confidentiality agreements to protect our proprietary
rights. Certain of our products have received trademark and patent protection in
China and Hong Kong. No assurance can be given that such patents and licenses
will not be challenged, invalidated, infringed or circumvented, or that such
intellectual property rights will provide a competitive advantage to us. Our
trade secrets may otherwise become known or be independently discovered by our
competitors. Policing the unauthorized use of proprietary technology can be
difficult and expensive. Also, litigation may be necessary to enforce our
intellectual property rights, protect our trade secrets or determine the
validity and scope of the proprietary rights of others. The outcome of such
potential litigation may not be in our favor and any success in litigation may
not be able to adequately protect our rights. Such litigation may be costly and
divert management attention away from our business. An adverse determination in
any such litigation would impair our intellectual property rights and may harm
our business, prospects and reputation. Enforcement of judgments in China and
Hong Kong is uncertain and even if we are successful in such litigation it may
not provide us with an effective remedy. In addition, we have no insurance
coverage against litigation costs and would have to bear all costs arising from
such litigation to the extent we are unable to recover them from other parties.
The occurrence of any of the foregoing could have a material adverse effect on
our business, financial condition and results of operations. In addition, there
can be no assurance that we will be able to obtain licenses from third-parties
that we may need to conduct our business or that such licenses can be obtained
at a reasonable cost.
In
addition, third parties may file infringement claims against us asserting that
we are infringing on their patents or trademarks. In the event that such claims
are filed, regardless of the merit of such a claim, we may incur substantial
costs and diversion of management as a result of our involvement in such
proceedings.
We
currently sell our products mainly in China. China will remain our primary
market for the foreseeable future. If we expand into additional countries, our
risk of intellectual property infringement may be heightened. Laws and
enforcement mechanisms in other countries may not protect proprietary rights to
the same extent as China and Hong Kong. To date, no trademark or patent filings
have been made other than in China and Hong Kong.
The
measures we take to protect our proprietary rights may be inadequate, and we
cannot give you any assurance that our competitors will not independently
develop formulations and processes that are substantially equivalent or superior
to our own or copy our products.
If
we cannot procure our raw materials from our current sources we may be forced to
seek alternative sources of supply, which may disrupt our operations or may
result in the supply of lesser quality products.
The loss
of any of our primary supply sources, or delays, disruptions or other
difficulties in procuring these raw materials from our primary supply sources
could have a material adverse effect on our business and results of operations.
Additionally, due to the nature of the raw materials, mainly plants, the supply
of these raw materials can be adversely affected by any material change in the
climatic or environmental conditions in China, which may, in turn, result in
increased costs to purchase these raw materials. If we are required to procure
alternative sources of supply, our ability to maintain high quality products,
lower costs and to provide our products to customers when needed could be
impaired, and as a result we could lose business and our results of operations
could be materially and adversely affected.
We
do not have product liability insurance and we could be exposed to substantial
liability.
We face
an inherent business risk of exposure to product liability claims in the event
that the use of our products is alleged to have resulted in adverse side
effects. Adverse side effects, marketing or manufacturing problems pertaining to
any of our products could result in:
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decreased
demand for our products;
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adverse
publicity resulting in injury to our
reputation;
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product
liability claims and significant litigation
costs;
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substantial
monetary awards to or costly settlements with
consumers;
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the
inability to commercialize future
products.
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These
risks will exist for those products in clinical development and with respect to
those products that have received regulatory approval for commercial sale or any
product we may acquire. To date, we have not experienced any product liability
claims. However, that does not mean that we will not have any such claims with
respect to our products in the future. We do not carry product liability
insurance. The lack of product liability insurance exposes us to risks
associated with potential product liability claims, which can be
significant.
Our
international operations require us to comply with a number of U.S. and
international regulations.
We need
to comply with a number of international regulations in countries outside of the
United States. In addition, we must comply with the Foreign Corrupt Practices
Act, or FCPA, which prohibits U.S. companies or their agents and employees from
providing anything of value to a foreign official for the purposes of
influencing any act or decision of these individuals in their official capacity
to help obtain or retain business, direct business to any person or corporate
entity or obtain any unfair advantage. Any failure by us to adopt appropriate
compliance procedures and ensure that our employees and agents comply with the
FCPA and applicable laws and regulations in foreign jurisdictions could result
in substantial penalties or restrictions on our ability to conduct business in
certain foreign jurisdictions. The U.S. Department of The Treasury’s Office of
Foreign Asset Control, or OFAC, administers and enforces economic and trade
sanctions against targeted foreign countries, entities and individuals based on
U.S. foreign policy and national security goals. As a result, we are restricted
from entering into transactions with certain targeted foreign countries,
entities and individuals except as permitted by OFAC which may reduce our future
growth.
We
may incur significant costs to ensure compliance with U.S. corporate governance
and accounting requirements.
We may
incur significant costs associated with our public company reporting
requirements, costs associated with applicable corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002, or
Sarbanes-Oxley, and other rules implemented by the Securities and Exchange
Commission and the New York Stock Exchange, or NYSE. We expect all of these
applicable rules and regulations to increase our legal and financial compliance
costs and to make some activities more time-consuming and costly. We also expect
that these applicable rules and regulations may make it more difficult and more
expensive for us to obtain director and officer liability insurance and we may
be required to accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. As a result, it may be more
difficult for us to attract and retain qualified individuals to serve on our
board of directors, on committees of our board of directors or as executive
officers.
As a
public company, we are required to comply with Sarbanes-Oxley and the related
rules and regulations of the SEC, including expanded disclosure, accelerated
reporting requirements and more complex accounting rules. Compliance with
Section 404 of Sarbanes-Oxley and other requirements resulted in increased
compliance costs and will continue to require additional management resources.
We upgraded our finance and accounting systems, procedures and controls and will
need to continue to implement additional finance and accounting systems,
procedures and controls as we grow to satisfy these reporting requirements. In
addition, we may need to hire additional legal and accounting staff with
appropriate experience and technical knowledge, and we cannot assure you that if
additional staffing is necessary that we will be able to do so in a timely
fashion. If we are unable to complete the required annual assessment as to the
adequacy of our internal reporting or if our independent registered public
accounting firm is unable to provide us with an unqualified report as to the
effectiveness of our internal controls over financial reporting in the future,
we could incur significant costs to become compliant.
We
continuously evaluate and monitor developments with respect to Section 404
of Sarbanes-Oxley and other applicable rules, however, we cannot predict or
estimate the amount of additional costs we may incur or the timing of such
costs.
Risks
Related to China
There
could be changes in government regulations toward the pharmaceutical and
nutraceutical industries that may adversely affect our business.
The
manufacture and sale of pharmaceutical products in China is heavily regulated by
many state, provincial and local authorities. These regulations significantly
increase the difficulty and costs involved in obtaining and maintaining
regulatory approvals for marketing new and existing products. Our future growth
and profitability depend to a large extent on our ability to obtain regulatory
approvals. Additionally, the law could change so as to prohibit the use of
certain pharmaceuticals. If one of our products becomes prohibited, this change
would cease the productivity of that product. The China National Development and
Reform Commission, or CNDRC, has recently implemented price adjustments on many
marketed pharmaceutical products. We have no control over such governmental
policies, which may impact the pricing and profitability of our
products.
The State
Food and Drug Administration of China requires pharmaceutical manufacturers to
obtain Good Manufacturing Practices, or GMP, certifications. We have received
our GMP certifications. However, should we fail to receive or maintain the GMP
certifications in the future, we would no longer be able to manufacture
pharmaceuticals in China, and our businesses would be materially and adversely
affected.
Moreover,
the laws and regulations regarding acquisitions in the pharmaceutical industry
in China may change, which could significantly impact our ability to grow
through acquisitions.
Certain
political and economic considerations relating to China could adversely affect
our company.
China is
transitioning from a planned economy to a market economy. While the PRC
government has pursued economic reforms since its adoption of the open-door
policy in 1978, a large portion of the Chinese economy is still operating under
five-year plans and annual state plans. Through these plans and other economic
measures, such as control on foreign exchange, taxation and restrictions on
foreign participation in the domestic market of various industries, the PRC
government exerts considerable direct and indirect influence on the economy.
Many of the economic reforms carried out by the PRC government are unprecedented
or experimental, and are expected to be refined and improved. Other political,
economic and social factors can also lead to further readjustment of such
reforms. This refining and readjustment process may not necessarily have a
positive effect on our operations or future business development. Our operating
results may be adversely affected by changes in China’s economic and social
conditions as well as by changes in the policies of the PRC government, such as
changes in laws and regulations, or the official interpretation thereof, which
may be introduced to control inflation, changes in the interest rate or method
of taxation, and the imposition of additional restrictions on currency
conversion.
Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof, and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
The
recent nature and uncertain application of many PRC laws applicable to us create
an uncertain environment for business operations and they could have a negative
effect on us.
The PRC
legal system is a civil law system. Unlike the common law system, the civil law
system is based on written statutes in which decided legal cases have little
value as precedents. In 1979, the PRC government began to promulgate a
comprehensive system of laws and has since introduced many laws and regulations
to provide general guidance on economic and business practices in China and to
regulate foreign investment. Progress has been made in the promulgation of laws
and regulations dealing with economic matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade. The promulgation
of new laws, changes of existing laws and the abrogation of local regulations by
national laws could have a negative impact on our business and business
prospects. In addition, as these laws, regulations and legal requirements are
relatively recent, their interpretation and enforcement involve significant
uncertainty.
Currency
conversion and exchange rate volatility could adversely affect our financial
condition and the value of our common stock.
The PRC
government imposes control over the conversion of Renminbi, or RMB, into foreign
currencies. Under the current unified floating exchange rate system, the
People’s Bank of China publishes an exchange rate, which we refer to as the PBOC
exchange rate, based on the previous day’s dealings in the inter-bank foreign
exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC exchange rate according to market
conditions.
Pursuant
to the Foreign Exchange Control Regulations of the PRC issued by the State
Council which came into effect on April 1, 1996, and the Regulations on the
Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which
came into effect on July 1, 1996, regarding foreign exchange control,
conversion of RMB into foreign exchange by Foreign Investment Enterprises, or
FIEs, for use on current account items, including the distribution of dividends
and profits to foreign investors, is permissible. FIEs are permitted to convert
their after-tax dividends and profits to foreign exchange and remit such foreign
exchange to their foreign exchange bank accounts in China. Conversion of RMB
into foreign currencies for capital account items, including direct investment,
loans, and security investment, is still under certain restrictions. On
January 14, 1997, the State Council amended the Foreign Exchange Control
Regulations and added, among other things, an important provision, which
provides that the PRC government shall not impose restrictions on recurring
international payments and transfers under current account items.
Enterprises
in China, including FIEs, which require foreign exchange for transactions
relating to current account items, if within a certain limited amount may,
without approval of the State Administration of Foreign Exchange, or SAFE,
effect payment from their foreign exchange account or convert and pay at the
designated foreign exchange banks by providing valid receipts and
proofs.
Convertibility
of foreign exchange in respect of capital account items, such as direct
investment and capital contribution, is still subject to certain restrictions,
and prior approval from the SAFE or its relevant branches must be
sought.
Our
wholly owned subsidiaries, Three Happiness, HSPL, GLP, HQPL, CCXA, BOKE, Nuo Hua
and GHK are FIEs to which the Foreign Exchange Control Regulations are
applicable. There can be no assurance that we will be able to obtain sufficient
foreign exchange to pay dividends or satisfy other foreign exchange requirements
in the future.
Between
1994 and 2004, the exchange rate for RMB against the U.S. dollar remained
relatively stable, most of the time in the region of approximately RMB8.28 to
US$1.00. However, in 2005, the Chinese government announced that it would begin
pegging the exchange rate of the RMB against a number of currencies, rather than
just the U.S. dollar. As our operations are primarily in China, any significant
revaluation of the RMB may materially and adversely affect our cash flows,
revenues, financial condition and the value of our common stock. For example, to
the extent that we need to convert U.S. dollars into RMB for our operations,
appreciation of this currency against the U.S. dollar could have a material
adverse effect on our business, financial condition, results of operations and
the value of our common stock. Conversely, if we decide to convert our Renminbi
into U.S. dollars for the purpose of declaring dividends on our common stock or
for other business purposes and the U.S. dollar appreciates against the RMB, the
U.S. dollar equivalent of our earnings from our subsidiaries in China would be
reduced.
Future
inflation in China may inhibit our ability to conduct business in
China.
In recent
years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation. During the past ten years, the rate of inflation in China
has been as high as 20.7% and as low as 2.2%. These factors have led to the
adoption by the PRC government, from time to time, of various corrective
measures designed to restrict the availability of credit or regulate growth and
contain inflation. While inflation has been more moderate since 1995, high
inflation may in the future cause the PRC government to impose controls on
credit or prices, or to take other action, which could inhibit economic activity
in China, and thereby harm the market for our products.
It
may be difficult to effect service of process and enforcement of legal judgments
upon us and our officers and certain of our directors because they reside
outside the United States.
As our
operations are presently based in China and our officers and certain of our
directors reside in China, service of process on us and our officers and certain
directors may be difficult to effect within the United States. Also, our main
assets are located in China and any judgment obtained in the United States
against us may not be enforceable outside the United States.
Any
future outbreak of avian influenza, or the Asian bird flu, or any other epidemic
in China could have a material adverse effect on our business operations,
financial condition and results of operations.
Since
mid-December 2003, a growing number of Asian countries have reported outbreaks
of highly pathogenic avian influenza in chickens and ducks. Since all of our
operations are in China, an outbreak of the Asian Bird Flu in China in the
future may disrupt our business operations and have a material adverse effect on
our financial condition and results of operations. For example, a new outbreak
of Asian Bird Flu, or any other epidemic, may reduce the level of economic
activity in affected areas, which may lead to a reduction in our revenue if our
clients cancel existing contracts or defer future expenditures. In addition,
health or other government regulations may require temporary closure of our
offices, or the offices of our customers or partners, which will severely
disrupt our business operations and have a material adverse effect on our
financial condition and results of operations.
Our
business may be affected by unexpected changes in regulatory requirements in the
jurisdictions in which we operate.
We are
subject to many general regulations governing business entities and their
behavior in China and in other jurisdictions in which we have operations. In
particular, we are subject to laws and regulations covering food, dietary
supplements and pharmaceutical products. Such regulations typically deal with
licensing, approvals and permits. Any change in product licensing may make our
products more or less available on the market. Such changes may have a positive
or negative impact on the sale of our products and may directly impact the
associated costs in compliance and our operational and financial viability. Such
regulatory environment also covers any existing or potential trade barriers in
the form of import tariffs and taxes that may make it difficult for us to import
our products to certain countries and regions, such as Japan, South Korea and
Hong Kong, which would limit our international expansion.
Most
of our assets are located in China, any dividends or proceeds from liquidation
are subject to the approval of the relevant Chinese government
agencies.
Our
assets are predominantly located inside China. Under the laws governing FIEs in
China, dividend distribution and liquidation are allowed but subject to special
procedures under the relevant laws and rules. Any dividend payment will be
subject to the decision of the board of directors and subject to foreign
exchange rules governing such repatriation. Any liquidation is subject to both
the relevant government agency’s approval and supervision as well the foreign
exchange control. This may generate additional risk for our investors in case of
dividend payment or liquidation.
There
have been recent incidents in which patients have experienced severe adverse
reactions following the use of pharmaceutical products manufactured in
China.
There
have been recent incidents reported in the Chinese media of a significant number
of patients experiencing severe adverse health consequences following their use
of pharmaceutical products manufactured by certain pharmaceutical companies in
China. A number of patients have become ill and a number of fatalities have been
reported. For example, several deaths were caused by drugs sold by the Second
Pharmaceutical Factory of Qiqihaer, a Chinese drug manufacturer, in May 2006.
Concerns over the safety of pharmaceutical products manufactured in China could
have an adverse effect on the sale of such products, including products
manufactured by us. If in the future we become involved in incidents of the type
described above, such problems could severely and adversely impact our product
sales and reputation.
Anti-corruption
measures taken by the government to correct corruptive practices in the
pharmaceutical industry could adversely affect our sales and
reputation.
The
government has recently taken anti-corruption measures to correct corrupt
practices. In the pharmaceutical industry, such practices include, among others,
acceptance of kickbacks, bribery or other illegal gains or benefits by the
hospitals and medical practitioners from pharmaceutical distributors in
connection with the prescription of a certain drug. Substantially all of our
sales to our ultimate customers are conducted through third-party distributors.
We have no control over our third-party distributors, who may engage in corrupt
practices to promote our products. While we maintain strict anti-corruption
policies applicable to our internal sales force and third-party distributors,
these policies may not be effective. If any of our third-party distributors
engage in such practices and the government takes enforcement action, our
products may be seized and our own practices, and involvement in the
distributors’ practices may be investigated. If this occurs, our sales and
reputation may be materially and adversely affected.
Risks
Related to Our Common Stock
Our
common stock price may be extremely volatile, and you may not be able to resell
your shares at or above the price you paid for the stock.
Our
common stock price has experienced large fluctuations. In addition, the trading
prices of stocks for companies in our industry in general have experienced
extreme price fluctuations in recent years. Any negative change in the public’s
perception of the prospects of companies in our industry could depress our stock
price regardless of our results of operations. Other broad market and industry
factors may decrease the trading price of our common stock, regardless of our
performance. Market fluctuations, as well as general political and economic
conditions such as terrorism, military conflict, recession or interest rate or
currency rate fluctuations, may also decrease the trading price of our common
stock. In addition, our stock price could be subject to wide fluctuations in
response to various factors, including:
|
•
|
changes
in laws or regulations applicable to our
products;
|
|
•
|
period
to period fluctuations in our operating
results;
|
|
•
|
announcements
of new technological innovations or new products by us or our
competitors;
|
|
•
|
changes
in financial estimates or recommendations by securities
analysts;
|
|
•
|
conditions
or trends in our industry;
|
|
•
|
changes
in the market valuations of other companies in our
industry;
|
|
•
|
developments
in domestic and international governmental policy or
regulations;
|
|
•
|
announcements
by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
|
•
|
additions
or departures of key personnel;
|
|
•
|
disputes
or other developments relating to proprietary rights, including patents,
litigation matters and our ability to obtain patent protection for our
technologies;
|
|
•
|
additional
sales of our common stock by us;
and
|
|
•
|
sales
and distributions of our common stock by our
stockholders.
|
In the
past, stockholders have often instituted securities class action litigation
after periods of volatility in the market price of a company’s securities. If a
stockholder files a securities class action suit against us, we would incur
substantial legal fees and our management’s attention and resources would be
diverted from operating our business in order to respond to the
litigation.
Some
of our existing stockholders can exert control over us and may not make
decisions that are in the best interest of all the stockholders.
Our
officers, directors and holders of more than five percent of our outstanding
shares of common stock, together control approximately 46.0% of the voting power
of our stock, of which approximately 43.4% is controlled by Tony Liu, our
Chairman and Chief Executive Officer. In particular, Mr. Liu owns 1,000,000
shares of Series A preferred stock, which shares by their terms have aggregate
voting power equal to 25.0% of the combined voting power of our common and
preferred stock. Moreover, this voting power cannot be diluted or reduced by the
issuance of additional shares of common stock, meaning that the holder or
holders of our Series A preferred stock will always possess 25.0% of the
aggregate voting power of our common and preferred stock. As a result,
Mr. Liu, or these stockholders acting together, will be able to exert a
significant degree of influence over our management and over matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, this concentration of ownership
may delay or prevent a change in control of our company and might affect the
market price of our common stock, even when a change may be in the best
interests of all stockholders. In addition, the interests of our officers,
directors and principal stockholders may not always coincide with our interests
or the interests of other stockholders and, accordingly, these control persons
could cause us to enter into transactions or agreements that we would not
otherwise consider.
Provisions
of the Nevada Revised Statutes may discourage a change of control.
We are
incorporated in Nevada. Certain provisions of the Nevada Revised Statutes, or
NRS, could delay or make more difficult a change of control transaction or other
business combination that may be beneficial to stockholders. We are subject to
Nevada’s “Combinations With Interested Stockholders” statutes (NRS Sections
78.411 through 78.444), which provide that specified persons who, together with
affiliates and associates, own, or within three years did own, 10% or more of
the outstanding voting stock of a Nevada corporation with at least 200
stockholders cannot engage in specified business combinations with the
corporation for a period of three years after the date on which the person
became an interested stockholder, unless the combination or the transaction by
which the person first became an interested stockholder is approved by the
corporation’s Board of Directors before the person first became an interested
stockholder.
Nevada’s
“Acquisition of Controlling Interest” statutes (NRS Sections 78.378–78.3793)
apply only to Nevada Corporations with at least 200 stockholders, including at
least 100 stockholders of record who are Nevada residents, and which conduct
business directly or indirectly in Nevada. As of the date of this prospectus, we
do not believe we have 100 stockholders of record who are residents of Nevada,
although there can be no assurance that in the future the “Acquisition of
Controlling Interest” statutes will not apply to us. The “Acquisition of
Controlling Interest” statutes provide that persons who acquire a “controlling
interest”, as defined in NRS Section 78.3785, in a company may only be
given full voting rights in their shares if such rights are conferred by the
disinterested stockholders of the company at an annual or special meeting.
However, any disinterested stockholder that does not vote in favor of granting
such voting rights is entitled to demand that the company pay fair value for
their shares, if the acquiring person has acquired at least a majority of all of
the voting power of the company. As such, persons acquiring a controlling
interest may not be able to vote their shares.
We
may never pay any dividends to our stockholders.
We have
not paid any cash dividends on shares of our common stock. We currently intend
to retain all available funds and future earnings, if any, to support our
operations and finance the growth and development of our business. Our board of
directors does not intend to distribute dividends in the foreseeable future. The
declaration, payment and amount of any future dividends, if any, will be made at
the discretion of the board of directors, and will depend upon, among other
things, the results of our operations, cash flows and financial condition,
operating and capital requirements, and other factors the board of directors
considers relevant. There is no assurance that future dividends will be paid,
and if dividends are paid, there is no assurance with respect to the amount of
any such dividend.
None.
According
to Chinese law, the government owns all the land in China and companies or
individuals are authorized to use the land only through land use rights granted
by the Chinese government. Our facilities are located at each of our operating
subsidiaries summarized as follow:
Subsidiary
|
|
Facilities
|
|
Size of
Land
|
|
Land Use Right
Expires
|
Three Happiness
|
|
GMP Manufacturing,
warehouse and office
|
|
1,532,775
sq. feet
|
|
2052-2056
|
HSPL
|
|
GMP
Manufacturing, warehouse and office
|
|
532,339
sq. feet
|
|
2052
|
GLP
|
|
GMP
Manufacturing, warehouse and office
|
|
1,485,055 sq. feet
|
|
2052-2077
|
CCXA
|
|
GMP
Manufacturing, warehouse and office
|
|
1,077,467
sq. feet
|
|
2058
|
BOKE
|
|
GMP
Manufacturing, warehouse and office
|
|
174,280
sq. feet
|
|
2052
|
We also
invested and purchased land and properties in Beijing Economic-Technological
Development Area during 2008. The size of land is 551,715 sq. feet with land use
right expiring in year 2054. We intend to utilize the facilities as our
multi-functional headquarters for purposes including administration, research
and development, convention and training.
In
addition to the above, we own a 2,450 square feet office in Hong Kong. We lease
98 sales representative offices throughout China and we lease offices in
Shenzhen and New York. All leases are for a term of one year and are
renewable.
We are
not involved in any litigation that we believe could have a material adverse
effect on our financial position or results of operations. There is no action,
suit, proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of our executive officers or any of our subsidiaries, threatened
against or affecting our company, our common stock, any of our subsidiaries or
of our companies or our Company’s subsidiaries’ officers or directors in their
capacities as such, in which an adverse decision could have a material adverse
effect.
On
December 5, 2008 the Company held its annual meeting of stockholders. There
were two proposals presented to the stockholders at the meeting.
Proposal
1 was the election of the following nine directors to serve for a one year term
or until their respective successors have been duly elected and
qualified.
DIRECTOR
NOMINEE
|
|
FOR
|
|
AGAINST
|
|
WITHHELD
|
Tony
Liu
|
|
65,014,276
|
|
0
|
|
1,367,929
|
Jun
Min
|
|
64,957,784
|
|
0
|
|
1,424,421
|
Yanchun
Li
|
|
63,564,176
|
|
0
|
|
2,818,029
|
Binsheng
Li
|
|
64,959,442
|
|
0
|
|
1,422,763
|
Cosimo
Patti
|
|
65,139,544
|
|
0
|
|
1,242,661
|
Xianmin
Wang
|
|
63,740,052
|
|
0
|
|
2,642,153
|
Eileen
Brody
|
|
65,139,478
|
|
0
|
|
1,242,726
|
Lawrence
S. Wizel
|
|
65,140,093
|
|
0
|
|
1,242,112
|
Baiqing
Zhang
|
|
65,134,761
|
|
0
|
|
1,247,444
|
Proposal
2 was the ratification of the appointment of Weinberg & Company, P.A.
as the Company’s independent registered public accounting firm for the 2008.
There were 65,480,259 votes FOR, 768,778 votes AGAINST and 133,167 votes
ABSTAINED.
Our
common stock has been listed for trading on the New York Stock Exchange, or
NYSE, under the ticker symbol “AOB” since December 18, 2006. The following
table shows the high and low closing sales price for our common stock reported
by the NYSE from January 1, 2007 to February 28, 2009.
Year
|
|
Period
|
|
High
|
|
Low
|
2007
|
|
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
|
|
$ 13.90
$ 11.53
$ 11.59
$ 13.79
|
|
$ 8.52
$
8.39
$
7.11
$ 10.55
|
|
|
|
|
|
|
|
2008
|
|
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
|
|
$ 10.79
$ 12.13
$
9.92
$
6.79
|
|
$ 7.46
$ 8.20
$ 6.36
$ 4.49
|
|
|
|
|
|
|
|
2009
|
|
First
Quarter (January 1 – February 28)
|
|
$
7.39
|
|
$ 3.69
|
Stockholders
and Dividends
As of
March 6, 2009, there were approximately 650 record holders of our common
stock. We have not paid any cash dividends on shares of our common stock and do
not plan to do so in the near future. We currently plan to retain future
earnings to fund the development and growth of our business. Any future
determination related to our dividend policy will be made at the discretion of
our Board of Directors.
Equity
Compensation Plan Information
The
following table sets forth aggregate information regarding our equity
compensation plans in effect as of December 31, 2008:
|
|
Number
of
securities
to be
issued
upon
exercise of
outstanding options,
warrants
and
rights
|
|
|
Weighted-average
exercise price of
outstanding
options, warrants
and rights
|
|
|
Number
of
securities
remaining
available
for
future issuance
under
equity
compensation
plans (excluding
securities reflected
in column
(a))
|
|
Plan
category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
1,697,763
|
|
|
$
|
8.68
|
|
|
|
3,302,237
|
|
Equity
compensation plans not approved by security holders(1)
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Total
|
|
|
1,697,763
|
|
|
$
|
8.68
|
|
|
|
3,302,237
|
|
(1)
|
Includes
shares issuable pursuant to the Company’s 2006 Equity Incentive Plan (the
“2006 Plan”), which was approved by the Company’s
stockholders.
|
Stock
Price Performance Graph
The
following chart compares the cumulative total stockholder return on the
Company’s shares of common stock with the cumulative total stockholder return of
(i) the New York Stock Exchange Market Index and (ii) a peer group
index consisting of companies reporting under the Standard Industrial
Classification Code 2834 (Pharmaceutical Preparations):
COMPARISON
OF CUMULATIVE TOTAL RETURN
AMONG
AMERICAN ORIENTAL BIOENGINEERING, INC.,
NEW YORK
STOCK EXCHANGE INDEX AND SIC CODE INDEX
COMPARISON
OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES,
PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS
|
|
YEAR
ENDING
|
|
COMPANY/INDEX/MARKET
|
|
12/31/2003
|
|
|
12/31/2004
|
|
|
12/30/2005
|
|
|
12/29/2006
|
|
|
12/31/2007
|
|
|
12/31/2008
|
|
American
Oriental Bioengineering
|
|
|
100.00
|
|
|
|
42.47
|
|
|
|
120.82
|
|
|
|
319.73
|
|
|
|
303.56
|
|
|
|
186.03
|
|
Pharmaceutical
Preparations
|
|
|
100.00
|
|
|
|
98.99
|
|
|
|
105.25
|
|
|
|
117.74
|
|
|
|
119.33
|
|
|
|
99.51
|
|
NYSE
Market Index
|
|
|
100.00
|
|
|
|
112.92
|
|
|
|
122.25
|
|
|
|
143.23
|
|
|
|
150.88
|
|
|
|
94.76
|
|
The
material in this chart is not soliciting material, is not deemed filed with the
SEC and is not incorporated by reference in any filing of the Company under the
Securities Act of 1933, as amended or the Exchange Act, whether made before or
after the date of this proxy statement and irrespective of any general
incorporation language in such filing.
Issuance
of Unregistered Shares
On
March 31, 2008, the Company issued 26,580 shares of restricted common stock
to five of its independent directors. The shares issued were part of the total
compensation for their services rendered in 2007. In June 2008, the Company
issued 26,748 shares of restricted common stock to consultants firm for advisory
services rendered and to be rendered in 2009. The issuance of the foregoing
shares was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
Equity
Repurchases
In
connection with the private placement pursuant to Section 4(2) of the
Securities Act of $115,000,000 principal amount of 5% Convertible Senior Notes
due 2015 (the “Notes”) at a purchase price of $1,000 per Note to several
“qualified institutional buyers,” as defined in Rule 144A under the Securities
Act, the Company purchase shares of its common stock in the approximate value of
$30.0 million.
Issuer
Purchases of Equity Securities
Period
|
|
Total Number of Shares
of
Common Stock
Purchased
|
|
|
Average Price Paid per
Share of Common Stock
|
|
|
Total Number of Shares
of
Common Stock
Purchased
as Part of
Publicly
Announced
Plans
|
|
|
Maximum Number (or
Approximate
Dollar
Value)
of of Common
Stock
that May Yet Be
Purchased
Under the
Plans or
Programs
|
|
7/15/2008
|
|
|
3,712,700
|
|
|
$
|
8.08
|
|
|
|
3,712,700
|
|
|
$
|
45,000,000
|
|
The
following table sets forth selected historical financial information as of the
dates and for the periods indicated.
The
selected financial information for each of the three years ended
December 31, 2008, 2007 and 2006 has been derived from, and should be read
in conjunction with, the audited consolidated financial statements and other
financial information presented elsewhere herein. The selected financial
information for each of the two years ended December 31, 2005 and 2004 has
been derived from the Company’s Annual Report on Form 10-KSB for the years ended
December 31, 2005 and 2004 and are not included herein. Capitalized terms
are as defined and described in the consolidated financial statements or
elsewhere herein.
The
selected financial information for the year ended December 31, 2008
reflects the acquisition of Nuo Hua on October 18, 2008 and the acquisition
of GHK on October 20, 2008. The selected financial information for the year
ended December 31, 2007 reflects the acquisition of CCXA on
September 6, 2007 and the acquisition of Boke on October 18, 2007. The
selected financial information for the year ended December 31, 2006
reflects the acquisition of the GLP effective in May 2006 and the acquisition of
HQPL effective in July 2006. The selected financial information for the year
ended December 31, 2004 reflects the acquisition of HSPL effective in
September 2004.
|
|
Year Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Statement of Operations Data:
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
264,643,058
|
|
|
$
|
160,482,383
|
|
|
$
|
110,182,092
|
|
|
$
|
54,732,557
|
|
|
$
|
31,966,927
|
|
COST
OF GOODS SOLD
|
|
|
91,031,274
|
|
|
|
49,364,486
|
|
|
|
38,318,223
|
|
|
|
20,524,201
|
|
|
|
11,775,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
173,611,784
|
|
|
|
111,117,897
|
|
|
|
71,863,869
|
|
|
|
34,208,356
|
|
|
|
20,191,561
|
|
Selling
and marketing
|
|
|
39,774,330
|
|
|
|
20,669,303
|
|
|
|
8,876,829
|
|
|
|
3,216,545
|
|
|
|
2,387,805
|
|
Advertising
|
|
|
34,102,538
|
|
|
|
22,865,903
|
|
|
|
15,174,125
|
|
|
|
5,238,186
|
|
|
|
2,926,629
|
|
General
and administrative
|
|
|
19,603,947
|
|
|
|
13,832,110
|
|
|
|
10,446,740
|
|
|
|
7,076,139
|
|
|
|
4,582,388
|
|
Depreciation
and amortization
|
|
|
4,383,215
|
|
|
|
1,989,425
|
|
|
|
988,488
|
|
|
|
337,537
|
|
|
|
250,001
|
|
Purchased
in-process research and development
|
|
|
12,255,248
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
63,492,506
|
|
|
|
51,761,156
|
|
|
|
36,377,687
|
|
|
|
18,339,949
|
|
|
|
10,044,738
|
|
Equity
in earnings (loss) from unconsolidated entities
|
|
|
(1,132,986
|
)
|
|
|
23,711
|
|
|
|
(3,811
|
)
|
|
|
—
|
|
|
|
—
|
|
Interest
income (expense), net
|
|
|
(2,571,015
|
)
|
|
|
617,524
|
|
|
|
574,172
|
|
|
|
(505,822
|
)
|
|
|
(100,765
|
)
|
Other
income (expense), net
|
|
|
(65,843
|
)
|
|
|
(525,065
|
)
|
|
|
(329,987
|
)
|
|
|
(6,876
|
)
|
|
|
44,035
|
|
Minority
interests
|
|
|
(27,575
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
59,695,087
|
|
|
|
51,877,326
|
|
|
|
36,618,061
|
|
|
|
17,827,251
|
|
|
|
9,988,008
|
|
Income
taxes
|
|
|
12,635,472
|
|
|
|
8,011,248
|
|
|
|
7,416,915
|
|
|
|
4,400,870
|
|
|
|
2,216,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
47,059,615
|
|
|
$
|
43,866,078
|
|
|
$
|
29,201,146
|
|
|
$
|
13,426,381
|
|
|
$
|
7,771,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
0.62
|
|
|
$
|
0.63
|
|
|
$
|
0.47
|
|
|
$
|
0.31
|
|
|
$
|
0.23
|
|
DILUTED
|
|
$
|
0.61
|
|
|
$
|
0.61
|
|
|
$
|
0.46
|
|
|
$
|
0.31
|
|
|
$
|
0.23
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
76,504,035
|
|
|
|
69,870,775
|
|
|
|
62,679,996
|
|
|
|
43,827,725
|
|
|
|
33,595,685
|
|
DILUTED
|
|
|
82,254,185
|
|
|
|
71,364,244
|
|
|
|
62,913,961
|
|
|
|
43,840,463
|
|
|
|
33,953,507
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Balance
Sheet Data:
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
70,636,510
|
|
|
$
|
166,410,075
|
|
|
$
|
87,784,419
|
|
|
$
|
57,532,049
|
|
|
$
|
11,404,149
|
|
Working
capital
|
|
|
87,082,705
|
|
|
|
180,536,568
|
|
|
|
92,252,071
|
|
|
|
66,813,509
|
|
|
|
14,700,456
|
|
Total
assets
|
|
|
528,675,732
|
|
|
|
358,351,088
|
|
|
|
188,468,241
|
|
|
|
99,422,239
|
|
|
|
42,836,624
|
|
Total
debt (including current maturities of debt)
|
|
|
8,003,328
|
|
|
|
9,927,270
|
|
|
|
10,681,493
|
|
|
|
3,717,380
|
|
|
|
5,060,241
|
|
Shareholders’
equity
|
|
$
|
348,944,446
|
|
|
$
|
313,778,571
|
|
|
$
|
156,095,725
|
|
|
$
|
90,604,546
|
|
|
$
|
33,037,820
|
|
|
|
Year Ended
December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Cash
Flow Data:
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$
|
74,809,867
|
|
|
$
|
45,364,532
|
|
|
$
|
29,093,464
|
|
|
$
|
11,402,350
|
|
|
$
|
8,236,258
|
|
Net
cash used in investing activities
|
|
|
(257,374,093
|
)
|
|
|
(69,845,702
|
)
|
|
|
(26,386,564
|
)
|
|
|
(5,861,945
|
)
|
|
|
(8,961,529
|
)
|
Net
cash provided by financing activities
|
|
$
|
80,948,164
|
|
|
$
|
96,833,706
|
|
|
$
|
26,158,514
|
|
|
$
|
39,663,836
|
|
|
$
|
6,762,563
|
|
All of the financial information
presented in this Item 7 has been adjusted to reflect the restatement of
our consolidated financial statements as of and for the fiscal years ended
December 31, 2008 and December 31, 2007. Specifically, we have restated our
consolidated balance sheets and the related consolidated statements of income,
consolidated statements of stockholders’ equity and consolidated statements of
cash flows as of and for the years ended December 31, 2008 and 2007. The
restatement is more fully described in the “Explanatory Note” immediately
preceding Part I, Item 1 and in Note 4 “Restatement of Consolidated
Financial Statements,” which is included in “Financial Statements and
Supplementary Data” in Item 8 of this Form 10-K/A. You should read the
following discussion in conjunction with our consolidated financial statements
and related notes included elsewhere in this annual report on Form 10-K/A. This
discussion contains forward-looking statements that are based on management’s
current expectations, estimates and projections about our business and
operations. Our actual results may differ materially from those currently
anticipated and expressed in such forward-looking statements. See “ —
Forward-Looking Statements.”
As used
in this report, the terms “Company”, “we”, “our”, “us” and “AOB” refer to
American Oriental Bioengineering, Inc., a Nevada corporation.
PRELIMINARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This
Annual Report contains forward-looking statements within the meaning of the
federal securities laws. These include statements about our expectations,
beliefs, intentions or strategies for the future, which we indicate by words or
phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,”
“AOB believes,” “management believes” and similar language. The forward-looking
statements are based on the current expectations of AOB and are subject to
certain risks, uncertainties and assumptions, including those set forth in the
discussion under “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in this report. Actual results may differ materially
from results anticipated in these forward-looking statements. We base the
forward-looking statements on information currently available to us, and we
assume no obligation to update them.
Investors
are also advised to refer to the information in our previous filings with the
Securities and Exchange Commission (SEC), especially on Forms 10-K, 10-Q, and
8-K, in which we discuss in more detail various important factors that could
cause actual results to differ from expected or historic results. It is not
possible to foresee or identify all such factors. As such, investors should not
consider any list of such factors to be an exhaustive statement of all risks and
uncertainties or potentially inaccurate assumptions.
CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
This
section should be read together with the Summary of Significant Accounting
Policies included as Note 3 to the consolidated financial statements included in
our Annual Report on Form 10-K for the year ended December 31,
2008.
Estimates
affecting accounts receivable and inventories
The
preparation of our consolidated financial statements requires management to make
estimates and assumptions that affect our reporting of assets and liabilities
(and contingent assets and liabilities). These estimates are particularly
significant where they affect the reported net realizable value of the Company’s
accounts receivable and inventories.
At
December 31, 2008, the Company provided a $226,330 reserve against accounts
receivable. Management’s estimate of the appropriate reserve on accounts
receivable at December 31, 2008 was based on the aged nature of these
accounts receivable. In making its judgment, management assessed its customers’
ability to continue to pay their outstanding invoices on a timely basis, and
whether their financial position might deteriorate significantly in the future,
which would result in their inability to pay their debts to the
Company.
At
December 31, 2008, the Company provided an allowance against its
inventories amounting to $167,429. Management determination of this allowance
was based on potential impairments to the current carrying value of the
inventories due to potential obsolescence of aged inventories. In making its
estimate, management considered the probable demand for our products in the
future and historical trends in the turnover of our inventories.
While the
Company currently believes that there is little likelihood that actual results
will differ materially from these current estimates, if customer demand for our
products decreases significantly in the near future, or if the financial
condition of our customers deteriorates in the near future, the Company could
realize significant write downs for slow-moving inventories or uncollectible
accounts receivable.
Policy
affecting recognition of revenue
Among the
most important accounting policies affecting our consolidated financial
statements is our policy of recognizing revenue in accordance with the SEC’s
Staff Accounting Bulletin (“SAB”) No. 104. Under this policy, all of the
following criteria must be met in order for us to recognize
revenue:
|
1.
|
Persuasive
evidence of an arrangement exists;
|
|
2.
|
Delivery
has occurred or services have been
rendered;
|
|
3.
|
The
seller’s price to the buyer is fixed or determinable;
and
|
|
4.
|
Collectability
is reasonably assured.
|
The
majority of the Company’s revenue results from sales contracts with distributors
and revenue is recorded upon the shipment of goods. Management conducts credit
background checks for new customers as a means to reduce the subjectivity of
assuring collectability. Based on these factors, the Company believes that it
can apply the provisions of SAB 104 with minimal subjectivity.
Estimates
affecting purchase price allocated to in-process research and
development
Approximately
$12.2 million of the purchase price of GuangXi HuiKe Pharmaceutical Research and
Development Co., Ltd. (“GHK”) represents the estimated fair value of acquired
in-process R&D projects that had no alternative future use. Accordingly,
this amount was immediately expensed on the acquisition date. The value assigned
to purchase in-process R&D comprises seven projects. The estimated fair
value of these projects was determined by using estimated future net cash flows
expected and then discounting these estimated future net cash flows to their
present value using an appropriate discount rate that reflects the stage of risk
of the project. This risk adjustment reflected the probability of success of
each project based upon the nature of the product, the current patent situation
and the stage of completion of the project. In estimating the forecast of future
cash flows, we also made the assumptions on:
|
1.
|
Revenue
that is likely to result from specific in-process research and development
projects, including estimated number of units to be sold, estimated
selling prices, estimated market penetration and estimated market share
and year over year growth rates over the product life
cycles;
|
|
2.
|
Cost
of sales related to the potential products using historical data, industry
data or other sources of market
data;
|
|
3.
|
Sales
and marketing expense using historical financial data, industry data or
other market data;
|
|
4.
|
General
and administrative expense.
|
RECENT ACCOUNTING
PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standard Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements,” which provides enhanced guidance for
using fair value to measure assets and liabilities. SFAS No. 157 provides a
common definition of fair value and establishes a framework to make the
measurement of fair value in generally accepted accounting principles more
consistent and comparable. SFAS No. 157 also requires expanded disclosures
to provide information about the extent to which fair value is used to measure
assets and liabilities, the methods and assumptions used to measure fair value,
and the effect of fair value measures on earnings. SFAS No. 157 is
effective for financial statements issued in fiscal years beginning after
November 15, 2007 and to interim periods within those fiscal years. The
Company is currently in the process of evaluating the effect, if any, the
adoption of SFAS No. 157 will have on its consolidated results of
operations, financial position, or cash flows.
In
February 2007, the FASB issued FASB Statement No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities — including an amendment
of FASB Statement No. 115” (FAS 159). FAS 159 will became effective for the
Company on January 1, 2008. This standard permits companies to choose to
measure many financial instruments and certain other items at fair value and
report unrealized gains and losses in earnings. Such accounting is optional and
is generally to be applied instrument by instrument. The Company does not
anticipate that the election, if any, of this fair-value option will have a
material effect on results or operations or consolidated financial
position.
In
December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations”,
and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements.” SFAS No. 141 (R) requires an acquirer to measure the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree at their fair values on the acquisition date, with
goodwill being the excess value over the net identifiable assets acquired. SFAS
No.160 clarifies that a noncontrolling interest in a subsidiary should be
reported as equity in the consolidated financial statements. The calculation of
earnings per share will continue to be based on income amounts attributable to
the parent. SFAS No. 141 (R) and SFAS No. 160 are effective for
financial statements issued for fiscal years beginning after December 15,
2008. Early adoption is prohibited. We have not yet determined the effect on our
consolidated financial statements, if any, upon adoption of SFAS No. 141
(R) or SFAS No. 160. We are aware that our accounting for minority
interest will change and we are considering those effects now but believe we
will only be a reclassification of minority interest from mezzanine equity to
our stockholder’s equity section in the balance sheet, in any case we do not
believe the implementation of SFAS 160 will be material to our financial
position. SFAS 141 (R) will significantly affect the accounting for future
business combinations and we will determine the accounting as new combinations
are determined.
FINANCIAL STATEMENT
PRESENTATION
Restatement of Consolidated Financial
Statements
During
the review of its third quarter September 30, 2009 operating results, the
Company identified isolated historical accounting errors in: (i) the calculation
of stock based compensation, (ii) the recognition of deferred tax liabilities of
certain acquired assets and (iii) the provision of deferred tax liabilities on
undistributed earnings. The accounting errors have resulted in the misstatement
of certain balance sheet and income statement items and the
cumulative net earnings since 2006. The Company has no evidence that the errors
resulted from any fraud or intentional misconduct. The Company undertook a
review to determine the total amount of the errors and the accounting periods in
which the errors occurred. Although the impact of each individual error
identified or in aggregate was not material, c
onsidering the effects of prior year misstatements when
quantifying misstatements in current year financial statements, the Company
chose to restate its previously reported financial
statements.
The
restatement corrects three historical accounting errors identified:
(i)
The Company identified historical accounting errors in
stock-based compensation expense for years ended December 31, 2008 and 2007. The
errors were identified after the Company re-examined the calculation of
expected
volatility. The Company used monthly price observations to
derive the standard deviation of expected monthly returns but failed to
annualize the standard deviation as required by the Black Scholes Model. The
Company have understated the expected volatility and thus understated the
fair value of option being granted. The impact is the
understatement of stock-based compensation expenses being amortized in
subsequent periods. The errors also led to an inflated number of options being
granted when the grants were approved based on the total estimated fair value
instead of the quantity of options.
The
Company determined that the aggregate stock-based compensation expense error
related to the periods discussed above totaled $1.3 million. To correct these
errors, the Company has recorded additional non-cash stock-based compensation
expense of $0.8 million in 2008, $0.5 million in 2007. The Company has also
cancelled 723,493 options granted in 2008 based the revised options fair value.
The cumulative effect of the stock-based compensation adjustments on the
consolidated balance sheets for the years ended 2008 and 2007 resulted in an
increase in additional paid-in capital offset by a corresponding change in
retained earning which resulted in no net effect on shareholders’
equity.
(ii)
The Company identified errors in
the recognition
of deferred tax liabilities of certain acquired assets and the corresponding
goodwill
for years ended December 31, 2007 and
2006. The errors were identified when the Company reviewed and re-evaluated
applicable tax laws at the time of acquisitions. T
he Company
acquired 100% of Guangxi Lingfeng Pharmaceutical Co., Ltd. (“GLP”) and Guangxi
Boke Pharmaceutical Co., Ltd. (“Boke”) in 2006 and 2007, respectively. The
acquisitions were accounted under business combination The purchase prices was
allocated to assets and liabilities to the extend of their fair value and the
excess was accounted for as goodwill. The Company also provided deferred tax for
the
fair value
adjustments.
GLP and
Boke measured the deferred tax related to fair value adjustments at its
preferential tax rate at the acquisition date of 15%. The Company
subsequently determined that according to “Cai Shui [2001] 202”issued in 2001,
the preferential tax rate of 15% would expire in year 2010. The Company should
have been using the then enacted statutory tax rate of 30%, instead of 15%, in
measuring its deferred tax for anticipated reversal post 2010. Furthermore, when
new Corporate Income Tax Law was enacted in March 2007, the companies’ deferred
tax should have been re-measured at the new enacted statutory corporate tax rate
of 25%. This rate change was not recorded by the
companies.
The
Company determined that the aggregate errors related to the initial recording of
the deferred tax at acquisition totaled approximately $4.0 million which was
corrected with the off-setting entry recorded to Goodwill in May 2006
and in October 2007. The Company also corrected the subsequent change in tax
rate by reducing the deferred tax of approximately $1.0 million with the
off-setting entry to income tax expenses in 2007. The related translation impact
was recorded to Other Comprehensive Income accordingly. The adjustment
affected certain applicable financial statements as of and for the years ended
December 31, 2008, 2007 and 2006.
(iii)
The Company identified errors in the recording of a
deferred tax liability on its foreign subsidiaries’ post-2007 undistributed
earnings. The errors were identified after the Company re-examined applicable
tax laws and accounting standards. As the Company has asserted permanent
reinvestment of its foreign subsidiaries’ undistributed earnings, no deferred
tax liability should be recorded for any outside basis differences and related
translation adjustments
.
The
Company determined that the aggregate error related to this issue totaled
approximately $3.2 million. To correct this error, the Company wrote-off the
deferred tax liability with the off-setting entry to Other Comprehensive Income
in 2008. The error has no impact to revenue or cash and cash equivalents but
impacted the consolidated balance sheet and changes in shareholders'
equity as of and for the year ended December 31, 2008.
The
Company has restated certain applicable financial statements as of and for the
years ended December 31, 2008, 2007 and 2006. The following discloses each
line item on the Company’s consolidated financial statements as originally
reported in the Company’s annual report on Form 10-K for the year ended
December 31, 2008 filed with the Securities and Exchange Commission on
March 9, 2009, the increase (decrease) in each line item on the
Company’s consolidated financial statements as a result of the restatement and
each line item on the Company’s consolidated financial statements as
restated.
The
effects of the restatement on selected income statement line items for the years
ended December 31, 2008 and 2007 are as follows:
Increase/(Decrease)
in income statement line items
|
|
2008
|
|
2007
|
|
General
and administrative
|
$
|
838,190
|
|
$
|
466,954
|
|
Income
before income tax
|
|
(838,190)
|
|
|
(466,954)
|
|
Income
tax
|
|
(91,916)
|
|
|
(1,042,151)
|
|
Net
income attributable to common shareholders
|
|
(746,274)
|
|
|
575,197
|
|
Net
income per common share attributable to common shareholders —
basic
|
|
-
|
|
|
0.01
|
|
Net
income per common share attributable to common shareholders —
diluted
|
$
|
-
|
|
$
|
0.01
|
|
The
cumulative effects of the restatement on selected balance sheet line items as of
December 31, 2008 and 2007 are as follows:
Increase/(Decrease)
in balance sheet line items
|
|
2008
|
|
2007
|
|
Goodwill
|
$
|
4,620,895
|
|
$
|
4,620,895
|
|
Deferred
tax assets
|
|
-
|
|
|
15,297
|
|
Deferred
tax liability - current
|
|
(667,095)
|
|
|
(109,733)
|
|
Deferred
tax liability - non current
|
|
1,551,743
|
|
|
4,050,444
|
|
Accumulated
other comprehensive income
|
|
2,602,180
|
|
|
(346,670)
|
|
Retained
earnings
|
|
(171,077)
|
|
|
575,197
|
|
Additional
paid-in capital
|
|
1,305,144
|
|
|
466,954
|
|
RESULTS OF OPERATIONS – YEAR
ENDED DECEMBER 31, 2008 AS COMPARED TO YEAR ENDED DECEMBER 31,
2007
The
following table sets forth the amounts and the percentage relationship to
revenues of certain items in our consolidated statements of income for the years
ended December 31, 2008 and 2007:
|
|
Year Ended
December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
264,643,058
|
|
|
$
|
160,482,383
|
|
|
|
100%
|
|
|
|
100%
|
|
COST
OF GOODS SOLD
|
|
|
91,031,274
|
|
|
|
49,364,486
|
|
|
|
34.40
|
|
|
|
30.76
|
|
GROSS
PROFIT
|
|
|
173,611,784
|
|
|
|
111,117,897
|
|
|
|
65.60
|
|
|
|
69.24
|
|
Selling
and marketing
|
|
|
39,774,330
|
|
|
|
20,669,303
|
|
|
|
15.03
|
|
|
|
12.88
|
|
Advertising
|
|
|
34,102,538
|
|
|
|
22,865,903
|
|
|
|
12.89
|
|
|
|
14.25
|
|
General
and administrative
|
|
|
19,603,947
|
|
|
|
13,832,110
|
|
|
|
7.4
|
|
|
|
8.6
|
|
Depreciation
and amortization
|
|
|
4,383,215
|
|
|
|
1,989,425
|
|
|
|
1.66
|
|
|
|
1.24
|
|
Purchased
in-process research and development
|
|
|
12,255,248
|
|
|
|
—
|
|
|
|
4.63
|
|
|
|
—
|
|
Total
operating expenses
|
|
|
110,119,278
|
|
|
|
59,356,741
|
|
|
|
41.61
|
|
|
|
36.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
63,492,506
|
|
|
|
51,761,156
|
|
|
|
23.99
|
|
|
|
32.27
|
|
Equity
in earnings (loss) from unconsolidated entities
|
|
|
(1,132,986
|
)
|
|
|
23,711
|
|
|
|
(0.43
|
)
|
|
|
0.01
|
|
Interest
income (expense), net
|
|
|
(2,571,015
|
)
|
|
|
617,524
|
|
|
|
(0.97
|
)
|
|
|
0.38
|
|
Other
income (expense), net
|
|
|
(65,843
|
)
|
|
|
(525,065
|
)
|
|
|
(0.02
|
)
|
|
|
(0.33
|
)
|
Minority
interests
|
|
|
(27,575
|
)
|
|
|
—
|
|
|
|
(0.01
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
59,695,087
|
|
|
|
51,877,326
|
|
|
|
22.56
|
|
|
|
32.33
|
|
Income
taxes
|
|
|
12,635,472
|
|
|
|
8,011,248
|
|
|
|
4.77
|
|
|
|
4.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
47,059,615
|
|
|
$
|
43,866,078
|
|
|
|
17.79%
|
|
|
|
27.34%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
0.62
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
$
|
0.61
|
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
Revenues
Revenues
for the year ended December 31, 2008 were $264,643,058, an increase of
$104,160,675 over revenues for the year ended December 31, 2007. Revenues
by segments and product categories were as follows:
|
|
Year Ended
December 31,
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Revenue
from pharmaceutical products
|
|
$
|
224,904,348
|
|
|
$
|
127,823,297
|
|
|
$
|
97,081,051
|
|
|
|
75.95%
|
|
Revenue
from nutraceutical products
|
|
|
34,266,739
|
|
|
|
32,659,086
|
|
|
|
1,607,653
|
|
|
|
4.92%
|
|
Total
manufacturing revenue
|
|
|
259,171,087
|
|
|
|
160,482,383
|
|
|
|
98,688,704
|
|
|
|
61.5%
|
|
Distribution
revenue
|
|
|
5,471,971
|
|
|
|
—
|
|
|
|
5,471,971
|
|
|
|
100%
|
|
Total
sales revenue
|
|
$
|
264,643,058
|
|
|
$
|
160,482,383
|
|
|
$
|
104,160,675
|
|
|
|
64.90%
|
|
Sales of
our pharmaceutical products increased by $97,081,051, or 76%, as compared to the
year of 2007 primarily due to the following factors:
|
•
|
The
sales of our prescription pharmaceutical products increased from
$59,015,481 in 2007 to $87,423,056 in 2008, or 48% increase. This is
primarily due to contributions from the Company’s diversifying product
portfolio, including recently launched CCXA prescription products, in
addition to existing products. Expanding rural market coverage also drove
prescription pharmaceutical revenue performance during
2008.
|
|
•
|
The
sales of our OTC pharmaceutical products increased from $68,807,816 to
$137,481,292, or 99.8 % increase. This was attributable to the
continuous increase in sales of our Jinji series , Jinji Yimucao product
that was launched in early 2007 and as a result of our marketing campaigns
to enhance recognition of such products;
and
|
|
•
|
The
contribution by our newly acquired subsidiaries, CCXA and Boke, of
$24,759,539 and $38,182,006, to our revenue for the year ended
December 31, 2008, respectively. Boke was consolidated starting
October 2007, and CCXA was consolidated starting September 2007, and had
contributed $5,402,877 and $3,246,125 to our revenue for the year ended
December 31, 2007,
respectively.
|
Sales
from our nutraceutical products increased from $32,659,086 in the year of 2007
to $34,266,739 in the year of 2008, representing a growth of 5% and it is
primarily due to the following factors:
|
•
|
Sales
of our Protein Peptide series of products increased by 1.8%, from
$31,560,609 in 2007 to $32,136,951 in 2008. This increase was mainly
attributed to the increase in sales of peptide coffee and peptide powder
through our expanded distribution network;
and
|
|
•
|
Sales
of our nutraceutical beverage series increased from $583,830 in the year
of 2007 to $1,935,402 in the year of
2008.
|
The
Company has recorded $5,471,971 distribution revenue from Nuo Hua since its
acquisition on October 18, 2008. The Company had no distribution revenue
for the years ended December 31, 2007.
Cost of Goods Sold and Gross
Profit
Cost of
goods sold was $91,031,274 for the year ended December 31, 2008, compared
to $49,364,486 for the year ended December 31, 2007. Expressed as a
percentage of revenues, cost of goods sold was 34.40% for the year ended
December 31, 2008, compared to 30.76% for the year ended December 31,
2007. The increase in cost of goods sold as a percentage of revenues reflected
sales of more lower margin products by CCXA, increase of raw material prices and
lower margin distribution business from Nuo Hua.
Cost of
goods sold for the years ended December 31, 2008 and 2007 by segments and
product categories were as follows:
|
|
Year Ended
December 31,
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Pharmaceutical
products
|
|
$
|
72,244,010
|
|
|
$
|
37,089,204
|
|
|
$
|
35,154,806
|
|
|
|
94.78%
|
|
Nutraceutical
products
|
|
|
13,543,450
|
|
|
|
12,275,282
|
|
|
|
1,268,168
|
|
|
|
10.33%
|
|
Total
manufacturing cost
|
|
|
85,787,460
|
|
|
|
49,364,486
|
|
|
|
36,422,974
|
|
|
|
73.78%
|
|
Distribution
cost
|
|
|
5,243,814
|
|
|
|
—
|
|
|
|
5,243,814
|
|
|
|
100%
|
|
Total
cost
|
|
$
|
91,031,274
|
|
|
$
|
49,364,486
|
|
|
$
|
41,666,788
|
|
|
|
84.41%
|
|
The cost
of goods sold of pharmaceutical and nutraceutical products increased by 95% and
10%, respectively, in the year ended December 31, 2008 compared to the year
ended December 31, 2007. These increases are attributed to our increase in
sales. The Company had no distribution revenue and thus the corresponding cost
of goods sold for the years ended December 31, 2007.
Gross
profit increased by $62,493,887, or 56.24%, for the year ended December 31,
2008 over the year ended December 31, 2007. This increase reflected higher
net sales. Gross profit as a percentage of net revenues decreased from 69.24% in
the prior year to 65.60% in the year of 2008 due to lower margin distribution
business and CCXA sold lower gross margin products than 2007.
Selling and
Marketing
Selling
and marketing expenses, including distribution expenses, increased from
$20,669,303 in the year ended December 31, 2007 to $39,774,330 in the year
ended December 31, 2008, representing a 92% increase. The details of our
sales and marketing expenses were as follows:
|
|
Year Ended
December 31,
|
|
|
Increase/
|
|
|
Increase/
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
(Decrease)
|
Promotional
materials and fees
|
|
$
|
24,062,209
|
|
|
$
|
7,249,854
|
|
|
$
|
16,812,355
|
|
|
|
232
|
%
|
Payroll
|
|
|
5,714,423
|
|
|
|
3,866,200
|
|
|
|
1,848,223
|
|
|
|
48
|
%
|
Shipping
|
|
|
3,501,453
|
|
|
|
2,796,100
|
|
|
|
705,353
|
|
|
|
25
|
%
|
Trips
and traveling
|
|
|
2,378,241
|
|
|
|
1,875,526
|
|
|
|
502,715
|
|
|
|
27
|
%
|
Sales
conferences
|
|
|
2,545,735
|
|
|
|
1,854,883
|
|
|
|
690,852
|
|
|
|
37
|
%
|
Office
supplies
|
|
|
756,544
|
|
|
|
553,844
|
|
|
|
202,700
|
|
|
|
37
|
%
|
Other
|
|
|
815,725
|
|
|
|
2,472,896
|
|
|
|
(1,657,171
|
)
|
|
|
(67
|
)%
|
TOTAL
|
|
$
|
39,774,330
|
|
|
$
|
20,669,303
|
|
|
$
|
19,105,027
|
|
|
|
92
|
%
|
Our
increase in selling and marketing expenses in the year ended December 31,
2008 compared to the year of 2007 was primarily due to the following
factors:
|
•
|
Our
promotional materials and fees increased by 232% in 2008 as compared to
2007. This was due primarily to our increased promotional activities to
support the sales of our SHL injection power, Jinji series, Jinji Yimucao
product and Boke Nose Spray in
2008;
|
|
•
|
Our
payroll expense increased by $1,848,223, or 48% in 2008 as compared to
2007. The increase in the payroll expenses was due to the increase in
hiring of sales and marketing professionals in 2008 to support future
growth of our businesses as well as the integration of CCXA and Boke. Boke
was consolidated starting October 2007, and CCXA was consolidated starting
September 2007. The new labor law which became effective starting
January 1, 2008 also contributed to the
increase;
|
|
•
|
Shipping
expense increased by 25% in 2008. This increase resulted primarily from
the growth of our sales and the increase in fuel cost;
and
|
|
•
|
The
increase in traveling and sales conferences expenses reflects increased
spending in organizing promotional activities to increase market awareness
of our brand and products.
|
Advertising
Advertising
expense increased by $11,236,635, from $22,865,903 in 2007 to $34,102,538 in
2008. The increase in advertising expense resulted from an increase in
promotional efforts and media advertisement in 2008 to promote the Company’s
Jinji series, Boke Nose Spray and Protein Peptide series of
products
General and
Administrative
General
and administrative expenses increased from $13,832,110 in 2007 to $19,603,947 in
2008, or a 42% increase. The details of general and administrative expenses were
as follows:
|
|
Year Ended
December 31,
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
|
|
|
Payroll
|
|
$
|
3,666,734
|
|
|
$
|
2,152,039
|
|
|
$
|
1,514,695
|
|
|
|
70
|
%
|
Professional
fees
|
|
|
2,755,215
|
|
|
|
1,395,826
|
|
|
|
1,359,389
|
|
|
|
97
|
%
|
Directors’
remuneration
|
|
|
903,333
|
|
|
|
865,344
|
|
|
|
37,989
|
|
|
|
4
|
%
|
Research
|
|
|
1,528,991
|
|
|
|
870,219
|
|
|
|
658,772
|
|
|
|
76
|
%
|
Stock
compensation – directors
|
|
|
2,077,003
|
|
|
|
1,063,129
|
|
|
|
1,013,874
|
|
|
|
95
|
%
|
Office
supplies
|
|
|
726,629
|
|
|
|
492,884
|
|
|
|
233,745
|
|
|
|
47
|
%
|
Stock
compensation – consultants
|
|
|
200,500
|
|
|
|
394,100
|
|
|
|
(193,600
|
)
|
|
|
-49
|
%
|
Business
entertainment
|
|
|
346,436
|
|
|
|
348,265
|
|
|
|
(1,829
|
)
|
|
|
-1
|
%
|
Office
rental
|
|
|
231,056
|
|
|
|
321,735
|
|
|
|
(90,679
|
)
|
|
|
-28
|
%
|
Utilities &
Vehicles
|
|
|
583,252
|
|
|
|
415,463
|
|
|
|
167,789
|
|
|
|
40
|
%
|
Provision
for bad debts
|
|
|
(94,258
|
)
|
|
|
76,322
|
|
|
|
(170,580
|
)
|
|
|
-224
|
%
|
Miscellaneous
|
|
|
6,679,056
|
|
|
|
5,436,784
|
|
|
|
1,242,272
|
|
|
|
23
|
%
|
TOTAL
|
|
$
|
19,603,947
|
|
|
$
|
13,832,110
|
|
|
$
|
5,771,837
|
|
|
|
42
|
%
|
Our
increase in general and administrative expenses in the year ended
December 31, 2008 compared to the year ended December 31, 2007 was
primarily due to the following factors:
|
•
|
Payroll
expenses increased by $1,514,695, or 70% compared with 2007, as a result
of the increased average salary for administrative employees and the
integration of Boke. Boke was consolidated starting October
2007;
|
|
•
|
Accounting
related professional fees for 2008 increased by $1,359,389, or 97% as
compared to 2007, due primarily to the increase in accounting fees
relating to our fund raising activities during the second quarter of 2008
and the increase in audit fees relating to our increased number of
subsidiaries being audited;
|
|
•
|
Directors’
remuneration and stock compensation increased by $37,989 and $1,013,874,
or 4% and 95%, respectively, as compared to 2007. This was a result of
accrued performance bonus, continuous vesting of 2007 granted stock
options and new stock options granted in
2008;
|
|
•
|
Research
expenses increased by 76% compared to 2007. This reflected our increased
spending on research and development of new
products;
|
|
•
|
Expenses
for office supplies increased by $233,745, or 47% compared to 2007, this
was a result of the new office building put into use in
2008;
|
|
•
|
The
Company made specific provision for bad debts based on the age of its
accounts receivable. We have been implementing a tight credit control
policy and making consistent efforts in collecting long outstanding debts
inherited from acquired subsidiaries. The Company reversed $94,258
provision for bad debts during 2008 based on the aging analysis;
and
|
|
•
|
Miscellaneous
expenses increased by $1,242,272, or 28% in 2008 compared to 2007. This
increase was due to increases in conference fees cost of
$1,107,884.
|
Depreciation and
Amortization
Depreciation
and amortization expense increased by $2,393,790, or 120%, in the year ended
December 31, 2008 compared to the year ended December 31,
2007.
Purchased in-process
research and development
Acquisition-related
in-process research and development charge of $12,255,248 is related to the
acquisition of GuangXi HuiKe Pharmaceutical Research and Development Co., Ltd.
(“GHK”). On the date of acquisition, GHK was working on at least seven in
progress R&D projects. The Company intends to continue and invest in all the
projects leading to either obtaining production licenses for new products or
proprietary technology patents of future economic value. We estimate fair value
of the IPR&D and recognized them as acquired intangible assets apart from
goodwill. However, according to US GAAP applicable at the time or the
acquisition, the IPR&D project that have no alternative future use was
charged to expense at the acquisition date. The acquired IPR&D charge was a
non-recurring expense deducted from operating income.
Interest Income (Expense),
Net
Net
interest expense was $2,571,015 for the year ended December 31, 2008,
compared to net interest income of $617,524 for the year ended December 31,
2007. The increase was mainly caused by convertible notes interest expense from
July 2008.
Other Income (Expense),
Net
Other
income (expenses), net, was a net expense of $65,843 for the year ended
December 31, 2008, compared to a net expense of $525,065 for the year ended
December 31, 2007.
Income
Taxes
Income
tax expense for the year ended December 31, 2008 was $12,635,472 as
compared to $8,011,248 for the year ended December 31, 2007. The
increase was due to the increase in pre-tax income of Three Happiness and HSPL.
The Company’s effective tax rate for the year was 21.16%. During this period,
income tax was provided for at 15% of pre-tax income for Three Happiness, Boke,
HSPL, CCXA and GLP under applicable Chinese law. All these subsidiaries were
granted high-tech enterprise status.
RESULTS OF OPERATIONS – YEAR
ENDED DECEMBER 31, 2007 AS COMPARED TO YEAR ENDED DECEMBER 31,
2006
The
following table sets forth the amounts and the percentage relationship to
revenues of certain items in our consolidated statements of income for the years
ended December 31, 2007 and 2006:
|
|
Year Ended
December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
160,482,383
|
|
|
$
|
110,182,092
|
|
|
|
100
|
%
|
|
|
100
|
%
|
COST
OF GOODS SOLD
|
|
|
49,364,486
|
|
|
|
38,318,223
|
|
|
|
30.76
|
|
|
|
34.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
111,117,897
|
|
|
|
71,863,869
|
|
|
|
69.24
|
|
|
|
65.22
|
|
Selling
and marketing
|
|
|
20,669,303
|
|
|
|
8,876,829
|
|
|
|
12.88
|
|
|
|
8.06
|
|
Advertising
|
|
|
22,865,903
|
|
|
|
15,174,125
|
|
|
|
14.25
|
|
|
|
13.77
|
|
General
and administrative
|
|
|
13,832,110
|
|
|
|
10,446,740
|
|
|
|
8.6
|
|
|
|
9.48
|
|
Depreciation
and amortization
|
|
|
1,989,425
|
|
|
|
988,488
|
|
|
|
1.24
|
|
|
|
0.90
|
|
Total
operating expenses
|
|
|
59,356,741
|
|
|
|
35,486,182
|
|
|
|
36.97
|
|
|
|
32.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
51,761,156
|
|
|
|
36,377,687
|
|
|
|
32.27
|
|
|
|
33.02
|
|
Equity
in earnings (loss) from unconsolidated entities
|
|
|
23,711
|
|
|
|
(3,811
|
)
|
|
|
0.01
|
|
|
|
0
|
|
Interest
income (expense), net
|
|
|
617,524
|
|
|
|
574,172
|
|
|
|
0.38
|
|
|
|
0.52
|
|
Other
income (expense), net
|
|
|
(525,065
|
)
|
|
|
(329,987
|
)
|
|
|
(0.33
|
)
|
|
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
51,877,326
|
|
|
|
36,618,061
|
|
|
|
32.33
|
|
|
|
33.23
|
|
Income
taxes
|
|
|
8,011,248
|
|
|
|
7,416,915
|
|
|
|
4.99
|
|
|
|
6.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
43,866,078
|
|
|
$
|
29,201,146
|
|
|
|
27.34
|
%
|
|
|
26.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
0.63
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
$
|
0.61
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
Revenues
Revenues
for the year ended December 31, 2007 were $160,482,383, an increase of
$50,300,291 over revenues for the year ended December 31, 2006. Revenues by
product categories were as follows:
|
|
Year Ended
December 31,
|
|
|
Increase/
|
|
|
Increase/
|
|
Product
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Pharmaceutical
products
|
|
$
|
127,823,297
|
|
|
$
|
79,367,161
|
|
|
$
|
48,456,136
|
|
|
|
61
|
%
|
Nutraceutical
products
|
|
|
32,659,086
|
|
|
|
30,814,931
|
|
|
|
1,844,155
|
|
|
|
6
|
%
|
TOTAL
|
|
$
|
160,482,383
|
|
|
$
|
110,182,092
|
|
|
$
|
50,300,291
|
|
|
|
46
|
%
|
Sales of
our pharmaceutical products increased by $48,456,136, or 61%, as compared to the
year of 2006 primarily due to the following factors:
|
•
|
The
sales of our prescription pharmaceutical products increased from
$45,385,970 in 2006 to $59,015,481 in 2007, or 30% increase. This is
primarily due to the increase in sales of our Shuanghuanglian Injection
Powder and Cease Enuresis Soft Gel supported by our continuous marketing
efforts, increasing brand recognition and effective pricing strategy as
well as expanding coverage to the previously unaddressed rural
market;
|
|
•
|
The
sales of our OTC pharmaceutical products increased from $33,981,191 to
$68,807,816, or 102% increase. This was attributable to the increase in
sales of our Jinji series and Jinji Yimucao product that was launched
early 2007 as a result of improved recognition of our new product
supported by our marketing campaigns. Our Jini Yimucao product contributed
$11,290,257 to our revenue in 2007;
and
|
|
•
|
Our
newly acquired CCXA and Boke have contributed $5,402,877 and $3,246,125 to
our revenue for the year ended December 31, 2007, respectively. CCXA
and Boke were not our subsidiaries last
year.
|
Sales
from our nutraceutical products increased from $30,814,931 in the year of 2006
to $32,659,086 in the year of 2007, representing a growth of 6% and it is
primarily due to the following factors:
|
•
|
Sales
of our Protein Peptide series of products increased by 15%, from
$27,356,572 in 2006 to $31,560,609 in 2007. This increase was mainly
attributed to the increase in sales of peptide coffee and peptide powder
through our expanded distribution network;
and
|
|
•
|
However,
the increase of our nutraceutical product sales were offset by the
decrease in the sales of our Compound Bio-functional beverage series from
$1,693,752 in the year of 2006 to $583,830 in the year of 2007 and our
Vitamate nutritional oral liquid product from $1,743,513 in 2006 to
$514,647 during 2007. These products are our old products and they are at
the end of their product life cycle. We reduced our marketing efforts on
promoting those products during the
year.
|
Cost of Goods Sold and Gross
Profit
Cost of
goods sold was $49,364,486 for the year ended December 31, 2007, compared
to $38,318,223 for the year ended December 31, 2006. Expressed as a
percentage of revenues, cost of goods sold was 30.76% for the year ended
December 31, 2007, compared to 34.78% for the year ended December 31,
2006. The reduction in cost of goods sold as a percentage of revenues reflected
a continued focus on operating cost management, sourcing efficiencies and
operation efficiencies.
Cost of
goods sold for the years ended December 31, 2007 and 2006 by product
categories were as follows:
|
|
Year Ended
December 31,
|
|
|
Increase/
|
|
|
Increase/
|
|
Product
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Pharmaceutical
products
|
|
$
|
37,089,204
|
|
|
$
|
26,913,846
|
|
|
$
|
10,175,358
|
|
|
|
38
|
%
|
Nutraceutical
products
|
|
|
12,275,282
|
|
|
|
11,404,377
|
|
|
|
870,905
|
|
|
|
8
|
%
|
TOTAL
|
|
$
|
49,364,486
|
|
|
$
|
38,318,223
|
|
|
$
|
11,046,263
|
|
|
|
29
|
%
|
The cost
of goods sold of pharmaceutical and nutraceutical products increased by 38% and
8%, respectively, in the year ended December 31, 2007 compared to the year
ended December 31, 2006. These increases are attributed to our increase in
sales.
Gross
profit increased by $39,254,028, or 55%, for the year ended December 31,
2007 over the year ended December 31, 2006. This increase reflected higher
net sales, improved margins and operating efficiencies generally across our
pharmaceutical and nutraceutical businesses.
Gross
profit as a percentage of net revenues increased from 65.22% in the prior year
to 69.24% in the year of 2007 due to the reductions in cost of goods sold as a
percentage of revenues discussed above and improved operational
efficiency.
Selling and
Marketing
Selling
and marketing expenses, including distribution expense, increased from
$8,876,829 in the year ended December 31, 2006 to $20,669,303 in the year
ended December 31, 2007, representing a 133% increase. The details of our
sales and marketing expenses were as follows:
|
|
Year Ended
December 31,
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Promotional
materials and fees
|
|
$
|
7,249,854
|
|
|
$
|
2,048,710
|
|
|
$
|
5,201,144
|
|
|
|
254
|
%
|
Shipping
|
|
|
3,866,200
|
|
|
|
1,856,743
|
|
|
|
2,009,457
|
|
|
|
108
|
%
|
Payroll
|
|
|
2,796,100
|
|
|
|
1,923,384
|
|
|
|
872,716
|
|
|
|
45
|
%
|
Offices
supplies
|
|
|
553,844
|
|
|
|
704,657
|
|
|
|
(150,813
|
)
|
|
|
(21
|
)%
|
AOB
Hong Kong marketing
|
|
|
90,141
|
|
|
|
176,079
|
|
|
|
(85,938
|
)
|
|
|
(49
|
)%
|
Other
|
|
|
6,113,164
|
|
|
|
2,167,256
|
|
|
|
3,945,908
|
|
|
|
182
|
%
|
TOTAL
|
|
$
|
20,669,303
|
|
|
$
|
8,876,829
|
|
|
$
|
11,792,474
|
|
|
|
133
|
%
|
Our
increase in selling and marketing expenses in the year ended December 31,
2007 compared to the year of 2006 was primarily due to the following
factors:
|
•
|
Our
promotional materials and fees increased by 254% in 2007 as compared to
2006. This was due primarily to our increased promotional activities to
support the sales of our Jinji series and Jinji Yimucao product in 2007.
The increase was also due to additional pharmacies and stores decoration
as a new marketing initiative launched by the Company in 2007 to help
establish and enforce relationships with retailers by providing decorative
posters and print ads for store
windows;
|
|
•
|
Our
payroll expense increased $2,009,457, or 108% in 2007 as compared to 2006.
This was a result of our increased average salaries and increase in number
of sales and marketing employees;
|
|
•
|
Shipping
expense increased by 45% in 2007. This increase resulted primarily from
the growth of our sales and the increase of fuel
cost;
|
|
•
|
Selling
and marketing expenses in our Hong Kong branch decreased during 2007 as we
integrated our showroom from our specialty store to our administrative
office. In 2007 we focused on sales to chain
stores;
|
|
•
|
Other
expenses increased by $3,945,908 in 2007 compared to 2006, primarily due
to increases in traveling expenses business expense and sales conference
fee by $1,120,602, $1,013,026 and $1,649,108, respectively. This reflects
increased spending in marketing communications to increase market
awareness of our brand and products. More sales conferences in more cities
were held in 2007 compared to 2006;
and
|
|
•
|
Our
newly acquired subsidiaries CCXA and Boke also incurred $216,491 and
$910,782 in selling and marketing expenses in 2007
respectively.
|
Advertising
Advertising
expense increased by $7,691,778, from $15,174,125 in 2006 to $22,865,903 in
2007. The increase in advertising expense resulted from an increase in
promotional efforts in 2007 to promote the Company’s Shuanghuanglian Injection
Powder and Cease Enuresis Soft Gel and media advertisement in Protein Peptide
product series as well as our CE Patch. Our Hong Kong branch also increased
advertisement on brand building and name recognition in the Hong Kong market in
the year of 2007 compared to the year of 2006. GLP incurred $12,933,727 in
advertising expense during the year of 2007, which accounts for 57% of the total
advertising expense. CCXA, our newly acquired subsidiary, also incurred $380,501
in advertising expense during 2007.
General and
Administrative
General
and administrative expenses increased from $10,446,740 in 2006 to $13,832,110 in
2007, or a 32% increase. The details of general and administrative expenses were
as follows:
|
|
Year Ended
December 31,
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
Payroll
|
|
$
|
2,152,039
|
|
|
$
|
1,618,032
|
|
|
$
|
534,007
|
|
|
|
33
|
%
|
Professional
fees
|
|
|
1,395,826
|
|
|
|
2,177,874
|
|
|
|
(782,048
|
)
|
|
|
(36
|
)%
|
Directors’
remuneration
|
|
|
865,344
|
|
|
|
526,167
|
|
|
|
339,177
|
|
|
|
64
|
%
|
Research
|
|
|
870,219
|
|
|
|
742,705
|
|
|
|
127,514
|
|
|
|
17
|
%
|
Stock
compensation – directors
|
|
|
1,063,129
|
|
|
|
225,644
|
|
|
|
837,485
|
|
|
|
371
|
%
|
Office
supplies
|
|
|
492,884
|
|
|
|
691,370
|
|
|
|
(198,486
|
)
|
|
|
(29
|
)%
|
Stock
compensation – consultants
|
|
|
394,100
|
|
|
|
596,885
|
|
|
|
(202,785
|
)
|
|
|
(34
|
)%
|
Business
entertainment
|
|
|
348,265
|
|
|
|
361,940
|
|
|
|
(13,675
|
)
|
|
|
(4
|
)%
|
Office
rental
|
|
|
321,735
|
|
|
|
317,828
|
|
|
|
3,907
|
|
|
|
1
|
%
|
Utilities
|
|
|
208,314
|
|
|
|
226,361
|
|
|
|
(18,047
|
)
|
|
|
(8
|
)%
|
Vehicles
|
|
|
207,149
|
|
|
|
223,446
|
|
|
|
(16,297
|
)
|
|
|
(7
|
)%
|
Transportation
|
|
|
77,167
|
|
|
|
51,619
|
|
|
|
25,548
|
|
|
|
49
|
%
|
Provision
for bad debts
|
|
|
76,322
|
|
|
|
(234,772
|
)
|
|
|
311,094
|
|
|
|
133
|
%
|
Miscellaneous
|
|
|
5,359,617
|
|
|
|
2,921,641
|
|
|
|
2,437,976
|
|
|
|
83
|
%
|
TOTAL
|
|
$
|
13,832,110
|
|
|
$
|
10,446,740
|
|
|
$
|
3,385,370
|
|
|
|
32
|
%
|
Our
increase in general and administrative expenses in the year ended
December 31, 2007 compared to the year ended December 31, 2006 was
primarily due to the following factors:
|
•
|
Payroll
expense increased by $534,007, or 33% compared with 2006, as a result of
increase of average salary as well as increase in the number of new
employees;
|
|
•
|
Professional
fees for 2007 decreased by $782,048, or 36% as compared to 2006 as a
result of a decrease in our use of legal and accounting services in
connection with the listing of our stock on the New York Stock Exchange,
such additional services were not used during
2007;
|
|
•
|
Directors’
remuneration and stock compensation increased by $339,177 and $837,485, or
64% and 371% respectively, as compared to 2006. This was a result of
accrued performance bonus during 2007 and new stock options granted in
April 2007;
|
|
•
|
Research
expense increased by 17% compared to 2006, reflecting the devotion of
additional resources to research on our existing and new product
development;
|
|
•
|
Expense
for office supplies decreased by $198,486, or 29% compared to 2006, This
was a result of increased cost control on general and administrative
activities as well as reallocation of some administrative functions in
2007;
|
|
•
|
The
Company made specific provision for bad debts based on the age of its
accounts receivable. We have been implementing a tight credit control
policy and making consistent efforts in collecting long outstanding debts
inherited from acquired subsidiaries. The Company increased its provision
by $311,094 for bad debts during 2007 based on the aging
analysis;
|
|
•
|
Miscellaneous
expenses increased by $2,437,976, or 83% in 2007 compared to 2006. This
increase was due to increases in sales tax, trip and traveling and
insurance cost of $778,592, $408,245 and $408,921, respectively;
and
|
|
•
|
Our
newly acquired subsidiaries CCXA and Boke also incurred $334,058 and
$311,613 in general and administrative expenses in
2007.
|
Depreciation and
Amortization
Depreciation
and amortization expense increased by $1,000,937, or 101%, in the year ended
December 31, 2007 compared to the year ended December 31, 2006. The
increase was mainly due to (i) the integration of GLP with the net book
value of $9,661,731 in fixed assets and $24,702,995 in intangible assets from
May 2006; (ii) the integration of CCXA with the net book value of
$9,051,130 in fixed assets and $16,524,939 in intangible assets from September
2007; and (iii) the integration of Boke with the net book value of
$4,018,429 in fixed assets and $22,214,455 in intangible assets from October
2007. The depreciation and amortization expense at GLP, CCXA and Boke amounted
to $691,056, $123,166 and $491,981during 2007, respectively.
Interest Income (Expense),
Net
Net
interest income was $617,524 for the year ended December 31, 2007, compared
to net interest income of $574,172 for the year ended December 31, 2006.
This was because of the cash proceeds received from our public offering in 2007
as well as the proceeds from the exercise of warrants during 2007. There were no
significant fluctuations in interest expense incurred by us.
Other Income (Expense),
Net
Other
income (expense), net, was a net expense of $525,065 for the year ended
December 31, 2007, compared to a net expense of $329,987for the year ended
December 31, 2006. This was resulted primarily from the exchange loss of
$680,311 offset by government subsidies of $102,669 in GLP during
2007.
Income
Taxes
Income
tax expense for the year ended December 31, 2007 was
$8,011,248 as compared to $7,416,915 for the year ended
December 31, 2006. The increase was due to the increase in pre-tax income
of Three Happiness and HSPL as well as the integration of CCXA and Boke. The
Company’s effective tax rate for the year was 15.4%. During this period, income
tax was provided for at 15% of pre-tax income for Three Happiness and Boke and
33% of pre-tax income for HSPL and CCXA under applicable Chinese law. GLP enjoys
a tax exemption according to applicable Chinese tax laws.
LIQUIDITY AND CAPITAL
RESOURCES
Cash
Our cash
balance at December 31, 2008 was $70,636,510, representing a decrease of
$95,773,565, or 58%, compared with our cash balance of $166,410,075 at December
31, 2007. The decrease was mainly attributable to the investing activities in
acquisitions and the purchases of construction in progress, property, plant and
land for $248,117,301, offset by net proceeds from the issuance of our
convertible notes and prepaid forward repurchase contract, which amounted to
$80,359,934 and net cash provided by operating activities of
$74,809,867.
Cash
Flow
2008 Compared to
2007
Cash
flows from operations during 2008 amounted to $74,809,867, representing an
increase of approximately 65% compared with cash flows from operations of
$45,364,532 in 2007. The increased cash flow was due primarily to the increase
of our income from operations by 23%, to $63,492,506 in the year of
2008, compared with operation income of $51,761,156 in the year of
2007.
Our cash
flows used in investing activities amounted to $257,374,093 in the year ended
December 31, 2008. We also used $172,682,150 for the purchase of
construction in progress, property, plant and equipment and land use right in
PRC. Compared to 2007, our cash flows used in investing activities increased by
$187,528,391, which resulted primarily from the acquisition payments and
investments in long term assets.
Our cash
flows from financing activities amounted to $80,948,164 in the year of 2008.
During that period, the Company received net proceeds of $110 million from the
issuance of our convertible notes and paid $29,998,616 for our prepaid forward
stock repurchase contract.
2007 Compared to
2006
Cash
flows from operations during 2007 amounted to $45,364,532, representing an
increase of approximately 56% compared with cash flows from operations of
$29,011,947 in 2006. The increased cash flow was due primarily to the increase
of our net income by 50%, to $43,866,078 in the year of 2007,
compared with net income of $29,201,146 in the year of 2006. The increased cash
flow was also due in part to an increase in other payables and accrued expenses
by $2,856,936 during 2007, due primarily to our increased accrual on
advertisement. These increases were partly offset by an increase in our accounts
receivable of $4,142,308, other current assets of $2,755,757 and advances to
suppliers and prepaid expenses of $2,205,730 during 2007, which resulted from
our expanded scale of operations, which required support of increased sales and
production activities and additional demands on working capital.
Our cash
flows used in investing activities amounted to $69,845,702 in the year ended
December 31, 2007. During that period, we paid $29,397,657 for the
acquisition of CCXA and $36,475,090 for the acquisition of Boke. We also used
$1,507,017 for the purchase of plant and equipment. Compared to 2006, our cash
flows used in investing activities increased by $43,459,138, which resulted
primarily from the acquisition payments.
Our cash
flows from financing activities amounted to $96,833,706 in the year of 2007. We
received $72,984,358 from our secondary offering and we repaid $10,750,915 of
bank loans.
Working
Capital
Our
working capital decreased by $93,453,863 to $87,082,705, at December 31,
2008, as compared to $180,536,568, at December 31, 2007, primarily due to
our decrease in cash of $95,773,565.
We
currently generate our cash flow through operations. We believe that our cash
flow generated from operations will be sufficient to sustain operations for at
least the next twelve months. From time to time, we may identify new expansion
opportunities for which there will be a need for use of cash.
As of
December 31, 2008, the Company entered into unconditional capital commitments
for the purchase of land use rights and construction of manufacturing facilities
in the PRC for $7,666,839 within one year and $11,734,773 after one year. The
Company has no material unconditional purchase commitments for raw materials,
packing materials and advertising.
Contractual
Obligations
Payments
due by period
|
Total
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
Long-Term
Debt Obligations
|
|
|
|
|
Capital
Lease Obligations
|
7,666,839
|
11,734,773
|
-
|
-
|
Total
|
7,666,839
|
11,734,773
|
-
|
-
|
Issuance
of Common Stock
See PART
II Item 5 for issuance of unregistered common stock during the year ended
2007.
Inflation
Inflation
has not had a material impact on our business.
Currency
Exchange Fluctuations
All of
Company’s revenues and majority of the expenses in 2008 were denominated
primarily in Renminbi (“RMB”), the currency of China, and was converted into US
dollars at the exchange rate of 7.0842 to 1. In the third quarter of 2005, the
Renminbi began to rise against the US dollar. As a result of the appreciation of
RMB we recognized a foreign currency translation gain of $15,767,870. There
could be no assurance that RMB-to-U.S. dollar exchange rates will remain stable.
A devaluation of RMB relative to the U.S. dollar would adversely affect our
business, financial condition and results of operations. The Company's operations are exposed to a variety of global
market risks, including the effect of changes in foreign currency exchange
rates. The Company does not use financial derivatives to hedge exposures in the
ordinary course of business or for speculative purposes.
Foreign
Exchange Risk
We
currently conduct substantially all of our operations through our PRC
subsidiaries. The functional currency of our PRC subsidiaries is the Chinese
RMB. Thefinancial statements of our PRC subsidiaries are translated to U.S.
dollars using year-end exchange rates as to assets and liabilities and average
exchange rates as to revenues, expenses, and cash flows. Capital accounts are
translated at their historical exchange rates when the capital transaction
occurred. Translation adjustments resulting from this process are included in
accumulated other comprehensive income in the statement of shareholders’ equity.
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in the results of operations as incurred. As the majority of our net
revenue, 89% of consolidated costs and expenses, and substantially all of our
assets are denominated in RMB, any significant revaluation of the RMB may
materially and adversely affect our cash flows, revenues and financial
condition. For example, if the 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 could decline. In addition, if we decide to convert our RMB
into U.S. dollars for the purpose of making payments for business purposes, the
U.S. dollar equivalent of the RMB we convert would be reduced. On the other
hand, to the extent that we need to convert U.S. dollars we receive from an
offering of our securities into RMB for our operations, appreciation of the RMB
against the U.S. dollar could reduce the amount of the U.S. dollars available.
In addition, the appreciation of the RMB could make our customers’ products more
expensive to purchase, because some of our customers are involved in the export
of goods, which may have an adverse impact on their sales. A decrease in sales
by our customers could have an adverse effect on our operating
results.
The local
currencies in the countries in which we sell our products may fluctuate in value
in relation to other currencies. Such fluctuations may affect the costs of our
products sold and the value of our local currency profits. While we are not
conducting any operations in countries other than China at the present time, we
may expand to other countries and may then have an increased risk of exposure of
our business to currency fluctuation.
The PRC
government imposes control over the conversion of RMB, into foreign currencies.
Under the current unified floating exchange rate system, the People’s Bank of
China publishes an exchange rate, which we refer to as the PBOC exchange rate,
based on the previous day’s dealings in the inter-bank foreign exchange market.
Financial institutions authorized to deal in foreign currency may enter into
foreign exchange transactions at exchange rates within an authorized range above
or below the PBOC exchange rate according to market
conditions.
Pursuant
to the Foreign Exchange Control Regulations of the PRC issued by the State
Council which came into effect on April 1, 1996, and the Regulations on the
Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which
came into effect on July 1, 1996, regarding foreign exchange control, conversion
of RMB into foreign exchange by Foreign Investment Enterprises, or FIEs, for use
on current account items, including the distribution of dividends and profits to
foreign investors, is permissible. FIEs are permitted to convert their after-tax
dividends and profits to foreign exchange and remit such foreign exchange to
their foreign exchange bank accounts in China. Conversion of RMB into foreign
currencies for capital account items, including direct investment, loans, and
security investment, is still under certain restrictions. On January 14, 1997,
the State Council amended the Foreign Exchange Control Regulations and added,
among other things, an important provision, which provides that the PRC
government shall not impose restrictions on recurring international payments and
transfers under current account items.
Enterprises
in China, including FIEs, which require foreign exchange for transactions
relating to current account items, if within a certain limited amount may,
without approval of the State Administration of Foreign Exchange, or SAFE,
effect payment from their foreign exchange account or convert and pay at the
designated foreign exchange banks by providing valid receipts and
proofs.
Convertibility
of foreign exchange in respect of capital account items, such as direct
investment and capital contribution, is still subject to certain restrictions,
and prior approval from the SAFE or its relevant branches must be
sought.
Between
1994 and 2004, the exchange rate for RMB against the U.S. dollar remained
relatively stable, most of the time in the region of approximately RMB8.28 to
US$1.00. However, in 2005, the Chinese government announced that it would begin
pegging the exchange rate of the RMB against a number of currencies, rather than
just the U.S. dollar.
Since a
significant amount of our future revenues are expected to be denominated in RMB,
any existing and future restrictions on currency exchange may limit our ability
to utilize revenue generated in China to fund our business activities outside of
China, if any, or expenditures denominated in foreign currencies, or our ability
to meet our foreign currency obligations, which could have a material adverse
effect on our business, financial condition and results of operations. We cannot
be certain that the PRC regulatory authorities will not impose more stringent
restrictions on the convertibility of RMB with respect to foreign exchange
transactions.
We
recognized a foreign currency translation adjustment of $15.8 million and $11.6
million as of December 31, 2008 and 2007, respectively. The balance sheet
amounts with the exception of equity at December 31, 2008 were translated at
6.8542 RMB to $1.00 USD as compared to 7.3141 RMB at December 31, 2007. The
equity accounts were stated at their historical rate. The average translation
rates applied to the income and cash flow statement amounts for the fourth
quarter ended December 31, 2008 and 2007 were 6.8547 RMB and 7.4158 RMB to $1.00
USD, respectively. We do not hedge our exposure to foreign exchange risk; as
such, we may in the future experience economic loss as a result of any foreign
currency exchange rate fluctuations.
The
information required by Item 8 appears after the signature page to this
report.
None.
(a)
Evaluation of Disclosure Controls and Procedures
AOB
maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in reports filed by AOB under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission’s rules and form and that such information is accumulated and
communicated to AOB’s management, including its Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. Our Chief Executive Officer and Chief Financial Officer
evaluated, with the participation of other members of management, the
effectiveness of AOB’s disclosure controls and procedures (as defined in
Exchange Act Rule s 13a-15(e) and 15d-15(e)), as of the end of the period
covered by this Annual Report on Form 10-K. In addition, as
a result of the errors in our 2007 and 2008 interim and annual period reports,
whicherrors were identified subsequent to the evaluation of our disclosure
controls and procedures as of December 31, 2008, we re-evaluated such controls
in light of the errors. The re-evaluation process included (i) a detailed study
of (A) how the errors occurred, (B) when and how the errors were discovered, (C)
when the errors were communicated to the audit committee and (D) when and how
the errors were resolved and disclosed to the public and (ii) a review of
existing control procedures in the areas where the errors had occurred. Based
upon such re-evaluation and after considering the materiality of the errors,
management concluded that there was no impact on its assessment as of December
31, 2008 that the disclosure controls and procedures were
effective.
Although
the management of our Company, including the Chief Executive Officer and the
Chief Financial Officer, believes that our disclosure controls and internal
controls currently provide reasonable assurance that our desired control
objectives have been met, management does not expect that our disclosure
controls or internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
controls. The design of any system of controls is also based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
(b)
Management’s Report on Internal Control over Financial Reporting
The
management of AOB is responsible for establishing and maintaining adequate
internal control over financial reporting as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting
is 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 and
includes those policies and procedures that:
1.
Pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets;
2.
Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorization of our management and directors;
and
3.
Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisitions, use or disposition of our assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. 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.
Under the
supervision and with the participation of the Chief Executive Officer and Chief
Financial Officer, management conducted an evaluation of the effectiveness of
its internal control over financial reporting as of December 31, 2008. The
framework on which such evaluation was based is contained in the report entitled
“Internal Control — Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO Report”). The scope of the
assessment on internal control over financial reporting did not include controls
of all consolidated entities. The management excluded from its assessment the
internal control over financial reporting at Nuo Hua Investment Company Ltd.,
which was acquired October 18, 2008, and GuangXi HuiKe Pharmaceutical
Research and Development Co., Ltd., which was acquired October 20, 2008,
and whose combined financial statements constitute 11% and 10% of net and total
assets, respectively, and 2% of revenues and (25)% of net income of the
consolidated financial statements as of and for the year ended December 31,
2008. There were no material changes to our internal control over financial
reporting due to the above acquisitions.
Based on
that evaluation and the criteria set forth in the COSO Report, management
concluded that its internal control over financial reporting was effective as of
December 31, 2008.
Our
independent registered public accounting firm, Weinberg & Company,
P.A., who also audited our consolidated financial statements, independently
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008, as stated in their report which is included in this
Annual Report.
As a
result of the errors in our 2007 and 2008 interim and annual period reports,
which errors were identified subsequent to the evaluation of our internal
controls over financial reporting as of December 31, 2008, we re-evaluated such
controls in light of the errors. Based upon
such re-evaluation, management concluded that there was no impact on
its assessment as of December 31, 2008 that the internal controls over financial
reporting is effective even considering the error and the
restatements. Management considered the following factors in arriving
at such conclusion:
|
·
|
the
errors were isolated and not systematic
errors;
|
|
·
|
the
errors unveiled a control deficiency in the internal control system but
such deficiency did not rise to the level of a significant deficiency or
material weakness in the controls;
|
|
·
|
none
of the errors resulted in a more than remote likelihood that a material
misstatement of the financial statements, that is more than
inconsequential, would occur or could lead to non-reliance on such
financial statements;
|
|
|
a
reasonable person would conclude, after considering the errors and the
restatement that such errors are immaterial to the financial statements;
and
|
|
·
|
that
even with the errors, such errors would not cause a reasonable person to
conclude that they did not have sufficient information about the financial
condition, results of operations and cash flow to make an informed
decision about an investment in the
company.
|
We have
taken appropriate steps and actions to prevent these errors in the future,
including additional review.
(c)
Changes in Internal Control over Financial Reporting
There was
no change in our internal control over financial reporting that occurred during
the fourth fiscal quarter of the fiscal year covered by this Annual Report on
Form 10-K that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Not
applicable.
The
following table sets forth the names and ages of our current directors and
executive officers, their principal offices and positions and the date each such
person became a director or executive officer. Executive officers are elected
annually by our Board of Directors. Each executive officer holds his office
until he resigns, is removed by the Board or his successor is elected and
qualified. Directors are elected annually by our stockholders at the annual
meeting. Each director holds his or her office until his or her successor is
elected and qualified or his or her earlier resignation or removal.
The
following persons are the directors and executive officers of our
company:
Name
|
|
Age
|
|
Position
|
|
Date
Of Initial
Appointment
|
Tony
Liu
|
|
56
|
|
Chief
Executive Officer and Chairman of the Board
|
|
December 18, 2001
|
Jun
Min
|
|
50
|
|
Director
and Vice President
|
|
May
8, 2002
|
Yanchun
Li
|
|
40
|
|
Director,
Chief Financial Officer and Chief Operations Officer
|
|
May
8, 2002
|
Binsheng
Li
|
|
45
|
|
Director
and Chief Accounting Officer
|
|
May
8, 2002
|
Cosimo
J. Patti (1)(2)(3)
|
|
59
|
|
Independent
Director
|
|
September 27, 2004
|
Xianmin
Wang (1)(2)(3)
|
|
66
|
|
Independent
Director
|
|
January
1, 2005
|
Eileen
Brody (1)(2)(3)
|
|
47
|
|
Independent
Director
|
|
June
22, 2005
|
Lawrence S. Wizel (1)(2)(3)
|
|
65
|
|
Independent
Director
|
|
August
21, 2006
|
Baiqing
Zhang (3)
|
|
56
|
|
Independent
Director
|
|
December 15, 2006
|
(1)
|
Serves
as a member of the Audit Committee.
|
(2)
|
Serves
as a member of the Compensation
Committee.
|
(3)
|
Serves
as a member of the Nominating
Committee.
|
There are
no family relationships between or among any of the executive officers or
directors of the Company. Below are brief descriptions of the backgrounds and
experiences of the officers and directors:
Tony Liu
is the principal
founder of our Company and has served as our Chief Executive Officer and the
Chairman of our Board of Directors since 2001. He served in the army for over 19
years. After Mr. Liu left the army, he began working for the government in
the Heilongjiang province in northeastern China. In addition to serving as a
representative to the National People’s Congress in China, with his practical
work experience in the Chinese community for many years, Mr. Liu has
witnessed and participated in the massive macro economic changes for the past
thirty years. He has many years of experience in managing the army, government
agencies and pharmaceutical companies. Mr. Liu graduated with a major in
Communications & Commands from Wuhan Communication College in 1986 and
studied Integrated Marketing and Media at the University of Hong Kong in 2004.
Mr. Liu studied in the Program of Sustainable Growth of Large Corporations
sponsored by the School of Engineering and the School of Business at Stanford
University.
Jun Min
is one of our founders
and has served as our Vice President and as a member of our Board of Directors
since 2002. Mr. Min worked at the Price Checking Department Bureau of
Heilongjiang Province from 1987 to 1992. Subsequently, he worked for Harbin
Three-Happiness Bioengineering, Co. Ltd. from 1994. He has over 20 years of
experience in operations management and has an extensive knowledge of the
consumer and pharmaceutical products industries in China. Mr. Min received
a BA in Business Management from Harbin Broadcast & TV University in
1986.
Yanchun Li
is one of our
partner founders and has served as Chief Financial Officer since May 2007. Prior
to her appointment as Chief Financial Officer, she had been the Acting Chief
Financial Officer since May 2002, Chief Operating Officer and Secretary since
October 2003 and has worked at the Company and served as a member of the Board
since 2002. Ms. Li has fifteen years of experience in management in the
food industry and the pharmaceutical industry in China. In particular, she has
extensive experience and innovative insight in marketing, management, brand
building, corporate strategy, human resource and financial capital management.
Before joining us, Ms. Li worked for China Ruida Food Limited Company and
successfully established the Ruida brand as the number one brand in the instant
frozen food industry. Ms. Li joined Three-Happiness Bioengineering, Co.
Ltd. in 1994 and was in charge of the marketing and sales. Under her leadership,
the functional drink of the Three-Happiness brand has reached stunning
achievement nationwide across China. The Three-Happiness brand was later awarded
the “Top Ten Well-known Brands in China”. Ms. Li won the China Golden Award
in Marketing of Year 2005 and was elected into the “Who’s Who of Chinese Origin
Worldwide”. Ms. Li received her BA in English from Beijing University of
Industry and Commerce in 1993 and completed the Owner/President Management
Program in 2008, an advanced program, at Harvard Business School.
Binsheng Li
is one of our
partner founders and has served as our Chief Accounting Officer and as a member
of our Board of Directors since 2002. Mr. Li began his career at
Three-Happiness Bioengineering, Co. Ltd. in 1994 in the accounting department.
Mr. Li is in charge of all financial management and accounting work for the
Company. Mr. Li graduated from Dalian Financial School in 1986 with a major
in Finance and Economics.
Cosimo J. Patti
has served on
our Board of Directors since 2004. Before joining us, Mr. Patti was an
arbitrator for the National Association of Securities Dealers and the New York
Stock Exchange for 18 years. Since August 1999, Mr. Patti has been the
President and Chairman of Technology Integration Group, Inc. In June 2007,
Mr. Patti joined the board of directors of Advanced Battery Technologies,
Inc. (NASDAQ:ABAT), a company engaged in the business of designing,
manufacturing and marketing rechargeable polymer lithium-ion batteries. From
2002 to 2004, Mr. Patti was the Senior Director of Applications Planning
with iCi/ADP. He was the Director of Strategic Cross-border Business with Cedel
Bank from 1996 to 1999, and President and Founder of FSI Advisors Group from
1998 to 2002. Mr. Patti attended Brooklyn College from 1968 to
1970.
Xianmin Wang
has served on our
Board of Directors since 2005. He was the Vice Governor of Heilongjiang Province
from 1998 to 2003, where he was in charge of Financial and Economic affairs.
Mr. Wang was Secretary of Daqing Municipal Party Committee from 1996 to
1998, and Vice Secretary of Harbin Municipal Party Committee from 1991 to 1992.
Mr. Wang received a post graduate degree in Philosophy from Renmin
University of China in 1964. He also holds a bachelor’s degree in Economics from
Northeast Forest University and postgraduate degrees in Philosophy from
Heilongjiang University and Renmin University of China.
Eileen Brody
has served on our
Board of Directors since 2005. Since August 2005, Ms. Brody has been
President of Dawson-Forte Cashmere, an apparel trading company. Since June 2007
Ms. Brody has been a member of the board of directors of Fuqi
International, Inc. (NASDAQ:FUQI), a company specializing in designing,
developing, promoting, and selling a range of precious metal jewelry products in
the Chinese luxury goods market. From 1997 to 2004, she was Vice President of
Merchandising and Planning for Carter’s Retail division of The William Carter
Company. From 1992 to 1997, she held various management positions for Melville
Corporation, a multi-billion dollar retailer. From 1983 to 1990, Ms. Brody
worked for KPMG Peat Marwick as a Senior Manager. Ms. Brody is a Certified
Public Accountant. She received her Undergraduate and MBA degrees from Pace
University and a second MBA from the Harvard Graduate School of
Business.
Lawrence S. Wizel
has served
on our Board of Directors since 2006. Prior to joining our Board of Directors,
he served as Deputy Professional Practice Director at Deloitte Touche USA LLP,
or Deloitte, in Deloitte’s New York office. Mr. Wizel began his career at
Deloitte in 1965 and was a partner from 1980 until he retired in June 2006.
Mr. Wizel was responsible for serving a diverse client base of publicly
held and private companies in a variety of capacities including, SEC filings,
initial public offerings, mergers and acquisition transactions and periodic
reporting. Since September 2006, Mr. Wizel has been a member of the board
of directors of 3SBio Inc. (NASDAQ:SSRX), a biotechnology company focused on
researching, developing, manufacturing and marketing biopharmaceutical products
primarily in China. Since August 2007, Mr. Wizel has been a member of the
board of directors of Puda Coal, Inc. (OTC:PUDC), a supplier of metallurgical
coking coal to the industrial sector in China. He received his BA in 1965 in
accounting from Michigan State University and is a Certified Public
Accountant.
Baiqing Zhang
has served on
our Board of Directors since 2006. Mr. Zhang brings to us two decades of
experience in the Chinese government’s regulatory and supervisory divisions.
From 1997 until Mr. Zhang retired in 2005, Mr. Zhang served as Deputy
Director, Division Chief of the Heilongjiang Regulatory Bureau of the China
Securities Regulatory Commission, or CSRC, where he managed and imposed
regulatory compliance for all Heilongjiang-based securities issuances, as well
as supervised securities trading, investment funds and legal affairs. The CSRC
is China’s primary regulatory body overseeing the country’s financial markets.
Prior to this, he spent ten years as a member of the Discipline Inspection
Committee in the Department of Supervision of the Heilongjiang Province, and
previously was the Vice Principal of Hebei Institute of Mechanical and
Electrical Technology, where he taught college courses. Since 2005,
Mr. Zhang has been a consultant in the fields of law and economics, public
policy, and business strategy. He also consults and lectures about regulatory
issues in the Chinese securities markets, based on his significant experience at
the CSRC. Mr. Zhang received a degree in Management of Economics from the
Tianjin Normal University and a degree in Accounting from the Heilongjiang
Economics Management Academy.
CORPORATE
GOVERNANCE
Board
of Directors
We have
nine members serving on our Board of Directors. Each board member is nominated
for election at our annual meeting to serve until the next annual meeting of
stockholders and until their successors are duly elected and
qualified.
Board
Committees
The Board
of Directors has an Audit Committee, Nominating and Corporate Governance
Committee and a Compensation Committee.
Nominating
and Corporate Governance Committee
The
purpose of the Nominating and Corporate Governance Committee is to assist the
Board of Directors in identifying qualified individuals to become board members,
in determining the composition of the Board of Directors and in monitoring the
process to assess Board effectiveness. Ms. Brody and Messrs. Patti, Wang
and Wizel are members of the Nominating and Corporate Governance Committee.
There have been no changes to the procedures by which the stockholders of the
Company may recommend nominees to the Board of Directors since the filing of the
Company’s Definitive Proxy Statement on October 17, 2008 for its Annual
Meeting of Stockholders, which was held on December 5, 2008. The Nominating
and Corporate Governance Committee operates under a written charter. The Amended
and Restated Nominating and Corporate Governance Committee Charter can be found
on our website at
www.bioaobo.com
and
can be made available in print free of charge to any shareholder who requests
it.
Compensation
Committee
The
Compensation Committee is responsible for (a) reviewing and recommending to
the Board of Directors on matters relating to employee compensation and benefit
plans, and (b) assisting the Board in determining the compensation of the
Chief Executive Officer and make recommendations to the Board with respect to
the compensation of the Chief Financial Officer, other executive officers of the
Company and independent directors. Ms. Brody and Messrs. Patti, Wang and
Wizel are members of the Compensation Committee. Our Compensation Committee
Charter was amended on February 25, 2008, in connection with our listing on
the New York Stock Exchange. The Compensation Committee operates under a written
charter. The Amended and Restated Compensation Committee Charter can be found on
our website at
www.bioaobo.com
and
can be made available in print free of charge to any shareholder who requests
it.
Compensation
Committee Interlocks and Insider Participation
Members
of our Compensation Committee of the Board of Directors during 2008 were
Ms. Brody and Messrs. Patti, Wizel and Wang. No member of our Compensation
Committee was, or has been, an officer or employee of the Company or any of our
subsidiaries. No member of the Compensation Committee has a relationship that
would constitute an interlocking relationship with executive officers or
directors of the Company or another entity.
Compensation
Committee Report (1)
The
Compensation Committee has reviewed and discussed the discussion and analysis of
the Company’s compensation which appears below above with management, and, based
on such review and discussion, the Compensation Committee recommended to the
Company’s Board of Directors that the above disclosure be included in this
Annual Report on Form 10-K.
The
members of the Compensation Committee are:
Eileen
Brody, Chair
Cosimo J.
Patti
Xianmin
Wang
Lawrence
S. Wizel
(1)
|
The
material in the above Compensation Committee reports is not soliciting
material, is not deemed filed with the SEC and is not incorporated by
reference in any filing of the Company under the Securities Act of 1933,
or the Securities Exchange Act of 1934, whether made before or after the
date of this Form 10-K and irrespective of any general incorporation
language in such filing.
|
Audit
Committee
The
Company has a separately designated standing audit committee in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The
audit committee members for the year ended December 31, 2008 consisted of
Lawrence S. Wizel, Cosimo J. Patti, Xianmin Wang and Eileen Brody. Each of these
members are considered “independent” under Section 303A.02 of the listing
standards of New York Stock Exchange, as determined by our board of directors.
The audit committee recommends to the board of directors the annual engagement
of a firm of independent accountants and reviews with the independent
accountants the scope and results of audits, our internal accounting controls
and audit practices and professional services rendered to us by our independent
accountants. The Audit Committee Charter can be found on our website at
www.bioaobo.com
and
can be made available in print free of charge to any shareholder who requests
it.
Our board
of directors has determined that we have at least one audit committee financial
expert, as defined in the Exchange Act, serving on our audit committee. Lawrence
S. Wizel is the “audit committee financial expert” and is an independent member
of our board of directors.
Pursuant
to its charter, the audit committee meets at least quarterly with the Company’s
internal auditors. The Company does not limit the number of audit committees on
which its audit committee members can serve.
EXECUTIVE
SESSIONS
Under the
New York Stock Exchange Rules, our non-management directors are required to hold
regular executive sessions without management. The chairperson of the executive
session will rotate at each session so that each non-management director shall
have an opportunity to serve as chairperson. Interested parties may communicate
directly with the presiding director of the executive session or with the
non-management directors as a group, by directing such written communication to
Mr. Cosimo Patti at American Oriental Bioengineering, Inc., 330 Madison
Avenue 9th Floor, New York NY 10017
CHIEF
EXECUTIVE OFFICER CERTIFICATIONS
In
connection with our listing on the New York Stock Exchange, Mr. Tony Liu,
our Chief Executive Officer, submitted an Annual CEO Certification, without
qualification, to the New York Stock Exchange certifying that he is not aware of
any violation by the Company of New York Stock Exchange corporate governance
listing standards during 2008. Mr. Liu has executed a Certification
pursuant to Rule 13a-14(a) of the Securities Exchange Act and a Certification
pursuant to 18 U.S.C. 1350, which are filed as Exhibits 31.1 and 32,
respectively, to this Annual Report on Form 10-K.
COMPLIANCE
WITH SECTION 16(a) OF EXCHANGE ACT
Section 16(a)
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
requires the executive officers and directors of the Company and every person
who is directly or indirectly the beneficial owner of more than 10% of any class
of security of the Company to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Such persons also are required to
furnish our company with copies of all Section 16(a) forms they file. Based
solely on our review of copies of such forms received by us, we believe that
during the fiscal year 2008, the executive officers and directors of the Company
and every person who is directly or indirectly the beneficial owner of more than
10% of any class of security of the Company complied with the filing
requirements of Section 16(a) of the Exchange Act, except the following
individuals who did not timely file Form 4s: Tony Liu, Yanchun Li, Binsheng Li
and Jun Min. Each of these individuals did not timely file one Form 4 disclosing
one reportable transaction, which they later timely reported on Form
5s.
CODE
OF ETHICS
We
adopted a code of ethics that applies to our officers, employees and directors,
including our Chief Executive Officer and Chief Financial Officer, and other
persons who perform similar functions. Our Code of Ethics was amended on
February 25, 2008 in connection with our listing on the New York Stock
Exchange. A copy of our Code of Ethics is available on our website
www.bioaobo.com
and
can be made available in print to any shareholder upon request at no charge by
writing to our Chief Financial Officer, c/o American Oriental Bioengineering,
Inc. at 330 Madison Avenue, 9th Floor, New York, NY 10017. Our Code of Ethics
can be made available in print free of charge to any shareholders who requests
it. Our Code of Ethics is intended to be a codification of the business and
ethical principles which guide us, and to deter wrongdoing, to promote honest
and ethical conduct, to avoid conflicts of interest, and to foster full, fair,
accurate, timely and understandable disclosures, compliance with applicable
governmental laws, rules and regulations, the prompt internal reporting of
violations and accountability for adherence to this Code. Any waiver of the Code
of Ethics will be promptly disclosed on our website at
www.bioaobo.com
and
in a Current Report on 8-K.
The
Company’s executive compensation program for the named executive officers (NEOs)
is administered by the Compensation Committee of the Board of
Directors.
Compensation
Objectives
We
believe that the compensation programs for the Company’s NEOs should reflect the
Company’s performance and the value created for the Company’s stockholders. In
addition, the compensation programs should support the short-term and long-term
strategic goals and values of the Company, and should reward individual
contributions to the Company’s success. Our compensation plans are consequently
designed to link individual rewards with Company’s performance by applying
objective, quantitative factors including the Company’s own business performance
and general economic factors. We also rely upon subjective, qualitative factors
such as technical expertise, leadership and management skills, when structuring
executive compensation in a manner consistent with our compensation
philosophy.
Process
for Determining Compensation for Executives
The
Compensation Committee makes independent decisions about all aspects of NEO
compensation, and takes into account (i) recommendations from our CEO with
respect to the compensation of NEOs other than himself, and
(ii) information that our Human Resources department provides regarding
compensation data and benchmarks for comparable positions and companies in
different applicable geographical area.
The
Compensation Committee regularly reviews the design and structure of the
Company’s compensation programs to ensure that management’s interests are
closely aligned with stockholders’ interests and that the compensation programs
are designed to further the Company’s strategic priorities.
Elements
of Compensation
Base Salary
. Base
salaries for the named executive officers are set forth in their respective
employment agreements. Periodically, however, the Compensation Committee
considers proposals from the Company’s management to approve increases to the
base salaries for named executive officers other than our CEO. When considering
whether to approve these adjustments, the Compensation Committee takes into
account a number of factors, including:
|
·
|
the
Company’s performance;
|
|
·
|
the
individual’s current and historical performance and contribution to the
Company;
|
|
·
|
and
the individual’s role and unique
skills.
|
We tried
to set executives’ base salaries near the median of the range of salaries for
executives in similar positions with similar responsibilities at comparable
companies, in line with our compensation philosophy. Base salaries are reviewed
annually, and may be increased to align salaries with market levels after taking
into account the subjective evaluation described previously.
Annual Cash Incentive
Bonuses
. The Company has a cash incentive bonus plans for NEO. The
plan is designed to promote executive decision making and achievement that
supports the realization of key overall Company financial goals. For the year
2008, the participants in the Company’s cash incentives program consisted of
each of the Company’s five named executive officers.
In 2008,
executives had target bonus opportunities ranging from 0% to 75% of salary
earnings, depending on position level and responsibility, with larger bonus
opportunities provided to those with greater responsibility. The Compensation
Committee establishes the guidelines under which the plan is administered,
including financial performance goals and payout schedules. The goals reflect
the Company’s performance using performance measures of net income.
The plan
provides payouts based on different levels of achievement:
|
·
|
Threshold
:
the minimum
level of performance for which a bonus is paid and set at 90% of the
Target level. No bonuses will be earned if the Threshold level of the
Company’s performance is not
achieved;
|
|
·
|
Minimum:
70% of bonus is paid for achievement of 90% to 99.9% of financial
goals.
|
|
·
|
Target
:
100% of bonus is
paid for achievement of financial
goals.
|
|
·
|
Maximum
:
achievement at a
superior level of performance for 300% payout of the Target
bonus.
|
For
achievement between Target and Maximum, bonus payouts are interpolated to
reflect the level of results achieved.
Equity Incentive
Compensation
. We believe that long-term performance is achieved through
an ownership culture participated in by our executive officers through the use
of stock-based awards. Currently, we do not maintain any incentive compensation
plans based on pre-defined performance criteria. The Compensation Committee has
the general authority, however, to award equity incentive compensation, i.e.
stock options, to our executive officers in such amounts and on such terms as
the committee determines in its sole discretion. The Committee does not have a
determined formula for determining the number of options available to be
granted. The Compensation Committee will review each executive’s individual
performance and his or her contribution to our strategic goals periodically.
With the exception of stock options automatically granted at the end of each
fiscal quarter in accordance with the terms of the employment agreement with our
executive officers, our Compensation Committee grants equity incentive
compensation at times when we do not have material non-public information to
avoid timing issues and the appearance that such awards are made based on any
such information.
The
Compensation Committee is carefully monitoring our executive compensation
programs. It is our general objective to provide our NEOs with total annual
compensation near the median of the range of salaries for executives in similar
positions with similar responsibilities at comparable companies. To accomplish
this objective, we anticipate increasing levels of executive compensation over
time. The Compensation Committee has reviewed the Compensation
Discussion & Analysis (“CD & A”) prepared by management and
recommended it for inclusion in this Annual Report on Form 10-K.
Summary
Compensation Table
The
following table sets forth all cash compensation paid or to be paid by the
Company, as well as certain other compensation paid or accrued, for each of the
last three years of our company to each named executive officer.
Name
and Principal Position
|
|
Year
|
|
Salary
($)
(1)
|
|
|
Bonus
($)
(2)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
(3)
|
|
|
Non-
Equity
Incentive
Plan
Compensation
($)
|
|
|
Change in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
Tony
Liu, CEO and Chairman
|
|
2008
|
|
|
200,000
|
|
|
|
40,267
|
|
|
|
—
|
|
|
|
538,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
778,267
|
|
|
|
2007
|
|
|
200,000
|
|
|
|
53,253
|
|
|
|
—
|
|
|
|
1,488,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,741,253
|
|
|
|
2006
|
|
|
150,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53,923
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
203,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yanchun
Li, CFO, COO, Director
|
|
2008
|
|
|
160,000
|
|
|
|
30,201
|
|
|
|
—
|
|
|
|
475,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
665,401
|
|
|
|
2007
|
|
|
160,000
|
|
|
|
39,940
|
|
|
|
—
|
|
|
|
1,190,400
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,390,340
|
|
|
|
2006
|
|
|
90,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,355
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
122,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jun
Min, VP, Director
|
|
2008
|
|
|
120,000
|
|
|
|
30,201
|
|
|
|
—
|
|
|
|
356,400
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
506,601
|
|
|
|
2007
|
|
|
120,000
|
|
|
|
39,940
|
|
|
|
—
|
|
|
|
892,800
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,052,740
|
|
|
|
2006
|
|
|
70,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
85,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Binsheng
Li, Chief Accounting officer, Director
|
|
2008
|
|
|
80,000
|
|
|
|
20,134
|
|
|
|
—
|
|
|
|
293,600
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
393,734
|
|
|
|
2007
|
|
|
80,000
|
|
|
|
26,626
|
|
|
|
—
|
|
|
|
595,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
701,826
|
|
|
|
2006
|
|
|
57,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,413
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
76,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wilfred
Chow, SVP of Finance
|
|
2008
|
|
|
190,000
|
|
|
|
40,267
|
|
|
|
—
|
|
|
|
327,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
557,267
|
|
|
|
2007
|
|
|
160,000
|
|
|
|
53,253
|
|
|
|
—
|
|
|
|
744,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
957,253
|
|
|
|
2006
|
|
|
100,000
|
|
|
|
26,666
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
126,666
|
|
(1)
|
The
amounts reported in this column represent base salaries paid to each of
the named executive officers for 2008 as provided for in their respective
employment agreements.
|
(2)
|
The
named executive officers did not receive any discretionary bonuses,
sign-on bonuses, or other annual bonus payments that are not contingent on
the achievement of stipulated performance goals. Cash bonus payments that
are contingent on achieving pre-established and communicated
goals.
|
(3)
|
Option
award amounts in this table relate to the accounting expense for options
granted in accordance with Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment, (SFAS 123(R)), which
requires the expensing of equity stock
awards.
|
Employee
Stock Option Plan
In March
2004, our board of directors formally adopted a Stock Option Plan (the “2004
Plan”). Under the 2004 Plan, we were authorized to grant non-qualified options
to purchase up to 2,900,000 shares of our common stock to our employees,
officers, directors and consultants. The 2004 Plan was administered directly by
our Compensation Committee. Subject to the provisions of the 2004 Plan, the
Compensation Committee determined who would receive stock options, the number of
shares of common stock that may be covered by the option grants, the time and
manner of exercise of options and exercise prices, as well as any other
pertinent terms of the options. The Company replaced the 2004 Plan with a new
Equity Incentive Plan that was adopted by the Board and approved by the
Stockholders in 2006 (“2006 Plan”). The 2006 Plan provides a maximum of
5,000,000 shares for future grants but the Company is not intended to grant more
than 1,000,000 shares in one calendar year. The Company will not grant any
additional awards under the 2004 Plan. All Awards starting from 2007 would be
granted under the 2006 Plan. Those individuals with awards outstanding under the
2004 Plan will continue to hold such awards in accordance with the terms of
their respective grant agreements.
As of
December 31, 2008, the Company granted an aggregate of 1,697,763 options
under the 2006 Plan. For the year ended December 31, 2008, options to
purchase a total of 413,763 shares of common stock were granted to the executive
officers. In 2008, the Company granted the following options to the NEO’s
pursuant to the 2006 Plan:
2008
Grants of plan-based awards table
Name
|
|
|
Grant
Date
|
|
|
Estimated Future
Payouts
Under
Equity
Incentive
Plan
Awards
(Target)
(#)(1)
|
|
|
Exercise or
Base
Price
of
Option
Awards
($ /Sh)
(2)
|
|
|
Closing
Price on
Grant
Date
($ /Sh)
|
|
|
Grant Date
Fair
Value
of
Option
Awards
($ /Sh)
|
|
Tony
Liu
|
|
|
4/20/08
|
|
|
|
111,850
|
|
|
|
8.35
|
|
|
|
8.35
|
|
|
|
538,000
|
|
Yanchun
Li
|
|
|
4/20/08
|
|
|
|
98,794
|
|
|
|
8.35
|
|
|
|
8.35
|
|
|
|
475,200
|
|
Jun
Min
|
|
|
4/20/08
|
|
|
|
74,096
|
|
|
|
8.35
|
|
|
|
8.35
|
|
|
|
356,400
|
|
Binsheng
Li
|
|
|
4/20/08
|
|
|
|
61,040
|
|
|
|
8.35
|
|
|
|
8.35
|
|
|
|
293,600
|
|
Wilfred
Chow
|
|
|
4/20/08
|
|
|
|
67,983
|
|
|
|
8.35
|
|
|
|
8.35
|
|
|
|
327,000
|
|
(1)
|
Represents
the number of stock options granted in 2008 under the Company’s 2006 Plan.
These options vest and become exercisable ratably in five equal annual
installments beginning one year after the grant
date.
|
(2)
|
Represents
the exercise price for the stock options granted, which was the five days
average closing stock prices on the NYSE of the Company’s Common Stock
preceding the grant date.
|
Employment
Agreements
In
April 20, 2008, we entered into employment agreements with Tony Liu, our
Chairman and Chief Executive Officer, Yanchun Li, our Chief Financial Officer
and Chief Operations Officer, Jun Min, our Vice President, and Binsheng Li, our
Chief Accounting Officer, all of whom are also directors of the Company. We also
entered into employment agreement with Wilfred Chow, our Senior Vice President
of Finance. Each of the Employment Agreements were subsequently amended to
reduce the number of options granted to the numbers included below in the
description of each employment agreement.
Tony
Liu’s employment agreement has a term of one year, effective as of
April 20, 2008, and provides for an annual base salary of $200,000, subject
to subsequent annual review by the Company’s Compensation Committee. The term of
his agreement shall be automatically renewed for another year, unless a written
notice is given by either party of an intention not to renew the agreement no
later than 90 days prior to the expiration of the term. The agreement also
provides for the grant of options to purchase 111,850 shares of common stock
with an exercise price of $8.35 per share. The stock options are granted under
the Company’s 2006 Equity Incentive Plan and will vest ratably over a five year
period, subject to Mr. Liu’s continued employment with the Company on each
vesting date. Mr. Liu is also entitled to an annual performance based bonus
of up to US$40,000 based upon the Company’s performance. Such amount may be
increased if the Company exceeds certain net income targets for the year, or may
be decreased if the net income targets are not met. We can terminate
Mr. Liu’s employment with cause or without cause pursuant to a decision by
our board of directors. In the event Mr. Liu’s employment is terminated
without cause, he will be eligible to receive monthly payments at his then
applicable monthly base salary for the rest of his term from the date of
termination of the employment.
Lily Li’s
employment agreement has a term of one year, effective as of April 20,
2008, and provides for an annual base salary of $160,000, subject to subsequent
annual review by the Company’s Compensation Committee. The term of her agreement
shall be automatically renewed for another year, unless a written notice is
given by either party of an intention not to renew the agreement no later than
90 days prior to the expiration of the term. The agreement also provides for the
grant of options to purchase 98,794 shares of common stock with an exercise
price of $8.35 per share. The stock options are granted under the Company’s 2006
Equity Incentive Plan and will vest ratably over a five year period, subject to
Ms. Li’s continued employment with the Company on each vesting date.
Ms. Li is also entitled to an annual performance based bonus of up to
US$30,000 based upon the Company’s performance and such amount may be increased
if the Company exceeds certain net income targets for the year, or may be
decreased if the net income targets are not met. We can terminate Ms. Li’s
employment with cause or without cause pursuant to a decision by our board of
directors. In the event Ms. Li’s employment is terminated without cause,
she will be eligible to receive monthly payments at her then applicable monthly
base salary for the rest of her term from the date of termination of her
employment.
Jun Min’s
employment agreement has a term of one year, effective as of April 20,
2008, and provides for an annual base salary of $120,000, subject to subsequent
annual review by our board of directors. The term of his agreement shall be
automatically renewed for another year, unless a written notice is given by
either party of an intention not to renew the agreement no later than 90 days
prior to the expiration of the term. The agreement also provides for the grant
of options to purchase 74,096 shares of common stock with an exercise price of
$8.35 per share. The stock options are granted under the Company’s 2006 Equity
Incentive Plan and will vest ratably over a five year period, subject to
Mr. Min’s continued employment with the Company on each vesting date.
Mr. Min is also entitled to an annual performance based bonus of up to
US$30,000 based upon the Company’s performance and such amount may be increased
if the Company exceeds certain net income targets for the year, or may be
decreased if the net income targets are not met. We can terminate Mr. Min’s
employment with cause or without cause pursuant to a decision by our Chief
Executive Officer. In the event Mr. Min’s employment is terminated without
cause, he will be eligible to receive monthly payments at his then applicable
monthly base salary for the rest of his term from the date of termination of the
employment.
Binsheng
Li’s employment agreement has a term of one year, effective as of April 20,
2008, and provides for an annual base salary of $80,000, subject to subsequent
annual review by our board of directors. The term of his agreement shall be
automatically renewed for another year, unless a written notice is given by
either party of an intention not to renew the agreement no later than 90 days
prior to the expiration of the term. The agreement also provides for the grant
of options to purchase 61,040 shares of common stock with an exercise price of
$8.35 per share. The stock options are granted under the Company’s 2006 Equity
Incentive Plan and will vest ratably over a five year period, subject to
Mr. Li’s continued employment with the Company on each vesting date.
Mr. Li is also entitled to an annual performance based bonus of up to
US$20,000 based upon the Company’s performance and such amount may be increased
if the Company exceeds certain net income targets for the year, or may be
decreased if the net income targets are not met. We can terminate Mr. Li’s
employment with cause or without cause pursuant to a decision by our Chief
Executive Officer. In the event Mr. Li’s employment is terminated without
cause, he will be eligible to receive monthly payments at his then applicable
monthly base salary for the rest of his term from the date of termination of the
employment.
Wilfred
Chow’s employment agreement has a term of one year, effective as of
April 20, 2008, and provides for an annual base salary of $190,000, subject
to subsequent annual review by our board of directors. The term of his agreement
shall be automatically renewed for another year, unless a written notice is
given by either party of an intention not to renew the agreement no later than
90 days prior to the expiration of the term. The agreement also provides for the
grant of options to purchase 67,983 shares of common stock with an exercise
price of $8.35 per share. The stock options are granted under the Company’s 2006
Equity Incentive Plan and will vest ratably over a five year period, subject to
Mr. Chow’s continued employment with the Company on each vesting date.
Mr. Chow is also entitled to an annual performance based bonus of up to
US$40,000 based upon the Company’s performance and such amount may be increased
if the Company exceeds certain net income targets for the year, or may be
decreased if the net income targets are not met. We can terminate
Mr. Chow’s employment with cause or without cause pursuant to a decision by
our Chief Executive Officer. In the event Mr. Chow’s employment is
terminated without cause, he will be eligible to receive monthly payments at his
then applicable monthly base salary for the rest of his term from the date of
termination of the employment.
Potential
Payments Upon Termination or Change in Control
Assuming
the employment of our named executive officers were to be terminated without
cause or for good reason, as of December 31, 2008, the following
individuals would have been entitled to payments in the amounts set forth
opposite to their name in the below table through April 20,
2009:
Cash
Payments
|
|
|
|
Tony
Liu
|
|
$
|
66,667
|
|
Yanchun
Li
|
|
|
53,333
|
|
JunMin
|
|
|
40,000
|
|
Binsheng
Li
|
|
|
26,667
|
|
Wilfred
Chow
|
|
|
63,333
|
|
2008
Outstanding Equity Awards at Year-end
|
|
Option
Awards
|
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
|
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
|
|
|
Equity
Incentive
Plan Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration
Date
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
Tony
Liu
|
|
|
40,000
|
|
|
|
160,000
|
|
|
|
200,000
|
|
|
10.74
|
|
|
4/20/2017
|
Tony
Liu
|
|
|
—
|
|
|
|
111,850
|
|
|
|
111,850
|
|
|
8.35
|
|
|
4/20/2018
|
Yanchun
Li
|
|
|
32,000
|
|
|
|
128,000
|
|
|
|
160,000
|
|
|
10.74
|
|
|
4/20/2017
|
Yanchun
Li
|
|
|
—
|
|
|
|
98,794
|
|
|
|
98,794
|
|
|
8.35
|
|
|
4/20/2018
|
Jun
Min
|
|
|
24,000
|
|
|
|
96,000
|
|
|
|
120,000
|
|
|
10.74
|
|
|
4/20/2017
|
Jun
Min
|
|
|
—
|
|
|
|
74,096
|
|
|
|
74,096
|
|
|
8.35
|
|
|
4/20/2018
|
Binsheng
Li
|
|
|
16,000
|
|
|
|
64,000
|
|
|
|
80,000
|
|
|
10.74
|
|
|
4/20/2017
|
Binsheng
Li
|
|
|
—
|
|
|
|
61,040
|
|
|
|
61,040
|
|
|
8.35
|
|
|
4/20/2018
|
Wilfred
Chow
|
|
|
20,000
|
|
|
|
80,000
|
|
|
|
100,000
|
|
|
10.74
|
|
|
4/20/2017
|
Wilfred
Chow
|
|
|
—
|
|
|
|
67,983
|
|
|
|
67,983
|
|
|
8.35
|
|
|
4/20/2018
|
Option
Exercises and Stock Vested During 2008
|
|
Option
Awards
|
|
|
|
Number of
Shares Acquired on
Exercise
(#)
|
|
|
Value Realized on
Exercise
($)
|
|
Tony
Liu
|
|
|
—
|
|
|
|
—
|
|
Yanchun
Li
|
|
|
—
|
|
|
|
—
|
|
Jun
Min
|
|
|
—
|
|
|
|
—
|
|
Binsheng
Li
|
|
|
—
|
|
|
|
—
|
|
Wilfred
Chow
|
|
|
—
|
|
|
|
—
|
|
Compensation
of Independent Directors for the 2008
On
April 9, 2008, Compensation Committee of the Company, after the annual
compensation review meeting, approved changes to the annual compensation
provided to independent directors. The changes were made upon the ratification
by the Board of Directors. The fee changes for annual retainers and the changes
for annual equity awards become effective as of April 20, 2008. The changes
in compensation for independent directors are as follows:
|
•
|
increased
the annual retainer fee for each independent director from $40,000 to
$50,000;
|
|
•
|
increased
the annual stock award for each independent director from $60,000 to
$65,000, and
|
|
•
|
additional
annual stock award of $5,000 for Compensation Committee Chair and $8,000
for Audit Committee Chair.
|
The
annual retainer is paid to the independent directors in monthly installments in
arrears. Independent director shall be entitled to receive each year shares of
common stock of the Company with an aggregate value range from $65,000 to
$73,000 per annum, calculated based on the average closing price per share for
the five (5) trading days preceding and including the date of the signing
of each such independent director’s service agreement. The equity award to
independent directors is awarded at the beginning of each year for service
rendered for the preceding year. The Company reimburses its independent
directors for reasonable travel expenses to attend Board and Committee
meetings.
The
following table sets forth all compensation paid or to be paid by AOB, as well
as certain other compensation paid or accrued, for each of the independent
directors for the year 2008.
Name
|
|
Fees Earned or
Paid in Cash
($)
|
|
|
Stock Awards
($)
|
|
Option Awards
($)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
Cosimo
J. Patti
|
|
46,667
|
|
|
|
63,333
|
(1)
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
110,000
|
|
Xianmin
Wang
|
|
46,667
|
|
|
|
63,333
|
(1)
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
110,000
|
|
Eileen
Brody
|
|
—
|
|
|
|
115,000
|
(2)
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
115,000
|
|
Lawrence
S Wizel
|
|
46,667
|
|
|
|
71,333
|
(3)
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
118,000
|
|
Baiqing
Zhang
|
|
46,667
|
|
|
|
63,333
|
(1)
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
110,000
|
|
(1)
|
7,085
shares of common stock to be issued were outstanding for each of the
independent directors as of January 1,
2009.
|
(2)
|
13,239
shares of common stock to be issued were outstanding as of January 1,
2009.
|
(3)
|
7,977
shares of common stock to be issued were outstanding as of January 1,
2009.
|
The
following table sets forth certain information regarding beneficial ownership of
common stock as of February 28, 2008 by each person known to us to own
beneficially more than 5% of our common stock, each of our directors, each of
our named executive officers; and all executive officers and directors as a
group.
Name
(1)
|
|
Title of Class
|
|
Amount and Nature of
Beneficial
Owner (2)
|
|
Percent of Class
(3)
|
|
Tony Liu
|
|
Series A Preferred
Stock
|
|
|
1,000,000
|
(4)
|
|
100.00
|
%
|
Tony
Liu
|
|
Common
Stock
|
|
|
14,437,648
|
(5)
|
|
18.45
|
%
|
Yanchun
Li
|
|
Common
Stock
|
|
|
795,716
|
(6)
|
|
1.02
|
%
|
Jun
Min
|
|
Common
Stock
|
|
|
933,494
|
(7)
|
|
1.19
|
%
|
Binsheng
Li
|
|
Common
Stock
|
|
|
308,906
|
(8)
|
|
*
|
|
Cosimo
J. Patti
|
|
Common
Stock
|
|
|
16,213
|
(9)
|
|
*
|
|
Xianmin
Wang
|
|
Common
Stock
|
|
|
34,018
|
(10)
|
|
*
|
|
Eileen
Brody
|
|
Common
Stock
|
|
|
59,998
|
(11)
|
|
*
|
|
Lawrence
S. Wizel
|
|
Common
Stock
|
|
|
18,099
|
(12)
|
|
*
|
|
Baiqing
Zhang
|
|
Common
Stock
|
|
|
11,702
|
(13)
|
|
*
|
|
Total
Ownership of Common Stock by All Directors and Officers as a
Group
|
|
|
|
|
16,615,795
|
|
|
21.23
|
%
|
(1)
|
Unless
otherwise indicated, the address for all named executive officers,
directors and stockholders is c/o American Oriental Bioengineering, Inc.,
25th Floor—Mid Section, Great China International Exchange Square,
No. 1 Fuhua 1 Rd, Futian District, Shenzhen, 518034, People’s
Republic of China.
|
(2)
|
The
amount of beneficial ownership includes the number of shares of common
stock and/or preferred stock, plus, in the case of each of the executive
officer and directors and all officers and directors as a group, all
shares issuable upon the exercise of the options held by them, which were
exercisable as of December 31, 2008 or within 60 days thereafter.
Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, and the rules promulgated by the SEC, every person who has or
shares the power to vote or to dispose of shares of common stock are
deemed to be the “beneficial owner” of all the shares of common stock over
which any such sole or shared power
exists.
|
(3)
|
Based
upon 78,249,264 shares outstanding as of February 28,
2009.
|
(4)
|
Through
his common and preferred stock ownership, currently Mr. Liu has
voting power equal to approximately 43.5% of our voting
securities.
|
(5)
|
Includes
40,000 shares of common stock issuable upon exercise of
options.
|
(6)
|
Includes
32,000 shares of common stock issuable upon exercise of
options.
|
(7)
|
Includes
24,000 shares of common stock issuable upon exercise of
options.
|
(8)
|
Includes
16,000 shares of common stock issuable upon exercise of
options.
|
(9)
|
Includes
7,085 shares of common stock issuable for service rendered in
2008.
|
(10)
|
Includes
7,085 shares of common stock issuable for service rendered in
2008.
|
(11)
|
Includes
13,239 shares of common stock issuable for service rendered in
2008.
|
(12)
|
Includes
7,977 shares of common stock issuable for service rendered in
2008.
|
(13)
|
Includes
7,085 shares of common stock issuable for service rendered in
2008.
|
There
were no transactions, since January 1, 2008, the beginning of the Company’s
last year in which the Company was or is to be a participant and in which any
related person had or will have a direct or indirect material interest. It is
the Company’s policy that the Company will not enter into any related party
transactions unless the Audit Committee or another independent body of the Board
of Directors first reviews and approves the transactions.
Director
Independence
A
majority of the directors must be independent directors under
Section 303A.01 of the listing standard of NYSE. Section 303A.02 of
the NYSE listing standards provide that no director can qualify as independent
unless the Board affirmatively determines that the director has no material
relationship with the listed company. The Board has adopted the following
standards in determining whether or not a director has a material relationship
with the Company and these standards are:
|
•
|
No
director who is an employee or a former employee of the Company can be
independent until three years after termination of such
employment.
|
|
•
|
No
director who is, or in the past three years has been, affiliated with or
employed by the Company’s present or former independent auditor can be
independent until three years after the end of the affiliation, employment
or auditing relationship.
|
|
•
|
No
director can be independent if he or she is, or in the past three years
has been, part of an interlocking directorship in which an executive
officer of the Company serves on the compensation committee of another
company that employs the director.
|
|
•
|
No
director can be independent if he or she is receiving, or in the last
three years has received, more than $120,000 during any 12-month period in
direct compensation from the Company, other than director and committee
fees and pension or other forms of deferred compensation for prior service
(provided such compensation is not contingent in any way on continued
service).
|
|
•
|
Directors
with immediate family members in the foregoing categories are subject to
the same three-year restriction.
|
|
•
|
No
director can be independent if he or she is a current employee, or an
immediate family member is a current executive officer, of a company that
has made payments to, or received payments from, AOB for property or
services in an amount which, in any of the last three fiscal years,
exceeds the greater of $1 million, or 2% of such other company’s
consolidated gross revenues.
|
Based on
these independence standards and all of the relevant facts and circumstances,
the Board determined that none of the following directors had any material
relationship with the Company and, thus, are independent under
Section 303A.02 of the listing standards of NYSE: Ms. Brody, and
Messrs. Patti, Wang, Wizel and Zhang. In accordance with New York Stock Exchange
rules a majority of our Board of Directors is independent.
Audit
Fees
The
aggregate fees for each of the last two fiscal years for professional services
rendered by the principal accountant for our audits of our annual financial
statements and interim reviews of our financial statements included in our
fillings with Securities and Exchange Commission on Form 10-Ks and 10-Qs
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for those years were
approximately:
|
2008:
|
$1,581,498
|
Weinberg
& Company, P.A.
|
|
|
|
|
|
2007:
|
$1,241,000
|
Weinberg
& Company, P.A.
|
Audit Related
Fees
The
aggregate fees in each of the last two years for the assurance and related
services provided by the principal accountant that are not reasonably related to
the performance of the audit or review of the Company’s financial statements and
are not reported in paragraph (1) were approximately:
|
2008:
|
$0
|
Weinberg
& Company, P.A.
|
|
|
|
|
|
2007:
|
$0
|
Weinberg
& Company, P.A.
|
We
incurred these fees in connection with registration statements and financing
transactions.
Tax Fees
The
aggregate fees in each of the last two years for the professional services
rendered by the principal accountant for tax compliance, tax advice and tax
planning were approximately:
|
2008:
|
$4,500
|
Weinberg
& Company, P.A.
|
|
|
|
|
|
2007:
|
$4,500
|
Weinberg
& Company, P.A.
|
We
incurred these fees due to the preparation of our tax returns.
All Other
Fees
The
aggregate fees in each of the last two fiscal years for the products and
services provided by the principal accountant, other than the services reported
in paragraph (1) through (3) were approximately:
|
2008:
|
$
85,811
|
Weinberg
& Company, P.A.
|
|
|
|
|
|
2007:
|
$
162,700
|
Weinberg
& Company, P.A.
|
Audit Committee
Approval
Our Audit
Committee must pre-approve all audit and permissible non-audit services
performed by the independent registered public accounting firm. These services
may include audit services, audit-related services, tax services and other
services.
All of
the services described herein were approved by the Audit Committee pursuant to
its pre-approval policies. None of the hours expended on the principal
accountant’s engagement to audit the Company’s financial statements for the most
recent fiscal year were attributed to work performed by persons other than the
principal accountant’s full-time permanent employees.
Exhibit No
|
|
Description
|
2.1
|
|
Purchase
Agreement, dated as of September 8, 2004, between American Oriental
Bioengineering, Inc., the Government of Heilongjiang Province of China and
Heilongjiang Songhuajiang Pharmaceutical Limited (incorporated by
reference from the Report on Form 8-K, Commission File No. 000-29785,
filed with the Commission on September 14, 2004).
|
|
|
|
2.2
|
|
Acquisition
Agreement, dated September 6, 2007, by and between American Oriental
Bioengineering, Inc. and Renson Holdings Limited for the purchase of all
of the outstanding capital stock of Changchun Xinan Pharmaceutical Group
Company Limited (incorporated by reference from the Report on Form 10-Q,
Commission File No. 001-32569, filed with the Commission on November 5,
2007).
|
|
|
|
2.3
|
|
Acquisition
Agreement, dated October 18, 2007, by and between American Oriental
Bioengineering, Inc. and Renson Holdings Limited for the purchase of all
of the outstanding capital stock of Guangxi Boke Pharmaceutical Limited
(incorporated by reference from the Report on Form 10-Q, Commission File
No. 001-32569, filed with the Commission on November 5,
2007).
|
|
|
|
3.1(a)
|
|
Amendment
and Restatement of Articles of Incorporation of American Oriental
Bioengineering, Inc. (incorporated by reference from the Registration
Statement on Form SB-2 Commission File No. 333-124133, filed with the
Commission on April 18, 2005).
|
|
|
|
3.1(b)
|
|
Certificate
of Amendment to Amendment and Restatement of Articles of Incorporation of
American Oriental Bioengineering, Inc. (incorporated by reference from the
Registration Statement on Form S-3 Commission File No. 333-131229, filed
with the Commission on January 23, 2006).
|
|
|
|
3.2
|
|
Amended
and Restated Bylaws of American Oriental Bioengineering, Inc.
(incorporated by reference from the Report on Form 10-Q, Commission File
No. 001-32569, filed with the Commission on August 11,
2008).
|
|
|
|
4.1
|
|
Form
of Warrant (incorporated by reference from the Current Report on Form 8-K,
Commission File No. 001-32569, filed with the Commission on December 1,
2005).
|
|
|
|
4.2
|
|
American
Oriental Bioengineering, Inc. 2003 Stock Option Plan (incorporated by
reference from the Report on Form 10-KSB, Commission File No. 000-29785,
filed with the Commission on April 15, 2004).
|
|
|
|
4.3
|
|
Indenture,
dated as of July 15, 2008, by and between Wells Fargo Bank, National
Association, as Trustee and American Oriental Bioengineering, Inc.
(incorporated by reference from the Current Report on Form 8-K, Commission
File No. 001-32569, filed with the Commission on July 15,
2008).
|
|
|
|
4.4
|
|
Registration
Rights Agreement, dated as of July 15, 2008, by and among the investors
specified therein and American Oriental Bioengineering, Inc. (incorporated
by reference from the Current Report on Form 8-K, Commission File No.
001-32569, filed with the Commission on July 15, 2008).
|
|
|
|
10.1
|
|
Stock
and Warrant Purchase Agreement, dated as of November 28, 2005, by and
among American Oriental Bioengineering, Inc. and the signatory purchasers
named therein (incorporated by reference from the Current Report on Form
8-K, Commission File No. 001-32569, filed with the Commission on December
1, 2005).
|
|
|
|
10.2
|
|
Form
of Registration Rights Agreement by and among American Oriental
Bioengineering, Inc. and the signatories thereto (incorporated by
reference from the Current Report on Form 8-K, Commission File No.
001-32569, filed with the Commission on December 1,
2005).
|
|
|
|
10.3
|
|
Purchase
Agreement, dated September 8, 2004, by and between American Oriental
Bioengineering, Inc. and the Government of Heilongjiang Province of China
and Heilongjiang Songhuajiang Pharmaceutical Limited (incorporated by
reference from the Current Report on Form 8-K, Commission File No.
000-29785, filed with the Commission on September 14,
2004).
|
|
|
|
10.4
|
|
Purchase
Agreement, dated as of August 18, 2002, by and between American Oriental
Bioengineering, Inc. and Tony Liu (incorporated by reference from the
Schedule 14C Commission File No. 000-29785, filed with the Commission on
October 15, 2002).
|
|
|
|
10.5
|
|
Subscription
Agreement, dated as of November 23, 2004, between American Oriental
Bioengineering, Inc. and the Subscribers (incorporated by reference from
the Registration Statement on Form SB-2, Commission File No. 333-124133,
filed with the Commission on April 18,
2005).
|
10.6(a)
|
|
Consulting
Agreement, dated June 28, 2004, by and between American Oriental
Bioengineering, Inc. and Bai Chao (incorporated by reference from the
Registration Statement on Form S-8, Commission File No. 333-117276, filed
with the
Commission
on July 9, 2004).
|
|
|
|
10.6(b)
|
|
Consulting
Agreement, dated June 28, 2004, by and between American Oriental
Bioengineering, Inc. and Kou Yumin (incorporated by reference from the
Registration Statement on Form S-8, Commission File No. 333-117276, filed
with the Commission on July 9, 2004).
|
|
|
|
10.6(c)
|
|
Consulting
Agreement, dated June 28, 2004, by and between American Oriental
Bioengineering, Inc. and Xiangli Men (incorporated by reference from the
Registration Statement on Form S-8 Commission File No. 333-117276, filed
with the Commission on July 9, 2004).
|
|
|
|
10.6(d)
|
|
Consulting
Agreement, dated June 28, 2004, by and between American Oriental
Bioengineering, Inc. and Linda Welsh (incorporated by reference from the
Registration Statement on Form S-8 Commission File No. 333-117276, filed
with the Commission on July 9, 2004).
|
|
|
|
10.6(e)
|
|
Consulting
Agreement, dated June 28, 2004, by and between American Oriental
Bioengineering, Inc. and Dr. Jie Zhu (incorporated by reference from the
Registration Statement on Form S-8 Commission File No. 333-117276, filed
with the Commission on July 9, 2004).
|
|
|
|
10.6(f)
|
|
Consulting
Agreement, dated June 28, 2004, by and between American Oriental
Bioengineering, Inc. and Brian Corday (incorporated by reference from the
Registration Statement on Form S-8 Commission File No. 333-117276, filed
with the Commission on July 9, 2004).
|
|
|
|
10.6(g)
|
|
Consulting
Agreement, dated October 1, 2003, by and between American Oriental
Bioengineering, Inc. and Haishan Wang (incorporated by reference from the
Registration Statement on Form S-8 Commission File No. 333-109832, filed
with the Commission on October 10, 2003).
|
|
|
|
10.6(h)
|
|
Consulting
Agreement, dated October 1, 2003, by and between American Oriental
Bioengineering, Inc. and Xiangli Men (incorporated by reference from the
Registration Statement on Form S-8 Commission File No. 333-109832, filed
with the Commission on October 10, 2003).
|
|
|
|
10.6(i)
|
|
Consulting
Agreement, dated October 1, 2003, by and between American Oriental
Bioengineering, Inc. and Lau Chak Wong (incorporated by reference from the
Registration Statement on Form S-8 Commission File No. 333-109832, filed
with the Commission on October 10, 2003).
|
|
|
|
10.7(a)
|
|
Independent
Director Agreement, dated July 1, 2006, by and between American Oriental
Bioengineering, Inc. and Cosimo J. Patti (incorporated by reference to the
Quarterly Report on Form 10-Q, filed with the Commission on August 14,
2006).
|
|
|
|
10.7(b)
|
|
Independent
Director Agreement, dated July 1, 2006, by and between American Oriental
Bioengineering, Inc. and Xianmin Wang (incorporated by reference to the
Quarterly Report on Form 10-Q, filed with the Commission on August 14,
2006).
|
|
|
|
10.7(c)
|
|
Independent
Director Agreement, dated July 1, 2006, by and between American Oriental
Bioengineering, Inc. and Eileen B. Brody (incorporated by reference to the
Quarterly Report on Form 10-Q, filed with the Commission on August 14,
2006).
|
|
|
|
10.7(d)
|
|
Independent
Director Agreement, dated August 21, 2006, by and between American
Oriental Bioengineering, Inc. and Lawrence S. Wizel, (incorporated by
reference to the Annual Report on Form 10-K, filed with the Commission on
March 13, 2007).
|
|
|
|
10.7(e)
|
|
Independent
Director Agreement, dated December 15, 2006, by and between American
Oriental Bioengineering, Inc. and Baiqing Zhang, (incorporated by
reference to the Annual Report on Form 10-K, filed with the Commission on
March 13, 2007).
|
|
|
|
10.8
|
|
Securities
Purchase Agreement, dated as of July 9, 2008, by and among the investors
specified therein and American Oriental Bioengineering, Inc. (incorporated
by reference from the Current Report on Form 8-K, Commission File No.
001-32569, filed with the Commission on July 15, 2008).
|
|
|
|
10.9
|
|
Form
of Prepaid Forward Share Repurchase Contract Confirmation, dated as of
July 15, 2009 (incorporated by reference from the Current Report on Form
8-K, Commission File No. 001-32569, filed with the Commission on July 15,
2008).
|
|
|
|
10.10(a)
|
|
Employment
Agreement, dated April 10 2009, by and between American Oriental
Bioengineering, Inc. and Tony Liu, filed
herewith.
|
|
|
|
10.10(b)
|
|
Employment
Agreement, dated April 10, 2009, by and between American
Oriental Bioengineering, Inc. and Yanchun Li, filed
herewith.
|
10.10(c)
|
|
Employment
Agreement, dated April 10, 2009, by and between American Oriental
Bioengineering, Inc. and Jun Min, filed
herewith.
|
|
|
|
10.10(d)
|
|
Employment
Agreement, dated April 10, 2009, by and between American Oriental
Bioengineering, Inc. and Binsheng Li, filed
herewith.
|
|
|
|
10.10(e)
|
|
Employment
Agreement, dated April 10, 2009, by and between American Oriental
Bioengineering, Inc. and Wilfred Chow, filed
herewith.
|
|
|
|
14
|
|
Amended
and Restated Code of Ethics of American Oriental Bioengineering, Inc.,
dated November 9, 2006, (incorporated by reference to the Annual Report on
Form 10-K, filed with the Commission on March 13,
2007).
|
|
|
|
21
|
|
Subsidiaries
of the Registrant, (incorporated by reference to the Annual Report on Form
10-K,
(incorporated
by reference to the Annual Report on Form 10-K, filed with the Commission
on March 15, 2009).
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
|
|
|
|
31.2
|
|
Certification
of Acting Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, filed herewith.
|
|
|
|
32
|
|
Certification
of Chief Executive Officer and Acting Chief Financial Officer Pursuant to
18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed
herewith.
|
|
|
|
FINANCIAL
SCHEDULES
|
|
SCHEDULE
II
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange
Act, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
Date:
March
15, 2010
|
By:
|
/s/
Tony Liu
|
|
By:
|
Tony
Liu
|
|
Title:
|
Chief
Executive Officer and Director
|
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this Report has
been signed below by the following person on behalf of the Registrant and in the
capacities and on the dates indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/
Tony Liu
|
|
Chief
Executive Officer and Chairman of the Board of Directors
|
|
March
15, 2010
|
Tony
Liu
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Yanchun Li
|
|
Chief
Financial Officer, Chief Operating Officer, Secretary and
Director
|
|
March
15, 2010
|
Yanchun
Li
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Jun Min
|
|
Vice
President and Director
|
|
March
15, 2010
|
Jun
Min
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Binsheng Li
|
|
Chief
Accounting Officer and Director
|
|
March
15, 2010
|
Binsheng
Li
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Cosimo J. Patti
|
|
Independent
Director
|
|
March
15, 2010
|
Cosimo
J. Patti
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Xianmin Wang
|
|
Independent
Director
|
|
|
Xianmin
Wang
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Eileen Brody
|
|
Independent
Director
|
|
|
Eileen
Brody
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Lawrence S. Wizel
|
|
Independent
Director
|
|
|
Lawrence
S. Wizel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Baiqing Zhang
|
|
Independent
Director
|
|
|
Baiqing
Zhang
|
|
|
|
|
FINANCIAL
SCHEDULE II
Valuation and Qualifying
Accounts
Description
|
Balance
at
December
31, 2005
|
Additions
|
Deductions
|
Balance
at December 31, 2006
|
Additions
|
Deductions
|
Balance
at December 31, 2007
|
Additions
|
Deductions
|
Balance
at
December
31, 2008
|
|
|
(1)
charge
to costs and expenses
|
(2)
Charged
to
other accounts
|
|
|
(1)
charge
to
costs
and expenses
|
(2)
Charged
to
other accounts
|
|
|
(1)
charge
to
costs and expenses
|
(2)
Charged
to
other accounts
|
|
|
Allowance
for doubtful accounts
|
$266,248
|
|
|
$226,472
|
$39,776
|
$262,494
|
|
|
$302,270
|
|
|
$75,940
|
$226,330
|
Allowance
for inventories
|
$842,112
|
|
|
$226,560
|
$615,552
|
|
|
$378,125
|
$237,427
|
|
|
$69,998
|
$167,429
|
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
CONTENTS
|
|
|
PAGE
|
2
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
|
|
PAGE
|
3-4
|
CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2007
|
|
|
|
PAGE
|
5
|
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER
31, 2008, 2007 AND 2006
|
|
|
|
PAGE
|
6-7
|
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER
31, 2008, 2007 AND 2006
|
|
|
|
PAGE
|
8-9
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND
2006
|
|
|
|
PAGE
|
10-38
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
2008, 2007 AND 2006
|
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders of
American
Oriental Bioengineering, Inc.:
We have
audited the accompanying consolidated balance sheets of American Oriental
Bioengineering, Inc. and Subsidiaries (the “Company”) as of December 31, 2008
and 2007, and the related consolidated statements of income and comprehensive
income, changes in shareholders’ equity and cash flows for each of the three
years in the period ended December 31, 2008. Our audits also include the
financial statement schedule on page 62. We have also audited the
Company’s internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organization of the Treadway Commission. As
described in Management’s Report on Internal Control over Financial Reporting,
management excluded from its assessment the internal control over financial
reporting at Nuo Hua Investment Company Ltd., which was acquired October 18,
2008, and Guangxi HuiKe Pharmaceutical Research and Development Co., Ltd., which
was acquired October 20, 2008, and whose combined financial statements
constitute 11% and 10% of net and total assets, respectively, and 2% of revenues
and (25%) of net income of the consolidated financial statements as of and for
the year ended December 31, 2008. Accordingly, our audit did not include the
internal control over financial reporting at Nuo Hua Investment Company Ltd. and
GuangXi HuiKe Pharmaceutical Research and Development Co., Ltd. The Company’s
management is responsible for these consolidated financial statements, 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 Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedule and an
opinion on the Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in
all material respects. An audit of the consolidated financial
statements includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive an principal
financial officers, or persons performing similar functions, and effected by the
company’s 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. 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 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 the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the 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, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of American Oriental
Bioengineering, Inc. and Subsidiaries as of December 31, 2008 and 2007, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein. Also in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission.
As
more fully described in Note 4 to the consolidated financial statements, errors
were discovered by management during 2009 relating to the accounting for stock
options, deferred taxes with respect to the acquisition of two subsidiaries and
deferred taxes with respect to the foreign currency translation gain as of and
for the years ended December 31, 2008 and 2007. Accordingly, the
consolidated balance sheets as of December 31, 2008 and 2007 and the related
statements of income and comprehensive income for the years ended December
31, 2008 and 2007 and changes in shareholders’ equity and cash flows for each of
the three years in the period ended December 31, 2008 have been restated to
reflect corrections to previously reported amounts.
/s/
Weinberg & Company, P.A.
Boca
Raton, Florida
February
27, 2009, except for Note 4, which is as of November 13, 2009
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
ASSETS
|
|
DECEMBER
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(RESTATED)
|
|
|
(RESTATED)
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
70,636,510
|
|
|
$
|
166,410,075
|
|
Accounts
receivable, net
|
|
|
36,982,167
|
|
|
|
16,494,619
|
|
Inventories,
net
|
|
|
13,042,123
|
|
|
|
12,264,536
|
|
Advances
to suppliers and prepaid expenses
|
|
|
3,593,979
|
|
|
|
4,309,352
|
|
Notes
receivable
|
|
|
708,076
|
|
|
|
2,259,616
|
|
Refundable
deposit
|
|
|
6,396,996
|
|
|
|
3,479,262
|
|
Deferred
tax assets
|
|
|
347,216
|
|
|
|
15,297
|
|
Other
current assets
|
|
|
744,903
|
|
|
|
1,654,856
|
|
Total
Current Assets
|
|
|
132,451,970
|
|
|
|
206,887,613
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
ASSETS
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
98,154,443
|
|
|
|
48,496,760
|
|
Land
use rights, net
|
|
|
148,988,870
|
|
|
|
46,310,240
|
|
Deposit
for long-term assets
|
|
|
6,347,174
|
|
|
|
—
|
|
Construction
in progress
|
|
|
25,385,835
|
|
|
|
755,614
|
|
Other
intangible assets, net
|
|
|
23,690,440
|
|
|
|
26,972,166
|
|
Goodwill
|
|
|
33,164,121
|
|
|
|
27,187,663
|
|
Investments
in and advances to equity investments
|
|
|
54,963,064
|
|
|
|
242,551
|
|
Deferred
tax assets
|
|
|
1,313,832
|
|
|
|
1,498,481
|
|
Unamortized
financing cost
|
|
|
4,215,983
|
|
|
|
—
|
|
Total
Long-Term Assets
|
|
|
396,223,762
|
|
|
|
151,463,475
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
528,675,732
|
|
|
$
|
358,351,088
|
|
See
accompanying notes to the consolidated financial statements
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
DECEMBER
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(RESTATED)
|
|
|
(RESTATED)
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
12,287,887
|
|
|
$
|
3,436,352
|
|
Notes
payables
|
|
|
3,262,877
|
|
|
|
72,254
|
|
Other
payables and accrued expenses
|
|
|
19,766,652
|
|
|
|
7,786,157
|
|
Taxes
payable
|
|
|
420,671
|
|
|
|
2,843,719
|
|
Short-term
bank loans
|
|
|
7,140,148
|
|
|
|
6,289,222
|
|
Current
portion of long-term bank loans
|
|
|
58,659
|
|
|
|
2,374,565
|
|
Other
liabilities
|
|
|
2,253,440
|
|
|
|
3,548,776
|
|
Deferred
tax liabilities
|
|
|
178,931
|
|
|
|
—
|
|
Total
Current Liabilities
|
|
|
45,369,265
|
|
|
|
26,351,045
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
bank loans, net of current portion
|
|
|
804,521
|
|
|
|
1,263,483
|
|
Long-term
notes payable
|
|
|
269,908
|
|
|
|
286,365
|
|
Deferred
tax liabilities
|
|
|
17,635,511
|
|
|
|
16,671,624
|
|
Convertible
notes
|
|
|
115,000,000
|
|
|
|
—
|
|
Total
Long-Term Liabilities
|
|
|
133,709,940
|
|
|
|
18,221,472
|
|
TOTAL
LIABILITIES
|
|
|
179,079,205
|
|
|
|
44,572,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTERESTS
|
|
|
652,081
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 2,000,000 shares authorized; 1,000,000 shares
issued and outstanding at December 31, 2008 and December 31,
2007, respectively
|
|
|
1,000
|
|
|
|
1,000
|
|
Common
stock, $0.001 par value; 150,000,000 shares authorized; 78,249,264 and
77,991,935 shares issued and outstanding at December 31, 2008 and
December 31, 2007, respectively
|
|
|
78,249
|
|
|
|
77,992
|
|
Common
stock to be issued
|
|
|
376,335
|
|
|
|
1,611,333
|
|
Prepaid
forward repurchase contract
|
|
|
(29,998,616
|
)
|
|
|
—
|
|
Additional
paid-in capital
|
|
|
197,046,688
|
|
|
|
193,474,941
|
|
Retained
earnings (the restricted portion of retained earnings is $
19,924,918
and $15,910,685 at
December 31, 2008 and December 31, 2007,
respectively)
|
|
|
149,752,604
|
|
|
|
102,692,989
|
|
Accumulated
other comprehensive income
|
|
|
31,688,186
|
|
|
|
15,920,316
|
|
Total
Shareholders’ Equity
|
|
|
348,944,446
|
|
|
|
313,778,571
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
528,675,732
|
|
|
$
|
358,351,088
|
|
See
accompanying notes to the consolidated financial statements
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
|
YEAR ENDED
DECEMBER 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(RESTATED)
|
|
|
(RESTATED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
264,643,058
|
|
|
$
|
160,482,383
|
|
|
$
|
110,182,092
|
|
COST
OF GOODS SOLD
|
|
|
91,031,274
|
|
|
|
49,364,486
|
|
|
|
38,318,223
|
|
GROSS
PROFIT
|
|
|
173,611,784
|
|
|
|
111,117,897
|
|
|
|
71,863,869
|
|
Selling
and marketing
|
|
|
39,774,330
|
|
|
|
20,669,303
|
|
|
|
8,876,829
|
|
Advertising
|
|
|
34,102,538
|
|
|
|
22,865,903
|
|
|
|
15,174,125
|
|
General
and administrative
|
|
|
19,603,947
|
|
|
|
13,832,110
|
|
|
|
10,446,740
|
|
Depreciation
and amortization
|
|
|
4,383,215
|
|
|
|
1,989,425
|
|
|
|
988,488
|
|
Purchased
in-process research and development
|
|
|
12,255,248
|
|
|
|
—
|
|
|
|
—
|
|
Total
operating expenses
|
|
|
110,119,278
|
|
|
|
59,356,741
|
|
|
|
35,486,182
|
|
EQUITY
IN EARNINGS (LOSS) FROM UNCONSOLIDATED ENTITIES
|
|
|
(1,132,986
|
)
|
|
|
23,711
|
|
|
|
(3,811
|
)
|
INTEREST
(EXPENSE), NET
|
|
|
(2,571,015
|
)
|
|
|
617,524
|
|
|
|
574,172
|
|
OTHER
EXPENSE, NET
|
|
|
(65,843
|
)
|
|
|
(525,065
|
)
|
|
|
(329,987
|
)
|
MINORITY
INTERESTS
|
|
|
(27,575
|
)
|
|
|
—
|
|
|
|
—
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
59,695,087
|
|
|
|
51,877,326
|
|
|
|
36,618,061
|
|
INCOME
TAXES
|
|
|
12,635,472
|
|
|
|
8,011,248
|
|
|
|
7,416,915
|
|
NET
INCOME
|
|
|
47,059,615
|
|
|
|
43,866,078
|
|
|
|
29,201,146
|
|
OTHER
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain, net of tax
|
|
|
15,767,870
|
|
|
|
11,623,761
|
|
|
|
2,867,276
|
|
OTHER
COMPREHENSIVE INCOME, NET OF TAX
|
|
|
15,767,870
|
|
|
|
11,623,761
|
|
|
|
2,
867,276
|
|
COMPREHENSIVE
INCOME
|
|
$
|
62,827,485
|
|
|
$
|
55,489,839
|
|
|
$
|
32,068,422
|
|
NET
INCOME PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
0.62
|
|
|
$
|
0.63
|
|
|
$
|
0.47
|
|
DILUTED
|
|
$
|
0.61
|
|
|
$
|
0.61
|
|
|
$
|
0.46
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
76,504,035
|
|
|
|
69,870,775
|
|
|
|
62,679,996
|
|
DILUTED
|
|
|
82,254,185
|
|
|
|
71,364,244
|
|
|
|
62,913,961
|
|
See accompanying notes to the
consolidated financial statements
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
|
|
Preferred Stock
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Stated
Value
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Stock
To
Be
Issued
|
|
|
Prepaid
forward
repurchase
contract
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
|
|
BALANCE
AT
JANUARY 1, 2006
|
|
|
1,000,000
|
|
|
$
|
1,000
|
|
|
|
57,109,188
|
|
|
$
|
57,109
|
|
|
$
|
141,044
|
|
|
$
|
—
|
|
|
$
|
59,491,393
|
|
|
$
|
29,625,765
|
|
|
$
|
1,429,279
|
|
|
$
|
90,745,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock and warrants issued in private placement, net
|
|
|
—
|
|
|
|
—
|
|
|
|
5,526,600
|
|
|
|
5,527
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,522,153
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,527,680
|
|
Common
stock to be issued for director services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
87,598
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
87,598
|
|
Common
stock to be issued for warrant exercise
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
370,427
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
370,427
|
|
Common
stock issued for consulting services
|
|
|
—
|
|
|
|
—
|
|
|
|
30,000
|
|
|
|
30
|
|
|
|
—
|
|
|
|
—
|
|
|
|
142,170
|
|
|
|
—
|
|
|
|
—
|
|
|
|
142,200
|
|
Common
stock issued for acquisition
|
|
|
—
|
|
|
|
—
|
|
|
|
1,200,000
|
|
|
|
1,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,638,800
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,640,000
|
|
Stock
option granted to executives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
138,046
|
|
|
|
—
|
|
|
|
—
|
|
|
|
138,046
|
|
Exercise
of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
364,581
|
|
|
|
364
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,928,121
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,928,485
|
|
Finance
expenses related to private placement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,552,723
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,552,723
|
)
|
Foreign
currency translation gain (Restated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,867,276
|
|
|
|
2,867,276
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29,201,146
|
|
|
|
—
|
|
|
|
29,201,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
AT
DECEMBER 31, 2006 (Restated)
|
|
|
1,000,000
|
|
|
$
|
1,000
|
|
|
|
64,230,369
|
|
|
$
|
64,230
|
|
|
$
|
599,069
|
|
|
$
|
—
|
|
|
$
|
92,307,960
|
|
|
$
|
58,826,911
|
|
|
$
|
4,296,555
|
|
|
$
|
156,095,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock and warrants issued in secondary offering, net
|
|
|
—
|
|
|
|
—
|
|
|
|
9,275,000
|
|
|
|
9,275
|
|
|
|
|
|
|
|
—
|
|
|
|
72,975,083
|
|
|
|
—
|
|
|
|
—
|
|
|
|
72,984,358
|
|
Common
stock issued for director services
|
|
|
—
|
|
|
|
—
|
|
|
|
48,379
|
|
|
|
49
|
|
|
|
(228,642
|
)
|
|
|
—
|
|
|
|
228,593
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common
stock issued for warrant exercises
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(370,427
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(370,427
|
)
|
Common
stock to be issued for director services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
285,333
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
285,333
|
|
Common
stock to be issued for warrant exercises
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,326,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,326,000
|
|
Common
stock issued for consulting services
|
|
|
—
|
|
|
|
—
|
|
|
|
20,000
|
|
|
|
20
|
|
|
|
—
|
|
|
|
—
|
|
|
|
259,980
|
|
|
|
—
|
|
|
|
—
|
|
|
|
260,000
|
|
Stock
options granted to executives (Restated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
777,795
|
|
|
|
—
|
|
|
|
—
|
|
|
|
777,795
|
|
Exercise
of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
4,318,918
|
|
|
|
4,319
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,576,191
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,580,510
|
|
Exercise
of option
|
|
|
—
|
|
|
|
—
|
|
|
|
99,269
|
|
|
|
99
|
|
|
|
—
|
|
|
|
—
|
|
|
|
198,439
|
|
|
|
—
|
|
|
|
—
|
|
|
|
198,538
|
|
Contribution
from shareholder
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150,900
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150,900
|
|
Foreign
currency translation gain (Restated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,623,761
|
|
|
|
11,623,761
|
|
Net
income (Restated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43,866,078
|
|
|
|
—
|
|
|
|
43,866,078
|
|
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
CONTINUED
|
|
Preferred Stock
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Stated
Value
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Stock
To
Be
Issued
|
|
|
Prepaid
forward
repurchase
contract
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
AT
DECEMBER 31, 2007 (Restated)
|
|
|
1,000,000
|
|
|
$
|
1,000
|
|
|
|
77,991,935
|
|
|
$
|
77,992
|
|
|
$
|
1,611,333
|
|
|
$
|
—
|
|
|
$
|
193,474,941
|
|
|
$
|
102,692,989
|
|
|
$
|
15,920,316
|
|
|
$
|
313,778,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for director services
|
|
|
—
|
|
|
|
—
|
|
|
|
26,581
|
|
|
|
26
|
|
|
|
(285,333
|
)
|
|
|
—
|
|
|
|
285,307
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common
stock to be issued for director services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
376,335
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
376,335
|
|
Common
stock issued for consulting services
|
|
|
—
|
|
|
|
—
|
|
|
|
26,748
|
|
|
|
27
|
|
|
|
—
|
|
|
|
—
|
|
|
|
259,973
|
|
|
|
—
|
|
|
|
—
|
|
|
|
260,000
|
|
Stock
options granted to executives (Restated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,700,671
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,700,671
|
|
Prepaid
forward repurchase contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,998,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,998,616
|
)
|
Exercise
of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
204,000
|
|
|
|
204
|
|
|
|
(1,326,000
|
)
|
|
|
—
|
|
|
|
1,325,796
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Foreign
currency translation gain (Restated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,767,870
|
|
|
|
15,767,870
|
|
Net
income (Restated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
47,059,615
|
|
|
|
—
|
|
|
|
47,059,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
AT
DECEMBER 31, 2008 (Restated)
|
|
|
1,000,000
|
|
|
$
|
1,000
|
|
|
|
78,249,264
|
|
|
$
|
78,249
|
|
|
$
|
376,335
|
|
|
$
|
(29,998,616
|
)
|
|
$
|
197,046,688
|
|
|
$
|
149,752,604
|
|
|
$
|
31,688,186
|
|
|
$
|
348,944,446
|
|
See
accompanying notes to the consolidated financial statements
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
|
YEAR ENDED
DECEMBER 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
47,059,615
|
|
|
$
|
43,866,078
|
|
|
$
|
29,201,146
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
9,919,809
|
|
|
|
4,627,607
|
|
|
|
2,479,955
|
|
Amortization
of deferred insurance cost
|
|
|
425,466
|
|
|
|
|
|
|
|
|
|
Loss
on disposal of property, plant and equipment
|
|
|
29,890
|
|
|
|
427
|
|
|
|
124,015
|
|
Amortization
of deferred consulting expenses
|
|
|
200,500
|
|
|
|
394,100
|
|
|
|
728,220
|
|
Purchased
in-process research and development
|
|
|
12,255,248
|
|
|
|
—
|
|
|
|
—
|
|
Provision
(reversal) for doubtful accounts and slow moving
inventories
|
|
|
(200,683
|
)
|
|
|
(194,363
|
)
|
|
|
548,753
|
|
Deferred
taxes
|
|
|
1,205,733
|
|
|
|
153,934
|
|
|
|
(32,210
|
)
|
Common
stock to be issued for services
|
|
|
68,000
|
|
|
|
285,333
|
|
|
|
87,598
|
|
Stock
based compensation expense
|
|
|
1,700,671
|
|
|
|
777,795
|
|
|
|
138,046
|
|
Equity
(income) loss of unconsolidated entity
|
|
|
1,580,344
|
|
|
|
(23,711
|
)
|
|
|
3,811
|
|
Independent
director stock compensation
|
|
|
376,335
|
|
|
|
—
|
|
|
|
—
|
|
Minority
interests
|
|
|
27,575
|
|
|
|
—
|
|
|
|
—
|
|
Acquisition
from Nuohua investment income
|
|
|
(448,697
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase)
Decrease In:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(16,093,721
|
)
|
|
|
(4,142,308
|
)
|
|
|
(2,814,800
|
)
|
Notes
receivable
|
|
|
1,551,540
|
|
|
|
978,545
|
|
|
|
(2,640,593
|
)
|
Inventories
|
|
|
745,267
|
|
|
|
433,341
|
|
|
|
(3,814,766
|
)
|
Advances
to suppliers and prepaid expenses
|
|
|
939,249
|
|
|
|
(2,205,730
|
)
|
|
|
1,824,318
|
|
Other
current assets
|
|
|
1,185,707
|
|
|
|
(2,755,757
|
)
|
|
|
121,761
|
|
Increase
(Decrease) In:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
4,854,620
|
|
|
|
628,638
|
|
|
|
(1,310,363
|
)
|
Other
payables and accrued expenses
|
|
|
11,927,197
|
|
|
|
2,856,936
|
|
|
|
1,471,912
|
|
Taxes
payable
|
|
|
(2,427,886
|
)
|
|
|
428,879
|
|
|
|
725,671
|
|
Customer
deposits
|
|
|
—
|
|
|
|
(29,738
|
)
|
|
|
550,461
|
|
Other
liabilities
|
|
|
(2,071,912
|
)
|
|
|
(715,474
|
)
|
|
|
1,619,012
|
|
Net
cash provided by operating activities
|
|
|
74,809,867
|
|
|
|
45,364,532
|
|
|
|
29,011,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of construction in progress
|
|
|
(24,574,369
|
)
|
|
|
(2,478,601
|
)
|
|
|
(2,010,869
|
)
|
Purchases
of property, plant and equipment
|
|
|
(48,561,170
|
)
|
|
|
(1,507,017
|
)
|
|
|
(2,326,932
|
)
|
Purchase
of land use rights and other intangible assets
|
|
|
(99,546,611
|
)
|
|
|
|
|
|
|
|
|
Purchases
of subsidiary, net of cash acquired
|
|
|
(53,055,492
|
)
|
|
|
(65,872,747
|
)
|
|
|
(22,060,687
|
)
|
Refundable
deposit
|
|
|
(2,917,734
|
)
|
|
|
—
|
|
|
|
—
|
|
Deposit
for long-term assets
|
|
|
(6,347,174
|
)
|
|
|
—
|
|
|
|
—
|
|
Investments
in and advances to equity investments
|
|
|
(22,379,659
|
)
|
|
|
—
|
|
|
|
—
|
|
Proceeds
from sales of marketable securities
|
|
|
—
|
|
|
|
—
|
|
|
|
2,768
|
|
Proceeds
from disposal of property, plant and equipment
|
|
|
8,116
|
|
|
|
12,663
|
|
|
|
9,156
|
|
Net
cash used in investing activities
|
|
|
(257,374,093
|
)
|
|
|
(69,845,702
|
)
|
|
|
(26,386,564
|
)
|
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
|
YEAR ENDED
DECEMBER 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds
from short-term bank loans
|
|
|
9,480,315
|
|
|
|
6,740,860
|
|
|
|
4,732,971
|
|
Repayment
of short-term bank loans
|
|
|
(8,834,575
|
)
|
|
|
(10,750,915
|
)
|
|
|
(4,489,926
|
)
|
Proceeds
from long-term bank loans
|
|
|
—
|
|
|
|
—
|
|
|
|
973,960
|
|
Repayment
of long-term bank loans
|
|
|
—
|
|
|
|
—
|
|
|
|
(653,836
|
)
|
Repayment
of short-term notes payable
|
|
|
(57,510
|
)
|
|
|
—
|
|
|
|
(1,664,587
|
)
|
Repayments
of capital lease and notes payable
|
|
|
—
|
|
|
|
(26,118
|
)
|
|
|
(13,935
|
)
|
Cash
proceeds from sales of common stock, net
|
|
|
—
|
|
|
|
72,984,358
|
|
|
|
24,974,955
|
|
Proceeds
from exercise of warrants
|
|
|
—
|
|
|
|
27,536,083
|
|
|
|
2,298,912
|
|
Proceeds
from exercise of option
|
|
|
—
|
|
|
|
198,538
|
|
|
|
—
|
|
Contribution
from shareholder
|
|
|
—
|
|
|
|
150,900
|
|
|
|
—
|
|
Net
proceeds from convertible notes
|
|
|
110,358,550
|
|
|
|
—
|
|
|
|
—
|
|
Prepaid
forward repurchase contract
|
|
|
(29,998,616
|
)
|
|
|
—
|
|
|
|
—
|
|
Net
cash provided by financing activities
|
|
|
80,948,164
|
|
|
|
96,833,706
|
|
|
|
26,158,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(101,616,
062
|
)
|
|
|
72,352,536
|
|
|
|
28,782,897
|
|
Effect
of exchange rate changes on cash
|
|
|
5,842,497
|
|
|
|
6,273,120
|
|
|
|
1,468,473
|
|
Cash
and cash equivalents, beginning of year
|
|
|
166,410,075
|
|
|
|
87,784,419
|
|
|
|
57,532,049
|
|
CASH AND CASH
EQUIVALENTS, END OF YEAR
|
|
$
|
70,636,510
|
|
|
$
|
166,410,075
|
|
|
$
|
87,784,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
778,013
|
|
|
$
|
855,715
|
|
|
$
|
571,892
|
|
Income
taxes paid
|
|
$
|
14,909,132
|
|
|
$
|
8,381,205
|
|
|
$
|
6,573,840
|
|
Also see
Note 21.
See
accompanying notes to the consolidated financial statements
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
NOTE
1 - PRINCIPAL ACTIVITIES AND ORGANIZATION
American
Oriental Bioengineering Inc. (“AOB”) is a fully integrated pharmaceutical
company dedicated to improving health through the development, manufacture,
commercialization and distribution of a broad range of pharmaceutical and
healthcare products in China. AOB and its subsidiaries are collectively referred
to herein as the “Company,” “we,” “us,” “our” and “ourselves,” unless the
context indicates otherwise. The following list contains the particulars of its
operating subsidiaries and major affiliate companies:
Name
of Subsidiary
|
|
Principal
activities
|
|
Acquired
|
|
Percentage
of
ownership
December 31,
2008
|
Harbin
Three Happiness Bioengineering Co., Ltd. (“Three
Happiness”)
|
|
Manufacture
and commercialize a board range of branded pharmaceutical and
nutraceutical products
|
|
Jun
2002
|
|
100%
|
|
|
|
|
|
|
|
Heilongjiang
Songhuajiang Pharmaceutical Co., Ltd. (“HSPL”)
|
|
Manufacture
and commercialize an anti-viral injection powder, a prescription
pharmaceutical product
|
|
Sept 2004
|
|
100%
|
|
|
|
|
|
|
|
Guangxi
Lingfeng Pharmaceutical Co., Ltd. (“GLP”)
|
|
Manufacture
and commercialize a series of pharmaceutical products that focus on
women’s health
|
|
Apr
2006
|
|
100%
|
|
|
|
|
|
|
|
Heilongjiang
Qitai Pharmaceutical Co.,Ltd. (“HQPL”)
|
|
Wholesale
of pharmaceutical and nutraceutical products
|
|
Jul
2006
|
|
100%
|
|
|
|
|
|
|
|
Changchun
Xinan Pharmaceutical Co.Ltd., (“CCXA”)
|
|
Manufacture
and distribute a broad range of generic pharmaceutical
products
|
|
Sept
2007
|
|
100%
|
|
|
|
|
|
|
|
Guangxi
Boke Pharmaceutical Co., Ltd. (“Boke”)
|
|
Manufacture
and commercialize pharmaceutical products that alleviate nasal congestion
and provide sinus relief
|
|
Oct
2007
|
|
100%
|
|
|
|
|
|
|
|
China
Aoxing Pharmaceutical Company, Inc. (”CAXG”)
|
|
Manufacture
and commercialize pain management pharmaceutical products
|
|
Mar
2008
|
|
38%
|
|
|
|
|
|
|
|
Nuo
Hua Investment Co., Ltd. (“Nuo Hua”)
|
|
Wholesale
and retail of pharmaceutical and nutraceutical products
|
|
Oct
2008
|
|
100%
|
|
|
|
|
|
|
|
GuangXi
HuiKe Research and Development Co., Ltd. (“GHK”)
|
|
Pharmaceutical
research and products development
|
|
Oct
2008
|
|
100%
|
Also see
Note 12 for acquisitions.
NOTE
2 - BASIS OF PRESENTATION
Basis
of Consolidation
The
consolidated financial statements include the accounts of American Oriental
Bioengineering, Inc. and its wholly owned subsidiaries. All of the Company’s
subsidiaries are included in the consolidated financial statements. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure 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. Management makes these estimates using the best
information available at the time the estimates are made; however actual results
when ultimately realized could differ from those estimates.
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue
Recognition
Revenues
represent the invoiced value of goods sold recognized upon the shipment of goods
to customers. Revenues are recognized when all of the following criteria are
met:
|
•
|
Persuasive
evidence of an arrangement exists,
|
|
•
|
Delivery
has occurred or services have been
rendered,
|
|
•
|
The
seller’s price to the buyer is fixed or determinable,
and
|
|
•
|
Collectability
is reasonably assured.
|
Selling
and Marketing Expenses
Selling
and marketing expenses include the costs of selling merchandise, including
preparing the merchandise for sale, such as picking, packing, warehousing and
order charges. All shipping and handling are expensed as incurred and outbound
freight is not billed to customers. Shipping and handling expenses included in
selling expenses were $3,501,453, $2,796,100 and $1,921,318 for the years ended
December 31, 2008, 2007 and 2006, respectively.
Advertising
Costs
The
Company expenses advertising costs as incurred or the first time advertising
takes place. Point of sale materials are accounted for as inventory and charged
to expense as utilized. Advertising costs were $34,102,538, $22,865,903 and
$15,174,125 for the years ended December 31, 2008, 2007 and 2006,
respectively.
Research
and Development
Research
and development costs are expensed as incurred. Engineers and technical staff
are involved in the production of our products as well as on-going research,
with no segregation of the portion of their salaries relating to research and
development from the portion of their salaries relating to production. The total
salaries are included in cost of goods sold. Research and development expense
for the years ended December 31, 2008, 2007 and 2006 is $1,528,992,
$870,219 and $742,705, respectively. The increased investment in research and
development demonstrates the Company’s focus on knowledge-based
products.
Purchased
In-Process Research and Development
In a
business combination, assets acquired to be used in R&D activities are
separately identifiable assets and each one is allocated a portion of the cost
of the acquired company based on its fair value. The value assigned to
acquisition related in-process technology was determined by identifying those
acquired specific in-process research and development projects that would be
continued and for which (a) technological feasibility had not been
established at the acquisition date, (b) there was no alternative future
use, and (c) the fair value was not determinable with reasonable
reliability. In-process research and development is that did not meet the
criteria above were charged to expense as of the date of the
combination. The Company recorded a charge for in-process research and
development of $12.2 million related to the acquisition of GHK.
Retirement
Benefits
Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to expense as incurred. The
retirement benefits expense for 2008, 2007 and 2006 is $457,432, $237,363 and
$43,506, respectively and is included in general and administrative
expenses.
Foreign
Currency Translation
The
accompanying consolidated financial statements are presented in United States
dollars. The functional currency of the Company
’
subsidiaries
operate in PRC is the
Chinese
Renminbi
(RMB). Capital accounts of the consolidated financial statements
are translated into United States dollars from RMB at their historical exchange
rates when the capital transactions occurred. Assets and liabilities are
translated at the exchange rates as of balance sheet date. Income and
expenditures are translated at the average exchange rate of the
year.
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Year
end RMB : US$ exchange rate
|
|
|
6.8542
|
|
|
|
7.3141
|
|
|
|
7.8175
|
|
Average
yearly RMB : US$ exchange rate
|
|
|
7.0842
|
|
|
|
7.5658
|
|
|
|
7.9439
|
|
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
The RMB is not freely convertible into foreign currency and all
foreign exchange transactions must take place through authorized institutions.
No representation is made that the RMB amounts could have been, or could be,
converted into USD at the rates used in translation.
Comprehensive
Income
Comprehensive
income is defined to include changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
items that are required to be recognized under current accounting standards as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other financial
statements. Comprehensive income includes net income and the foreign currency
translation gain.
Stock-Based
Compensation (Restated)
The
Company adopted Statement of Financial Accounting Standards (“SFAS”)
No. 123R in the first quarter of 2006, at which time the Company began
recognizing an expense for unvested share-based compensation that has been
issued or will be issued after that date. The Company adopted SFAS No. 123R
on a prospective basis.
The
Company estimates fair value of restricted stock based on the number of shares
granted and the quoted price of the Company’s common stock on the date of grant.
The fair value of stock options is estimated using the Black-Scholes model. The
Company’s expected volatility assumption is based on the historical volatility
of Company’s stock. The expected life assumption is primarily based on
historical exercise patterns and post-vesting termination behavior. The
risk-free interest rate for the expected term of the option is based on the U.S.
Treasury yield curve in effect at the time of grant.
Stock
compensation expense recognized is based on awards expected to vest, and there
were no estimated forfeitures as the current options outstanding were only
issued to founders and senior executives of the Company, which have very low
turnover. SFAS No. 123R requires forfeitures to be estimated at the time of
grant and revised in subsequent periods, if necessary, if actual forfeitures
differ from those estimates.
The fair
value of the stock based compensation expense for year ended December 31,
2008, 2007 and 2006 was $1,700,671, $777,795 and $138,046,
respectively.
Income
Taxes
The
Company accounts for income tax using an asset and liability approach and allows
for recognition of deferred tax benefits in future years. Under the asset and
liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will expire before either the Company is able to realize
their benefits, or that future realization is uncertain. The Company had adopted
FIN 48 January 1, 2007. See Note 16
Segmental
Reporting
Prior to
the acquisition of Nuo Hua and the consolidation of its business in October
2008, the Company operated in one significant business segment: manufacturing
and commercialization of pharmaceutical and nutraceutical products. Since
October 2008, the Company has two operating segments based on its major lines of
businesses: manufacturing and distribution. Each operating segment derives its
revenues from the sale of products or services, respectively and each is the
responsibility of a group of senior management of the Company who has knowledge
of product and service specific operational risks and opportunities. The
Company’s chief operating decision maker reviews and evaluates two sets of
financial information deciding how to allocate resources and in assessing
performance.
For the
years ended December 31, 2008, 2007 and 2006 the Company’s manufacturing
and distribution revenue, are as follows:
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenue
from pharmaceutical products
|
|
$
|
224,904,348
|
|
|
$
|
127,823,297
|
|
|
$
|
79,367,161
|
|
Revenue
from nutraceutical products
|
|
|
34,266,739
|
|
|
|
32,659,086
|
|
|
|
30,814,931
|
|
Total
manufacturing revenue
|
|
|
259,171,087
|
|
|
|
160,482,383
|
|
|
|
110,182,092
|
|
Distribution
revenue
|
|
|
5,471,971
|
|
|
|
—
|
|
|
|
—
|
|
Total
sales revenue
|
|
$
|
264,643,058
|
|
|
$
|
160,482,383
|
|
|
$
|
110,182,092
|
|
The
Company has recorded $5,471,971 distribution revenue from Nuo Hua since its
acquisition on October 18, 2008. The Company had no distribution revenue
for the years ended December 31, 2007 and 2006.
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
For the
years ended December 31, 2008, 2007 and 2006 the Company’s segments are as
follows:
|
|
Year Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
Operating
income from pharmaceutical products
|
|
$
|
49,874,480
|
|
|
$
|
37,706,161
|
|
|
$
|
24,190,975
|
|
Operating
income from nutraceutical products
|
|
|
13,542,261
|
|
|
|
14,054,995
|
|
|
|
12,186,712
|
|
Total
manufacturing operating income
|
|
|
63,416,741
|
|
|
|
51,761,156
|
|
|
|
36,377,687
|
|
Distribution
operating income
|
|
|
75,765
|
|
|
|
—
|
|
|
|
—
|
|
Total
operating income
|
|
$
|
63,492,506
|
|
|
$
|
51,761,156
|
|
|
$
|
36,377,687
|
|
The
Company’s manufacturing operating income from manufacturing segment included the
purchased in-process research and development amounting to
$12,255,248.
At
December 31, 2008 and 2007 total assets for the manufacturing and
distribution segments are as follows:
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Manufacturing
|
|
$
|
316,767,049
|
|
|
$
|
321,042,121
|
|
Distribution
|
|
|
52,445,008
|
|
|
|
—
|
|
Corporate
|
|
|
159,463,675
|
|
|
|
37,308,967
|
|
Total
assets
|
|
$
|
528,675,732
|
|
|
$
|
358,351,088
|
|
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The majority of the
Company’s cash as of December 31, 2008 is in our current working capital
account, among which, $39,589,261 was the US Dollar equivalent in Renminbi
(“RMB”) held in China and $31,047,249 was outside China in US Dollars and HK
Dollars. Included in the cash balance as of December 31, 2008 was
$2,575,741 restricted cash for the issuance of bank acceptance
notes.
Accounts
Receivable
Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts is
made when collection of the full amount is no longer probable. Bad debts are
written off as incurred. The allowance for doubtful accounts was $226,330 and
$302,270 as of December 31, 2008 and 2007, respectively.
Inventories
Inventories
consisting of raw materials, work-in-progress and finished goods are stated at
the lower of weighted average cost or market value. Finished goods are comprised
of direct materials, direct labor and an appropriate proportion of
overhead.
Fair
Value of Financial Instruments
The
Company’s financial instruments include cash and cash equivalents, accounts
receivable, advances to suppliers, notes receivable, other current assets, taxes
payable, accounts payable, accrued expenses, debt, customer deposits and other
payables. Management has estimated that the carrying amount approximates their
fair value due to their short-term nature or long-term debt interest rates
approximate the current market rates.
Construction
In Progress
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction in
progress is transferred to property, plant and equipment when substantially all
the activities necessary to prepare the assets for their intended use are
completed. No depreciation is provided until it is completed and ready for
intended use.
Land
Use Rights
According
to the law of China, the government owns all the land in China. Companies or
individuals are authorized to possess and use the land only through land use
rights granted by the Chinese government. Land use rights are being amortized
using the straight-line method over the lease term of 40 to 50
years.
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
Property,
Plant and Equipment
Property,
plant and equipment are carried at cost less accumulated depreciation.
Depreciation is provided over their estimated useful lives, using the
straight-line method. Estimated useful lives of the property, plant and
equipment are as follows:
Buildings
|
40 years
|
Machinery
and equipment
|
10
years
|
Motor
vehicles
|
5
years
|
Office
equipment
|
5
years
|
Other
equipment
|
5
years
|
Leasehold
improvements
|
10
years
|
The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to the statement of
income as incurred, whereas significant renewals and betterments are
capitalized.
Other
Intangible Assets
Other
intangible assets include product licenses, trademarks, patents and proprietary
technology. The cost of the product licenses are amortized over their licensed
period of 2 to 12 years; the cost of trademarks are amortized over their
registered period of 2 to 10 years; the cost of patents are amortized over their
protection period of 7 to 20 years and the cost of proprietary technology is
amortized over its protection period of 10 years.
Goodwill
Goodwill
and other intangible assets are accounted for in accordance with the provisions
of SFAS No. 142, “Goodwill and Other Intangible Assets”. Under
SFAS 142, goodwill, including any goodwill included in the carrying value
of investments accounted for using the equity method of accounting, and certain
other intangible assets deemed to have indefinite useful lives are not
amortized. Rather, goodwill and such indefinite-lived intangible assets are
assessed for impairment at least annually based on comparisons of their
respective fair values to their carrying values. Finite-lived intangible assets
are amortized over their respective useful lives and, along with other
long-lived assets, are evaluated for impairment periodically whenever events or
changes in circumstances indicate that their related carrying amounts may not be
recoverable in accordance with SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets”.
In
evaluating long-lived assets for recoverability, including finite-lived
intangibles and property and equipment, the Company uses its best estimate of
future cash flows expected to result from the use of the asset and eventual
disposition in accordance with SFAS No.144. To the extent that estimated
future, undiscounted cash inflows attributable to the asset, less estimated
future, undiscounted cash outflows, are less than the carrying amount, an
impairment loss is recognized in an amount equal to the difference between the
carrying value of such asset and its fair value. Assets to be disposed of and
for which there is a committed plan of disposal, whether through sale or
abandonment, are reported at the lower of carrying value or fair value less
costs to sell.
There
were no impairment losses recognized for the periods presented.
Economic
and Political Risks
The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.
The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among other
things.
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
New
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (R),
Business Combinations
. SFAS
No. 141 (R) requires an acquirer to measure the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at their fair values on the acquisition date, with goodwill being the
excess value over the net identifiable assets acquired. SFAS No. 141
(R) is effective for financial statements issued for fiscal years beginning
after December 15, 2008. Early adoption is prohibited. SFAS 141
(R) will significantly affect the accounting for future business
combinations and we will determine the accounting as new combinations
occur.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements
. This Statement establishes accounting
and reporting standards that require the ownership interests in subsidiaries’
non-parent owners be clearly presented in the equity section of the balance
sheet; requires the amount of consolidated net income attributable to the parent
and to the noncontrolling interest be clearly identified and presented on the
face of the consolidated statement of income; requires that changes in a
parent’s ownership interest while the parent retains its controlling financial
interest in its subsidiary be accounted for consistently; requires that when a
subsidiary is deconsolidated, any retained noncontrolling equity investment in
the former subsidiary be initially measured at fair value and the gain or loss
on the deconsolidation of the subsidiary be measured using the fair value of any
noncontrolling equity; requires that entities provide disclosures that clearly
identify the interests of the parent and the interests of the noncontrolling
owners. This Statement is effective as of the beginning of an entity’s first
fiscal year that begins after December 15, 2008. We are aware that our
accounting for minority interest will change and we are considering those
effects now but believe the effects will only be a reclassification of minority
interest from mezzanine equity to our shareholders’ equity section in the
balance sheet. The Company has not determined the impact, if any, SFAS
No. 160 will have on its financial statements.
In
March 2008, the FASB issued FAS No. 161,
Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133
. FAS No. 161 changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to provide
disclosures about (a) how and why derivative instruments are used,
(b) how derivative instruments and related hedged items are accounted for
under FAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities,
and its related interpretations, and
(c) how derivative instruments and related hedged items affect the entity’s
financial position, financial performance, and cash flows. FAS No. 161 is
effective January 1, 2009. We are currently evaluating the impact of
adopting this statement.
NOTE
4 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
During
the review of its third quarter September 30, 2009 operating results, the
Company identified isolated historical accounting errors in: (i) the calculation
of stock based compensation, (ii) the recognition of deferred tax liabilities of
certain acquired assets and (iii) the provision of deferred tax liabilities on
undistributed earnings. The accounting errors have resulted in the misstatement
of certain balance sheet and income statement items and the
cumulative net earnings since 2006. The Company has no evidence that the errors
resulted from any fraud or intentional misconduct. The Company undertook a
review to determine the total amount of the errors and the accounting periods in
which the errors occurred. Although the impact of each individual error
identified or in aggregate was not material, c
onsidering the effects of prior year misstatements when
quantifying misstatements in current year financial statements, the Company
chose to restate its previously reported financial
statements.
The
restatement corrects three historical accounting errors identified:
(i)
The Company identified historical accounting errors in
stock-based compensation expense for years ended December 31, 2008 and 2007. The
errors were identified after the Company re-examined the calculation of
expected
volatility. The Company used monthly price observations to
derive the standard deviation of expected monthly returns but failed to
annualize the standard deviation as required by the Black Scholes Model. The
Company have understated the expected volatility and thus understated the
fair value of option being granted. The impact is the
understatement of stock-based compensation expenses being amortized in
subsequent periods. The errors also led to an inflated number of options being
granted when the grants were approved based on the total estimated fair value
instead of the quantity of options.
The
Company determined that the aggregate stock-based compensation expense error
related to the periods discussed above totaled $1.3 million. To correct these
errors, the Company has recorded additional non-cash stock-based compensation
expense of $0.8 million in 2008, $0.5 million in 2007. The Company has also
cancelled 723,493 options granted in 2008 based the revised options fair value.
The cumulative effect of the stock-based compensation adjustments on the
consolidated balance sheets for the years ended 2008 and 2007 resulted in an
increase in additional paid-in capital offset by a corresponding change in
retained earning which resulted in no net effect on shareholders’
equity.
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
(ii)
The Company identified errors in
the recognition
of deferred tax liabilities of certain acquired assets and the corresponding
goodwill
for years ended December 31, 2007 and
2006. The errors were identified when the Company reviewed and re-evaluated
applicable tax laws at the time of acquisitions. T
he Company
acquired 100% of Guangxi Lingfeng Pharmaceutical Co., Ltd. (“GLP”) and Guangxi
Boke Pharmaceutical Co., Ltd. (“Boke”) in 2006 and 2007, respectively. The
acquisitions were accounted under business combination The purchase prices was
allocated to assets and liabilities to the extend of their fair value and the
excess was accounted for as goodwill. The Company also provided deferred tax for
the
fair value
adjustments.
GLP and
Boke measured the deferred tax related to fair value adjustments at its
preferential tax rate at the acquisition date of 15%. The Company
subsequently determined that according to “Cai Shui [2001] 202”issued in 2001,
the preferential tax rate of 15% would expire in year 2010. The Company should
have been using the then enacted statutory tax rate of 30%, instead of 15%, in
measuring its deferred tax for anticipated reversal post 2010. Furthermore, when
new Corporate Income Tax Law was enacted in March 2007, the companies’ deferred
tax should have been re-measured at the new enacted statutory corporate tax rate
of 25%. This rate change was not recorded by the
companies.
The
Company determined that the aggregate errors related to the initial recording of
the deferred tax at acquisition totaled approximately $4.0 million which was
corrected with the off-setting entry recorded to Goodwill in May 2006
and in October 2007. The Company also corrected the subsequent change in tax
rate by reducing the deferred tax of approximately $1.0 million with the
off-setting entry to income tax expenses in 2007. The related translation impact
was recorded to Other Comprehensive Income accordingly. The adjustment
affected certain applicable financial statements as of and for the years
ended December 31, 2008, 2007 and 2006.
(iii)
The
Company identified errors in the recording of a deferred tax liability on its
foreign subsidiaries’ post-2007 undistributed earnings. The errors were
identified after the Company re-examined applicable tax laws and accounting
standards. Since the Company has asserted permanent reinvestment of its foreign
subsidiaries’ undistributed earnings, no deferred tax liability should have been
recorded for any outside basis differences and related translation adjustments.
The original accounting entry was a credit to Deferred Tax Liability and a debit
to Other Comprehensive Income recorded at the end of 2008 for the foreign
currency translation adjustment during 2008. Since the foreign currency
translation adjustment is a component of Other Comprehensive Income, we
basically reversed the original entry to correct the error.
The
Company determined that the aggregate error related to this issue totaled
approximately $3.2 million. To correct this error, the Company wrote-off the
deferred tax liability with the off-setting entry to Other Comprehensive Income
in 2008. The error has no impact to revenue or cash and cash equivalents but
impacted the consolidated balance sheet and changes in shareholders'
equity as of and for the year ended December 31, 2008.
The
Company has restated certain applicable financial statements as of and for the
years ended December 31, 2008, 2007 and 2006. The following discloses each
line item on the Company’s consolidated financial statements as originally
reported in the Company’s annual report on Form 10-K for the year ended
December 31, 2008 filed with the Securities and Exchange Commission on
March 9, 2009, the increase (decrease) in each line item on the
Company’s consolidated financial statements as a result of the restatement and
each line item on the Company’s consolidated financial statements as
restated.
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008
|
|
|
As
of December 31, 2007
|
|
|
As
of December 31, 2006
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,297
|
|
|
$
|
15,297
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Goodwill
|
|
|
28,543,226
|
|
|
|
4,620,895
|
|
|
|
33,164,121
|
|
|
|
22,566,768
|
|
|
|
4,620,895
|
|
|
|
27,187,663
|
|
|
|
1,933,100
|
|
|
|
3,194,295
|
|
|
|
5,127,395
|
|
Total
assets
|
|
|
524,054,837
|
|
|
|
4,620,895
|
|
|
|
528,675,732
|
|
|
|
353,714,896
|
|
|
|
4,636,192
|
|
|
|
358,351,088
|
|
|
|
185,273,946
|
|
|
|
3,194,295
|
|
|
|
188,468,241
|
|
Deferred
tax liability - current
|
|
|
846,026
|
|
|
|
(667,095
|
)
|
|
|
178,931
|
|
|
|
109,733
|
|
|
|
(109,733
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred
tax liability - non current
|
|
|
16,083,768
|
|
|
|
1,551,743
|
|
|
|
17,635,511
|
|
|
|
12,621,180
|
|
|
|
4,050,444
|
|
|
|
16,671,624
|
|
|
|
4,580,698
|
|
|
|
3,275,812
|
|
|
|
7,856,510
|
|
Total
liabilities
|
|
|
178,194,557
|
|
|
|
884,648
|
|
|
|
179,079,205
|
|
|
|
40,631,806
|
|
|
|
3,940,711
|
|
|
|
44,572,517
|
|
|
|
29,096,704
|
|
|
|
3,275,812
|
|
|
|
32,372,516
|
|
Additional
paid-in capital
|
|
|
195,741,544
|
|
|
|
1,305,144
|
|
|
|
197,046,688
|
|
|
|
193,007,987
|
|
|
|
466,954
|
|
|
|
193,474,941
|
|
|
|
92,307,960
|
|
|
|
-
|
|
|
|
92,307,960
|
|
Retained
earnings
|
|
|
149,923,681
|
|
|
|
(171,077
|
)
|
|
|
149,752,604
|
|
|
|
102,117,792
|
|
|
|
575,197
|
|
|
|
102,692,989
|
|
|
|
58,826,911
|
|
|
|
-
|
|
|
|
58,826,911
|
|
Accumulated
other comprehensive income
|
|
|
29,086,006
|
|
|
|
2,602,180
|
|
|
|
31,688,186
|
|
|
|
16,266,986
|
|
|
|
(346,670
|
)
|
|
|
15,920,316
|
|
|
|
4,378,072
|
|
|
|
(81,517
|
)
|
|
|
4,296,555
|
|
Total equity
|
|
|
345,860,280
|
|
|
|
3,736,247
|
|
|
|
349,596,527
|
|
|
|
313,083,090
|
|
|
|
695,481
|
|
|
|
313,778,571
|
|
|
|
156,177,242
|
|
|
|
(81,517
|
)
|
|
|
156,095,725
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
524,054,837
|
|
|
$
|
4,620,895
|
|
|
$
|
528,675,732
|
|
|
$
|
353,714,896
|
|
|
$
|
4,636,192
|
|
|
$
|
358,351,088
|
|
|
$
|
185,273,946
|
|
|
$
|
3,194,295
|
|
|
$
|
188,468,241
|
|
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
|
Year
Ended December 31, 2008
|
|
|
Year
Ended December 31, 2007
|
|
|
Year
Ended December 31, 2006
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$
|
18,765,757
|
|
|
$
|
838,190
|
|
|
$
|
19,603,947
|
|
|
$
|
13,365,156
|
|
|
$
|
466,954
|
|
|
$
|
13,832,110
|
|
|
$
|
10,446,740
|
|
|
$
|
-
|
|
|
$
|
10,446,740
|
|
Income
from operations
|
|
|
64,330,696
|
|
|
|
(838,190
|
)
|
|
|
63,492,506
|
|
|
|
52,228,110
|
|
|
|
(466,954
|
)
|
|
|
51,761,156
|
|
|
|
36,377,687
|
|
|
|
-
|
|
|
|
36,377,687
|
|
Income
before income tax
|
|
|
60,533,277
|
|
|
|
(838,190
|
)
|
|
|
59,695,087
|
|
|
|
52,344,280
|
|
|
|
(466,954
|
)
|
|
|
51,877,326
|
|
|
|
36,618,061
|
|
|
|
-
|
|
|
|
36,618,061
|
|
Income
tax
|
|
|
12,727,388
|
|
|
|
(91,916
|
)
|
|
|
12,635,472
|
|
|
|
9,053,399
|
|
|
|
(1,042,151
|
)
|
|
|
8,011,248
|
|
|
|
7,416,915
|
|
|
|
-
|
|
|
|
7,416,915
|
|
Net
income
|
|
|
47,805,889
|
|
|
|
(746,274
|
)
|
|
|
47,059,615
|
|
|
|
43,290,881
|
|
|
|
575,197
|
|
|
|
43,866,078
|
|
|
|
29,201,146
|
|
|
|
-
|
|
|
|
29,201,146
|
|
Foreign
currency translation gain
|
|
|
12,819,020
|
|
|
|
2,948,850
|
|
|
|
15,767,870
|
|
|
|
10,105,577
|
|
|
|
1,518,184
|
|
|
|
11,623,761
|
|
|
|
2,506,474
|
|
|
|
360,802
|
|
|
|
2,867,276
|
|
Comprehensive
income
|
|
|
60,624,909
|
|
|
|
2,202,576
|
|
|
|
62,827,485
|
|
|
|
53,396,458
|
|
|
|
2,093,381
|
|
|
|
55,489,839
|
|
|
|
31,707,620
|
|
|
|
360,802
|
|
|
|
32,068,422
|
|
Basic
EPS
|
|
|
0.62
|
|
|
|
-
|
|
|
|
0.62
|
|
|
|
0.62
|
|
|
|
-
|
|
|
|
0.63
|
|
|
|
0.47
|
|
|
|
-
|
|
|
|
0.47
|
|
Diluted
EPS
|
|
$
|
0.61
|
|
|
$
|
-
|
|
|
$
|
0.61
|
|
|
$
|
0.61
|
|
|
$
|
-
|
|
|
$
|
0.61
|
|
|
$
|
0.46
|
|
|
$
|
-
|
|
|
$
|
0.46
|
|
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND
2006
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year
Ended December 31, 2008
|
|
|
Year
Ended December 31, 2007
|
|
|
Year
Ended December 31, 2006
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
47,805,889
|
|
|
$
|
(746,274
|
)
|
|
$
|
47,059,615
|
|
|
$
|
43,290,881
|
|
|
$
|
575,197
|
|
|
$
|
43,866,078
|
|
|
$
|
29,201,146
|
|
|
$
|
-
|
|
|
$
|
29,201,146
|
|
Deferred
tax
|
|
|
4,246,499
|
|
|
|
(3,040,766
|
)
|
|
|
1,205,733
|
|
|
|
930,932
|
|
|
|
(776,998
|
)
|
|
|
153,934
|
|
|
|
49,307
|
|
|
|
(81,517
|
)
|
|
|
(32,210
|
)
|
Stock
option compensation expense
|
|
|
862,481
|
|
|
|
838,190
|
|
|
|
1,700,671
|
|
|
|
310,841
|
|
|
|
466,954
|
|
|
|
777,795
|
|
|
|
138,046
|
|
|
|
-
|
|
|
|
138,046
|
|
Net
cash provided by operating activities
|
|
|
77,758,717
|
|
|
|
(2,948,850
|
)
|
|
|
74,809,867
|
|
|
|
45,099,379
|
|
|
|
265,153
|
|
|
|
45,364,532
|
|
|
|
29,093,464
|
|
|
|
(81,517
|
)
|
|
|
29,011,947
|
|
Effect
of exchange rate change on cash
|
|
|
2,893,647
|
|
|
|
2,948,850
|
|
|
|
5,842,497
|
|
|
|
6,538,273
|
|
|
|
(265,153
|
)
|
|
|
6,273,120
|
|
|
|
1,386,956
|
|
|
|
81,517
|
|
|
|
1,468,473
|
|
Cash
and cash equivalents, end of year
|
|
$
|
70,636,510
|
|
|
$
|
-
|
|
|
$
|
70,636,510
|
|
|
$
|
166,410,075
|
|
|
$
|
-
|
|
|
$
|
166,410,075
|
|
|
$
|
87,784,419
|
|
|
$
|
-
|
|
|
$
|
87,784,419
|
|
|
|
Three
Months Ended March 31, 2008
|
|
|
Three
Months Ended June 30, 2008
|
|
|
Three
Months Ended September 30, 2008
|
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$
|
3,912,683
|
|
|
$
|
202,705
|
|
|
$
|
4,115,388
|
|
|
$
|
5,253,274
|
|
|
$
|
176,351
|
|
|
$
|
5,429,625
|
|
|
$
|
4,467,638
|
|
|
$
|
223,155
|
|
|
$
|
4,690,793
|
|
Income
from operations
|
|
|
11,977,020
|
|
|
|
(202,705
|
)
|
|
|
11,774,315
|
|
|
|
18,677,700
|
|
|
|
(176,351
|
)
|
|
|
18,501,349
|
|
|
|
21,846,863
|
|
|
|
(223,155
|
)
|
|
|
21,623,708
|
|
Income
before income tax
|
|
|
11,892,077
|
|
|
|
(202,705
|
)
|
|
|
11,689,372
|
|
|
|
17,751,306
|
|
|
|
(176,351
|
)
|
|
|
17,574,955
|
|
|
|
20,845,253
|
|
|
|
(223,155
|
)
|
|
|
20,622,098
|
|
Income
tax
|
|
|
2,469,948
|
|
|
|
(22,299
|
)
|
|
|
2,447,649
|
|
|
|
3,891,614
|
|
|
|
(23,009
|
)
|
|
|
3,868,605
|
|
|
|
4,362,334
|
|
|
|
(23,289
|
)
|
|
|
4,339,045
|
|
Net
income
|
|
|
9,422,129
|
|
|
|
(180,406
|
)
|
|
|
9,241,723
|
|
|
|
13,859,692
|
|
|
|
(153,342
|
)
|
|
|
13,706,350
|
|
|
|
16,482,919
|
|
|
|
(199,866
|
)
|
|
|
16,283,053
|
|
Foreign
currency translation gain
|
|
|
6,934,434
|
|
|
|
2,148,769
|
|
|
|
9,083,203
|
|
|
|
5,154,761
|
|
|
|
859,027
|
|
|
|
6,013,788
|
|
|
|
729,272
|
|
|
|
(82,867
|
)
|
|
|
646,405
|
|
Comprehensive
income
|
|
|
16,356,563
|
|
|
|
1,968,363
|
|
|
|
18,324,926
|
|
|
|
19,014,453
|
|
|
|
705,685
|
|
|
|
19,720,138
|
|
|
|
17,212,191
|
|
|
|
(282,733
|
)
|
|
|
16,929,458
|
|
Basic
EPS
|
|
|
0.12
|
|
|
|
-
|
|
|
|
0.12
|
|
|
|
0.18
|
|
|
|
-
|
|
|
|
0.18
|
|
|
|
0.22
|
|
|
|
-
|
|
|
|
0.22
|
|
Diluted
EPS
|
|
$
|
0.12
|
|
|
$
|
-
|
|
|
$
|
0.12
|
|
|
$
|
0.18
|
|
|
$
|
-
|
|
|
$
|
0.18
|
|
|
$
|
0.21
|
|
|
$
|
-
|
|
|
$
|
0.21
|
|
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
NOTE
5 - EARNINGS PER SHARE
Basic
earnings per share are computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding,
excluding common shares to be delivered under a prepaid forward repurchase
contract (3,712,700 shares), during the period. Diluted earnings per share is
computed similar to basic earnings per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive.
The
following is a reconciliation of the numerator and denominator used in the
calculation of basic and diluted earnings per share available to common
shareholders.
|
|
Year Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
47,059,615
|
|
|
$
|
43,866,078
|
|
|
$
|
29,201,146
|
|
Interest
expense on convertible securities, net of taxes
|
|
|
2,635,417
|
|
|
|
—
|
|
|
|
—
|
|
Amortization
of financing costs, net of taxes
|
|
|
425,466
|
|
|
|
—
|
|
|
|
—
|
|
Net
income, as adjusted
|
|
$
|
50,120,498
|
|
|
$
|
43,866,078
|
|
|
$
|
29,201,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - Basic
|
|
|
76,504,035
|
|
|
|
69,870,775
|
|
|
|
62,679,996
|
|
Effect
of dilutive instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
—
|
|
|
|
54,295
|
|
|
|
56,111
|
|
Convertible
notes
|
|
|
5,749,763
|
|
|
|
—
|
|
|
|
—
|
|
Warrants
|
|
|
387
|
|
|
|
1,439,174
|
|
|
|
177,854
|
|
Weighted
average shares outstanding - Diluted
|
|
|
82,254,185
|
|
|
|
71,364,244
|
|
|
|
62,913,961
|
|
The
calculation of diluted earnings per share for the year December 31, 2008
excludes the potential exercise of options to purchase approximately 193,900
common shares, because their effect would be anti-dilutive.
As more
fully discussed in Notes 16, the Company had certain convertible notes
outstanding during the years presented. The aggregate number of shares of common
stock that could be issued in the future to settle these notes is deemed
outstanding for the purposes of the calculation of diluted earnings per share.
This approach, referred to as the if-converted method, requires that such shares
be deemed outstanding regardless of whether the notes are then contractually
convertible into the Company’s common stock. For this if-converted calculation,
the interest expense (net of tax) attributable to these notes is added back to
Net Income, reflecting the assumption that the notes have been
converted.
NOTE
6 - INVENTORIES
Inventories
are summarized as follows:
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Raw
materials
|
|
$
|
5,569,981
|
|
|
$
|
7,509,497
|
|
Work
in progress
|
|
|
2,350,291
|
|
|
|
2,685,053
|
|
Finished
goods
|
|
|
5,289,280
|
|
|
|
2,307,413
|
|
|
|
|
13,209,552
|
|
|
|
12,501,963
|
|
Less:
provision for slow moving inventories
|
|
|
(167,429
|
)
|
|
|
(237,427
|
)
|
Inventories,
net
|
|
$
|
13,042,123
|
|
|
$
|
12,264,536
|
|
NOTE
7 - NOTES RECEIVABLE
Notes
receivable are bank acceptance notes collected from customers. All the notes do
not bear interest and are to be received within one year.
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
NOTE
8 - LAND USE RIGHTS
Land use
rights consist of the following:
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Cost
of land use rights
|
|
$
|
152,297,695
|
|
|
$
|
48,177,647
|
|
Less:
Accumulated amortization
|
|
|
(3,308,825
|
)
|
|
|
(1,867,407
|
)
|
Land
use rights, net
|
|
$
|
148,988,870
|
|
|
$
|
46,310,240
|
|
As of
December 31, 2008, the net book value of land use rights pledged as
collateral was $21,170,021. See Note 14.
Amortization
expense for the years ended December 31, 2008, 2007 and 2006 was
$1,357,929, $835,562 and $585,243, respectively.
Amortization
expense for the next five years and thereafter is as follows:
2009
|
|
$
|
2,947,091
|
|
2010
|
|
$
|
2,947,091
|
|
2011
|
|
$
|
2,947,091
|
|
2012
|
|
$
|
2,947,091
|
|
2013
|
|
$
|
2,947,091
|
|
Thereafter
|
|
$
|
134,253,415
|
|
Total
|
|
$
|
148,988,870
|
|
NOTE
9 - CONSTRUCTION IN PROGRESS
Construction
in progress as of December 31, 2008 and 2007 was $25,385,835 and $755,614,
respectively. During 2008, the Company acquired land use rights located close to
its operating subsidiaries and started construction projects for the expansion
of manufacturing facilities.
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
NOTE
10 - PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consist of the following:
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
At
cost:
|
|
|
|
|
|
|
Buildings
|
|
$
|
91,261,579
|
|
|
$
|
41,017,380
|
|
Machinery
and equipment
|
|
|
20,665,315
|
|
|
|
17,949,890
|
|
Motor
vehicles
|
|
|
1,568,059
|
|
|
|
1,320,091
|
|
Office
equipment
|
|
|
1,543,300
|
|
|
|
1,137,140
|
|
Other
equipment
|
|
|
482,097
|
|
|
|
446,326
|
|
Leasehold
improvements
|
|
|
29,150
|
|
|
|
108,348
|
|
|
|
|
115,549,500
|
|
|
|
61,979,175
|
|
Less
: Accumulated depreciation
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
(4,732,906
|
)
|
|
|
(3,305,219
|
)
|
Machinery
and equipment
|
|
|
(10,782,285
|
)
|
|
|
(8,774,745
|
)
|
Motor
vehicles
|
|
|
(998,535
|
)
|
|
|
(694,256
|
)
|
Office
equipment
|
|
|
(771,630
|
)
|
|
|
(510,926
|
)
|
Other
equipment
|
|
|
(91,078
|
)
|
|
|
(118,528
|
)
|
Leasehold
improvements
|
|
|
(18,623
|
)
|
|
|
(78,741
|
)
|
|
|
|
(17,395,057
|
)
|
|
|
(13,482,415
|
)
|
Property,
plant and equipment, net
|
|
$
|
98,154,443
|
|
|
$
|
48,496,760
|
|
In 2008,
we invested and purchased buildings in Beijing Economic-Technological
Development Area for $47,545,960.
As of
December 31, 2008, the net book value of property, plant and equipment
pledged as collateral for bank loans was $19,650,294. See Note 14.
Depreciation
expense for the years ended December 31, 2008, 2007 and 2006 was
$3,396,747, $2,470,923 and $1,796,691, respectively.
NOTE
11 - OTHER INTANGIBLE ASSETS
Other
intangible assets include product licenses, trademarks, patents, proprietary
technology and software. The cost of the product licenses are amortized over
their estimated useful lives of 10 to 12 years; the cost of trademarks are
amortized over their registered useful lives of 4 to 10 years; the cost of
patents are amortized over their protection period of 7 to 8 years; the cost of
proprietary technology are amortized over their protection period of 10 years
and the cost of software are amortized over their estimated useful life of 10
years. Other intangible assets are summarized as follows:
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
At
cost:
|
|
|
|
|
|
|
Product
licenses
|
|
$
|
15,485,939
|
|
|
$
|
15,742,705
|
|
Trademarks
|
|
|
10,558,660
|
|
|
|
9,894,747
|
|
Patents
|
|
|
4,796,179
|
|
|
|
3,264,102
|
|
Proprietary
technology
|
|
|
281,664
|
|
|
|
263,954
|
|
Software
|
|
|
73,640
|
|
|
|
—
|
|
|
|
|
31,196,082
|
|
|
|
29,165,508
|
|
Less:
Accumulated amortization
|
|
|
(7,505,642
|
)
|
|
|
(2,193,342
|
)
|
Other
intangible assets, net
|
|
$
|
23,690,440
|
|
|
$
|
26,972,166
|
|
Amortization
expense for the years ended December 31, 2008, 2007 and 2006 was
$5,165,133, $1,351,288 and $94,413, respectively.
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
Amortization
expense for the next five years and thereafter is as follows:
2009
|
|
$
|
5,168,020
|
|
2010
|
|
$
|
5,168,020
|
|
2011
|
|
$
|
5,058,598
|
|
2012
|
|
$
|
3,516,430
|
|
2013
|
|
$
|
1,117,567
|
|
Thereafter
|
|
$
|
3,661,805
|
|
Total
|
|
$
|
23,690,440
|
|
NOTE
12 - ACQUISITIONS
2008
Acquisitions
1.
Nuo Hua Acquisition
On
October 18, 2008, the Company acquired from the Nuo Hua Investment Company
Limited (“Nuo Hua”) shareholders all of the issued and outstanding shares of
capital stock of Nuo Hua. Nuo Hua owns 55% equity of Yushuntang Pharmaceutical
Co., Ltd. in Jilin province, and 30% equity of a wholesale and distribution
company in Shandong province, (“Nuo Hua Affiliate”). Nuo Hua, through its
subsidiary and affiliated company, distributes pharmaceutical products through
sales network covering major urban and rural areas in China.
Nuo Hua consolidates YST'S financial results and account for Nuo
Affiliate using equity accounting.
The
acquisition cost was $39,500,000 in cash and the amount was paid in full as of
December 31, 2008.
The
following table summarizes the consideration paid for Nuo Hua and the amounts of
the assets acquired and liabilities assumed recognized at the acquisition date,
as well as the fair value at the acquisition date of the non-controlling
interest in Nuo Hua’s 55% owned subsidiary Yushuntang Pharmaceutical Co.,
Ltd..
Fixed
assets
|
|
$
|
126,612
|
|
30%
Equity investment in Nuo Hua Affiliate
|
|
|
33,353,879
|
|
Accounts
receivable
|
|
|
4,480,710
|
|
Inventory
|
|
|
1,424,039
|
|
Other
current assets
|
|
|
252,505
|
|
Total
assets purchased
|
|
|
39,637,745
|
|
Accounts
payables
|
|
|
4,347,904
|
|
Other
current liabilities
|
|
|
515,656
|
|
Total
liabilities assumed
|
|
|
4,863,560
|
|
Non-controlling
interest in Yushuntang
|
|
|
625,070
|
|
Net
assets acquired
|
|
|
34,149,115
|
|
Total
consideration paid
|
|
|
39,500,000
|
|
Goodwill
|
|
$
|
5,350,885
|
|
The
Company performed valuation of the acquired assets and assumed liabilities
internally based on guidance sets forth by FAS 141, par. 37. The 30% Equity
investment in Nuo Hua Affiliate is based on appraised value. If the final
valuation, which is expected to be completed within 12 months from the closing
of the acquisition, derives different amounts from our estimate, we will adjust
these amounts to goodwill.
2.
GHK Acquisition
On
October 20, 2008, the Company acquired from the GuangXi HuiKe
Pharmaceutical Research and Development Co., Ltd. (“GHK”) shareholders all of
the issued and outstanding shares of capital stock of GHK. GHK is engaged in
pharmaceutical research and product development leading to SFDA approval and
expedient product launches in China. The Company provides research and
development through innovative technology, raw material selection, extraction
and production of pharmaceutical products.
The
acquisition cost was $13,605,844 (including $5,844 in transaction cost) in cash
and the amount was paid in full as of December 31, 2008. Certain assets
acquired from GHK qualify for recognition as intangible assets apart from
goodwill, a portion of the purchase price allocation, $12,255,248 million,
representing in-process research and development was charged to expense as of
the date of the acquisition because it did not meet one of the following
criteria (a) technological feasibility had not been established at the
acquisition date, (b) there was no alternative future use, and (c) the
fair value was not determinable with reasonable reliability.
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
The
accompanying consolidated financial statements include the following allocation
of the acquisition cost to the net assets acquired and liabilities assumed based
on their respective fair values.
IPR&D
|
|
$
|
12,255,248
|
|
Fixed
assets
|
|
|
492,129
|
|
Cash
|
|
|
38,441
|
|
Other
receivables and prepayments
|
|
|
14,238
|
|
Total
assets purchased
|
|
|
12,800,056
|
|
Other
payables and accrued expenses
|
|
|
33,836
|
|
Total
liabilities assumed
|
|
|
33,836
|
|
Net
assets acquired
|
|
|
12,766,220
|
|
Total
consideration paid
|
|
|
13,605,844
|
|
Goodwill
|
|
$
|
839,624
|
|
The
amount of the purchase price allocated to the acquired in-process research and
development represents the estimated value based on risk-adjusted cash flows
related to in-process projects that have not yet reached technological
feasibility and have no alternative future uses as of the date of the
acquisition. The primary basis for determining the technological feasibility of
these projects is obtaining regulatory approval to market the underlying
products.
The value
assigned to the acquired IPR&D was determined by estimating the costs to
develop the acquired technology into commercially viable products, estimating
the resulting net cash flows from the projects, and discounting the net cash
flows to their present value. The revenue projections used to value the acquired
IPR&D was based on estimates of relevant market sizes and growth factors and
the nature and expected timing of new product introductions by us and our
competitors. The resulting net cash flows from such projects were based on our
estimates of cost of sales, operating expenses, and income taxes from such
projects.
The rate
of 10 percent utilized to discount the net cash flows to their present
value was based on estimated cost of capital plus a risk premium. Due to the
nature of the forecasts and the risks associated with the developmental
projects, appropriate risk-adjusted discount rates were used for the IPR&D
projects. The discount rates are based on the stage of completion and
uncertainties surrounding the successful development of the purchased in-process
technology projects.
GHK was
working on seven R&D project at the time of acquisition. The purchased
in-process technology of GHK relates to research and development projects in
both pharmaceutical and nutraceutical product families. The Company continues to
evaluate certain of these projects for their feasibility and alignment with the
Company’s core strategic objectives.
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
Details
of the acquired IPR&D were summarized as follow:
Material
Project
|
Fair
Value Assigned
|
Project
Description
|
Completeness
at Acquisition Date and Efforts to Complete the Projects
|
Estimated
Cost to Complete the Project
|
Anticipated
Completion Date
|
Project
1
|
$1,700,000
|
Nutraceutical
product to increase bone density
|
Waiting
for appraisal meeting with SFDA
|
$73,000
|
June
2009
|
Project
2
|
$2,111,000
|
Pharmaceutical
product to treat disease related to urinary system
|
Passed
efficacy test
|
$4,469,000
|
October
2010
|
Project
3
|
$1,759,000
|
Pharmaceutical
product for simple obesity
|
Waiting
for approval notice and will start pre-production trial
process
|
$58,000
|
March
2009
|
Project
4
|
$1,584,000
|
Pharmaceutical product
for anti radiation
|
Applied
for production license
|
$66,000
|
May
2009
|
Project
5
|
$1,349,000
|
Functional
Cosmetics
|
Passed
efficacy test
|
$58,000
|
October
2009
|
Project
6
|
$1,876,000
|
Pharmaceutical
product for illness related to liver and kidney
|
Waiting
for approval notice and will start pre-production trial
process
|
$1,796,000
|
August
2010
|
Project
7
|
$1,876,000
|
Pharmaceutical
product treating cough
|
Passed
efficacy test
|
$1,657,000
|
October
2009
|
*
Represents projects completed prior to November 2009
The
amount of the purchase price allocated to the acquired in-process research and
development represents the estimated value based on risk-adjusted cash flows
related to in process projects that have not yet reached technological
feasibility and have no alternative future uses as of the date of the
acquisition. The primary basis for determining the technological feasibility of
these projects is obtaining regulatory approval to market the underlying
products.
The value
assigned to the acquired IPR&D was determined by estimating the costs to
develop the acquired technology into commercially viable products, estimating
the resulting net cash flows from the projects, and discounting the net cash
flows to their present value. The revenue projections used to value the acquired
IPR&D was based on estimates of relevant market sizes and growth factors and
the nature and expected timing of new product introductions by us and our
competitors. The resulting net cash flows from such projects were
based on our estimates of cost of sales, operating expenses, and income taxes
from such projects.
The rate
of 10 percent utilized to discount the net cash flows to their present value was
based on estimated cost of capital plus a risk premium. Due to the nature of the
forecasts and the risks associated with the developmental projects, appropriate
risk-adjusted discount rates were used for the IPR&D projects. The discount
rates are based on the stage of completion and uncertainties surrounding the
successful development of the purchased in-process technology
projects.
If the
final valuation, which is expected to be completed within 12 months from the
closing of the acquisition, derives different amounts from our estimate, we will
adjust these amounts
The
results of operations for Nuo Hua and GHK are included in the consolidated
results of operations commencing October 18, 2008 and October 20,
2008, respectively.
The
following unaudited pro forma combined condensed statements of income for the
year ended December 31, 2008 and 2007 have been prepared as if the
acquisitions of Nuo Hua and GHK occurred on January 1, 2008 and 2007. The
statements are based on accounting for the business acquisitions under purchase
accounting. The pro forma information may not be indicative of the results that
actually would have occurred if the acquisition had been in effect from and on
the dates indicated or which may be obtained in the future.
|
|
Unaudited
Pro Forma Combined
(Restated)
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$
|
322,081,293
|
|
|
$
|
218,444,959
|
|
Income
from Operations
|
|
|
63,521,268
|
|
|
|
52,127,117
|
|
Net
Income
|
|
|
47,691,945
|
|
|
|
44,488,627
|
|
Net
Income Per Share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.62
|
|
|
$
|
0.64
|
|
Diluted
|
|
$
|
0.62
|
|
|
$
|
0.62
|
|
Weighted
Average number of shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
76,504,035
|
|
|
|
69,870,775
|
|
Diluted
|
|
|
82,254,185
|
|
|
|
71,364,244
|
|
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
2007
Acquisitions
1. Boke Acquisition
(Restated)
On
October 18, 2007, the Company acquired from Guangxi Boke Pharmaceutical
Limited (“Boke”) shareholders all of the issued and outstanding shares of
capital stock of Boke. Boke is a pharmaceutical company located in the city of
Nanning in Guangxi Province of the PRC and it manufactures and distributes
plant-based pharmaceutical, nutraceutical and personal care products, marketed
primarily in China.
The
acquisition cost was $36,966,471 (including $466,741 in transaction cost) in
cash and the amount was paid in full as of December 31, 2007.
The
accompanying consolidated financial statements include the following allocation
of the acquisition cost to the net assets acquired and liabilities assumed based
on their respective fair values.
Land
use right
|
|
$
|
4,772,779
|
|
Other
intangible assets
|
|
|
17,441,676
|
|
Fixed
assets
|
|
|
4,018,429
|
|
Cash
|
|
|
491,381
|
|
Accounts
receivable
|
|
|
1,116,711
|
|
Inventories
|
|
|
877,974
|
|
Other
receivables and prepayments
|
|
|
1,779,502
|
|
Total
assets purchased
|
|
|
30,498,452
|
|
Other
payables and accrued expenses
|
|
|
1,124,639
|
|
Deferred
taxes payable
|
|
|
4,757,319
|
|
Total
liabilities assumed
|
|
|
5,881,958
|
|
Net
assets acquired
|
|
|
24,616,494
|
|
Total
consideration paid
|
|
|
36,966,471
|
|
Goodwill
|
|
$
|
12,349,977
|
|
2. CCXA
Acquisition
On
September 5, 2007, the Company acquired from Changchun Xinan Pharmaceutical
Group Company Limited (“CCXA”) shareholders all of the issued and outstanding
shares of capital stock of CCXA. CCXA is a pharmaceutical company specializing
in manufacturing and distribution of plant-based medicines and is based in
Changchun, Jilin Province, China. CCXA’s products cover both the prescription
and OTC markets.
The
acquisition cost was $29,398,358 in cash (including $898,358 of transaction
costs) and the amount was paid in full as of December 31,
2007.
The
accompanying consolidated financial statements include the following allocation
of the acquisition cost to the net assets acquired and liabilities assumed based
on their respective fair values.
Land
use right
|
|
$
|
6,836,912
|
|
Other
intangible assets
|
|
|
9,688,027
|
|
Fixed
assets
|
|
|
9,051,130
|
|
Cash
|
|
|
700
|
|
Accounts
receivable
|
|
|
345,657
|
|
Inventories
|
|
|
690,109
|
|
Other
receivables and prepayments
|
|
|
55,640
|
|
Other
current assets
|
|
|
41,643
|
|
Total
assets purchased
|
|
|
26,709,818
|
|
Other
payables and accrued expenses
|
|
|
195,475
|
|
Long
term bank loans
|
|
|
2,639,039
|
|
Deferred
taxes payable
|
|
|
3,977,058
|
|
Total
liabilities assumed
|
|
|
6,811,572
|
|
Net
assets acquired
|
|
|
19,898,246
|
|
Total
consideration paid
|
|
|
29,398,358
|
|
Goodwill
|
|
$
|
9,500,112
|
|
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
The
results of operations for Boke and CCXA are included in the consolidated results
of operations commencing October 19, 2007 and September 6, 2007,
respectively.
The
following unaudited pro forma combined condensed statements of income for the
year ended December 31, 2007 and 2006 have been prepared as if the
acquisitions of Boke and CCXA had occurred on January 1, 2007 and 2006. The
statements are based on accounting for the business acquisition under purchase
accounting. The pro forma information may not be indicative of the results that
actually would have occurred if the acquisition had been in effect from and on
the dates indicated or which may be obtained in the future.
|
|
Unaudited
Pro Forma Combined
(Restated)
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Revenues
|
|
$
|
175,561,278
|
|
|
$
|
130,789,447
|
|
Income
from Operations
|
|
|
53,765,665
|
|
|
|
40,094,533
|
|
Net
Income
|
|
|
45,296,764
|
|
|
|
32,040,287
|
|
Net
Income Per Share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.65
|
|
|
$
|
0.51
|
|
Diluted
|
|
$
|
0.63
|
|
|
$
|
0.51
|
|
Weighted
Average number of shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
69,870,775
|
|
|
|
62,679,996
|
|
Diluted
|
|
|
71,364,244
|
|
|
|
62,913,961
|
|
NOTE
13 - INVESTMENTS AND ADVANCES IN UNCONSOLIDATED ENTITIES
Long-term
investments and advances include our equity investment in CAXG, Nuo Hua
Affiliate and Hezhou Jinji Color Printing Co Ltd. (“Jinji”). CAXG is a
China-based pharmaceutical company specializing in research, development,
manufacturing and distribution of narcotic and pain-management products in
China. Nuo Hua Affiliate maintains a significant presence in pharmaceutical
wholesale and retail distribution in China. Jinji is a color printing company
focusing on the printing of external packaging materials.
The
Company owns 38% equity interest in CAXG through an $18 million direct
investment of its common stock in April 2008. The cost of investment in excess
of our estimate of the underlying equity in net assets at the time of the
investments was $1,369,799. The Company owns 30% equity interest in Nuo Hua
Affiliate through the acquisition of Nuo Hua in October 2008 and the Company
owns 40% equity interest in Jinji through the acquisition of GLP in April 2006.
Long-term investments are accounted for using the equity accounting
method.
The
following table summarizes the long-term investments and advances as of
December 31, 2008 and 2007:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
Cost
of investments:
|
|
|
|
|
|
|
CAXG
|
|
$
|
18,000,000
|
|
|
$
|
—
|
|
Nuo
Hua Affiliate
|
|
|
32,999,023
|
|
|
|
—
|
|
Jinji
|
|
|
86,067
|
|
|
|
86,067
|
|
Share
of equity income (loss):
|
|
|
|
|
|
|
|
|
CAXG
|
|
|
(1,580,344
|
)
|
|
|
—
|
|
Nuo
Hua Affiliate
|
|
|
773,415
|
|
|
|
—
|
|
Jinji
|
|
|
42,303
|
|
|
|
28,672
|
|
Advances:
|
|
|
|
|
|
|
|
|
CAXG
|
|
|
4,520,209
|
|
|
|
—
|
|
Jinji
|
|
|
122,391
|
|
|
|
127,812
|
|
Long-term
investment and advances
|
|
$
|
54,963,064
|
|
|
$
|
242,551
|
|
Included
in the advance to CAXG is a RMB30 million, or approximately US$4.3 million,
convertible promissory note. The note bears interest at a rate of 8% payable
quarterly in arrears and matures in one year. CAXG may elect to make the
quarterly loan payments in cash or to convert the payments into shares of its
common stock. The Company also has the option to receive payment in shares of
CAXG’s common stock if CAXG is either unable to repay the loan in cash or
consents to the conversion of its payment obligations into shares of its common
stock.
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
NOTE
14 - DEBT
Short-term
bank loans are obtained from local banks with interest rates 7.47% per
annum. All the short-term bank loans are repayable within one year and are
secured by property, plant and equipment and land use rights owned by the
Company. See Notes 7 and 9.
Short-term
loans are summarized as follows:
No.
|
|
Due
Date
|
|
Interest Rate
Per
Annum
|
|
|
December 31,
2008
|
|
1.
|
|
March
14, 2009
|
|
|
7.470
|
%
|
|
$
|
729,480
|
|
2.
|
|
March
28, 2009
|
|
|
8.541
|
%
|
|
|
428,934
|
|
3.
|
|
April
16, 2009
|
|
|
7.470
|
%
|
|
|
1,458,959
|
|
4.
|
|
May
9, 2009
|
|
|
7.470
|
%
|
|
|
729,480
|
|
5.
|
|
May
22, 2009
|
|
|
7.470
|
%
|
|
|
729,480
|
|
6.
|
|
August
11, 2009
|
|
|
7.470
|
%
|
|
|
875,376
|
|
7.
|
|
August
14, 2009
|
|
|
7.470
|
%
|
|
|
1,458,959
|
|
8.
|
|
September
9, 2009
|
|
|
7.470
|
%
|
|
|
729,480
|
|
|
|
|
|
|
|
|
|
$
|
7,140,148
|
|
|
|
|
|
|
|
|
|
|
|
|
No.
|
|
Due
Date
|
|
Interest Rate
Per
Annum
|
|
|
December 31,
2007
|
|
1.
|
|
March
30, 2008
|
|
|
6.438
|
%
|
|
$
|
683,611
|
|
2.
|
|
April
19, 2008
|
|
|
6.482
|
%
|
|
|
1,367,222
|
|
3.
|
|
May
8, 2008
|
|
|
6.570
|
%
|
|
|
683,611
|
|
4.
|
|
June
3, 2008
|
|
|
6.570
|
%
|
|
|
683,611
|
|
5.
|
|
September
20, 2008
|
|
|
7.290
|
%
|
|
|
820,333
|
|
6.
|
|
September
5, 2008
|
|
|
7.020
|
%
|
|
|
1,367,222
|
|
7.
|
|
October
11, 2008
|
|
|
7.290
|
%
|
|
|
683,612
|
|
|
|
|
|
|
|
|
|
$
|
6,289,222
|
|
Long-term
loans include a mortgage loan that bears 4.25% interest per annum and is
repayable over 15 years. The principal amount of long-term loans is not payable
until the end of the term. Long-term loans are summarized as
follows:
|
|
December 31,
2008
|
|
|
December 31,
2007
|
|
Loan
from HSBC, due December 31, 2021, bearing a 4.250% interest rate per
annum, secured by the office in CNT Tower.
|
|
$
|
863,180
|
|
|
$
|
911,807
|
|
Loan
from Jilin Bank Changchun Heping Branch, due March 28, 2009, bearing
an 8.541% interest rate per annum, secured by building.
|
|
|
—
|
|
|
|
401,963
|
|
Loan
from Jilin Bank Changchun Heping Branch, due November 1, 2008,
bearing an 8.190% interest rate per annum, secured by
building.
|
|
|
—
|
|
|
|
1,367,222
|
|
Loan
from Jilin Bank Changchun Heping Branch, due June 18, 2008, bearing a
7.839% interest rate per annum, secured by building.
|
|
|
—
|
|
|
|
957,056
|
|
Total
long-term loan
|
|
|
863,180
|
|
|
|
3,638,048
|
|
Less:
current portion of long-term loan
|
|
|
58,659
|
|
|
|
2,374,565
|
|
Long-term
portion
|
|
$
|
804,521
|
|
|
$
|
1,263,483
|
|
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
The
repayment schedule is as below:
No.
|
|
|
Due
Date
|
|
Interest Rate
Per
Annum
|
|
|
December 31,
2008
|
|
|
1.
|
|
December
31, 2009
|
|
|
4.250
|
%
|
|
$
|
58,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term loans
|
|
|
|
|
|
|
58,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.
|
|
December
31, 2010
|
|
|
4.250
|
%
|
|
|
60,141
|
|
|
3.
|
|
December
31, 2011
|
|
|
4.250
|
%
|
|
|
61,663
|
|
|
4.
|
|
December
31, 2012
|
|
|
4.250
|
%
|
|
|
63,220
|
|
|
5.
|
|
December
31, 2013
|
|
|
4.250
|
%
|
|
|
64,821
|
|
|
6.
|
|
December
31, 2014
|
|
|
4.250
|
%
|
|
|
66,460
|
|
|
|
|
Thereafter
(Due December 31, 2021)
|
|
|
4.250
|
%
|
|
|
488,216
|
|
Long-term
portion
|
|
|
|
|
|
|
804,521
|
|
|
|
|
|
|
|
|
|
|
$
|
863,180
|
|
Current
notes payable was $3,262,877 as of December 31, 2008 with an annual
interest rate of 1.98% and is repayable on demand. The long-term notes payable
was $269,908 as of December 31, 2008 with an annual interest rate of
11.73%. Long-term notes payable will be fully repaid by January
2010.
Interest
expense for all outstanding debt was $1,244,411, $855,715 and $571,892 for the
years ended December 31, 2008, 2007 and 2006 respectively.
NOTE
15 - DEPOSIT FOR LONG-TERM ASSETS
Deposits
for long term assets are refundable deposits to acquire land use rights
located in the PRC. The long-lived assets to be acquired will be for use in
the expansion of some of the Company's current manufacturing facilities and are
not intended for resale by the Company. The deposits will be reclassified to the
respective accounts under the long lived assets upon the transfers
of legal title.
NOTE
16 - CONVERTIBLE NOTES AND PREPAID FORWARD CONTRACT
On
July 15, 2008, the Company closed a private offering and issued $115
million aggregate principal amount of 5.00% Convertible Senior Notes due 2015
(the “Notes”). The Notes were sold to qualified institutional buyers in a
private placement exempt from the registration requirements of the Securities
Act of 1933, as amended. The net proceeds from the sale of the Notes was
approximately $110.0 million, after deducting the placement agents’ commission
and estimated offering expenses payable by the Company.
The
following is a brief summary of certain terms of this offering.
|
•
|
Total
offering is $115,000,000 aggregate principal amount of 5.00% Convertible
Senior Notes due on July 15,
2015.
|
|
•
|
Interest
at 5.00% per year, payable semiannually in arrears in
cash.
|
|
•
|
The
notes are convertible, at the option of the holder, at any time prior to
the close of business on the second business day preceding the maturity
date based on an initial conversion rate of 107.6195 shares per $1,000
principal amount of notes, which represents an initial conversion price of
approximately $9.29 per share. (See
blow)
|
|
•
|
The
conversion rate is subject to certain adjustments. In particular, holders
who convert their notes in connection with certain fundamental changes may
be entitled to a make whole premium in the form of additional shares of
our common stock.
|
|
•
|
The
initial conversion rate may be adjusted on January 15, 2009 if the
volume weighted average price (“VWAP”) of our common stock for each of the
30 consecutive trading days ending on January 15, 2009 is less than
$8.08 per share, then the conversion rate will be increased as a one-time
purchase price adjustment such that the conversion price as adjusted would
represent the greater of (1) 115.0% of such arithmetic average of the
daily VWAP and (2) $8.08. (See
below)
|
|
•
|
Holders
may require the Company to purchase all or a portion of their notes on
July 15, 2013 for cash at a price equal to 100% of the principal
amount of the notes to be purchased, plus accrued and unpaid interest, if
any, to, but excluding, the purchase
date.
|
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
|
•
|
If
a fundamental change occurs, holders will have the right to require the
Company to purchase for cash all or any portion of their notes. The
fundamental change purchase price will be 100% of the principal amount of
the notes to be purchased plus accrued and unpaid interest, if any, to,
but excluding, the fundamental change purchase
date.
|
|
•
|
The
notes will be direct unsecured, unsubordinated obligations and will rank
equal in right of payment to all of the Company’s existing and future
unsecured and unsubordinated indebtedness. The notes will be effectively
subordinated to all of the Company’s existing and future secured
indebtedness.
|
Convertible
notes issuance costs incurred by the Company that were directly attributable to
the issuance of convertible notes were deferred and are charged to the
consolidated statements of income using the straight-line method over the term
of the convertible notes, the results of which approximate the effective
interest rate method.
The
Company has determined that the conversion feature embedded in the Convertible
Notes is not required to be bifurcated and accounted for as a derivative
pursuant to SFAS No. 133 “Accounting for Derivative Instruments and Hedging
Activities”, since the embedded conversion feature is indexed to the Company’s
own stock and would be classified in shareholders’ equity if it was a
free-standing instrument. Further, since the conversion price of the Convertible
Notes exceeded the market price of the Company’s ordinary shares on the date of
issuance of Convertible Notes, no portion of the proceeds from the issuance was
accounted for as attributable to the conversion feature.
Subsequent
to year end, as the VWAP of our common stock for each of the 30 consecutive
trading days ending on January 15, 2009 was $6.02 per share and 115% of the
VWAP is $6.9183, the initial conversion price of $9.29 per share was adjusted to
$8.08 on January 15, 2009.
NOTE
17 - PREPAID FORWARD SHARES REPURCHASE TRANSACTION
In
connection with the offering of the Notes, the Company entered into a prepaid
forward shares repurchase contract with an affiliate of the lead placement agent
(“Merrill affiliate”). Pursuant to the prepaid forward shares repurchase
contract, the Company paid approximately $30 million to the Merrill affiliate to
fund the purchase of 3.7 million shares of common stock for settlement at
or about maturity of the notes. The forward shares purchase transaction was also
intended to reduce the potential dilution of our common stock that would result
from the conversion of the Convertible Notes into shares of our common
stock.
The
company accounted for the forward shares purchase transaction pursuant to
guidance in EITF 00-19, “Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock.” Accordingly, the $30.0
million cost of the forward stock purchase transaction was recorded as a
reduction to additional paid in capital in the Balance Sheet as of
December 31, 2008 and will not recognize subsequent changes in fair
value.
The
Company is potentially subject to significant concentration of credit risk with
respect to the prepaid forward repurchase contract. The fact that Merrill
affiliate has merged with Bank of America reduced the bankruptcy and default
risk. We will closely monitor the third depositary and may request early
settlement of the contract prior to the maturity of the convertible
notes.
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
NOTE
18 - SHAREHOLDERS’ EQUITY
Preferred
Stock
The
Company had 1,000,000 shares of Series A preferred stock (“Series A”) issued and
outstanding. Pursuant to the terms of the Series A, the holder holds aggregate
voting power equal to 25% of the combined voting power of our common stock and
preferred stock. The percentage of voting power represented by the Series A
cannot be diluted by the issuance of additional shares of common stock. The
Series A has a liquidation preference equal to its initial issue price that will
be paid to the holders of the Series A upon liquidation, dissolution or winding
up and prior to any distributions being made to holders of our common
stock.
Common
Stock
A. Issuance of Common
Stock
The
Company entered into two consulting agreements during 2008 and issued 26,748
shares of common stock as part of the consulting fees. The Company recorded a
total of deferred consulting expenses of $260,000, based on the market value of
the common stock at the date of grants, which has been and will be amortized
over a one-year service period. Of the total value, $236,000 was amortized
through December 31, 2008.
B. Stock Options
(Restated)
As part
of the 2008 Compensation review and analysis, on April 9, 2008 the
Compensation Committee of the Board of Directors of the Company approved grant
of stock options to the Company’s principal executive officer, principal
financial officer and certain other executives. Stock options for 413,763 shares
of common stock at a per share exercise price of $8.35 were granted under the
Company’s 2006 Equity Incentive Plan (the “2006 Plan”) and will vest ratably
over a five year period. The Company valued the stock options at $1,990,200. The
value of the options was estimated using the Black Scholes Model with an
expected volatility of 56.9%, expected life of 6.5 years and risk-free interest
rate of 2.93 %.
On
May 23, 2008, the Company granted stock options for 100,000 shares of
common stock at a per share exercise price of $11.20 to a Company’s senior
member of the management under the 2006 Plan and will vest ratably over a five
year period. The Company valued the stock options at $665,000. The value of the
options was estimated using the Black Scholes Model with an expected volatility
of 58.4%, expected life of 6.5 years and risk-free interest rate of 3.45 %. This
granted stock options was subsequently cancelled in November 2008.
On
November 25, 2008, the Company granted stock options for 314,500 shares of
common stock at a per share exercise price of $4.95 to a group of senior
management under the 2006 Plan and will vest ratably over a five year period.
The Company valued the stock options at $1,050,430. The value of the options was
estimated using the Black Scholes Model with an expected volatility of 64.8%,
expected life of 6.5 years and risk-free interest rate of 2.41 %.
The
Company recorded total stock option compensation expenses $1,700,671 for 2008.
Of the total value of the old and new option grants, $8,257,234 has not yet been
recognized and will be amortized over the requisite service
periods.
The
following table summarizes the stock option activities of the
Company:
|
|
Activity
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding
as of January 1, 2008
|
|
|
974,500
|
|
|
$
|
10.03
|
|
Granted
|
|
|
828,263
|
|
|
$
|
7.40
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
Cancelled
|
|
|
(105,000
|
)
|
|
$
|
11.07
|
|
Outstanding
as of December 31, 2008 (Restated)
|
|
|
1,697,763
|
|
|
$
|
8.68
|
|
The
following table summarizes information about stock options outstanding as of
December 31, 2008:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Range of Exercise Prices
|
|
|
Number of
Shares
(Restated)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
$8.54-$10.74
|
|
|
|
969,500
|
|
|
$
|
10.04
|
|
|
|
4
|
|
|
|
193,900
|
|
|
$
|
10.04
|
|
|
$4.95-$8.35
|
|
|
|
728,263
|
|
|
$
|
6.88
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
1,697,763
|
|
|
|
|
|
|
|
|
|
|
|
193,900
|
|
|
|
|
|
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
All the
options granted have exercise price equal to the market price and they have no
intrinsic value at the grant date. The weighted average fair value per share of
the 1,697,763 options issued under the Plan is $8.68 per share. As of
December 31, 2008, the Company has 193,900 outstanding vested stock
options, with an exercise price above the average market price, are excluded
from the Company’s diluted computation.
C. Common Stock to be
Issued
For the
year ended December 31, 2008, the Company recorded general and
administrative expenses $376,332, respectively, for the stock compensation in
connection with the services rendered by the Company’s independent directors. A
total of 42,472 shares of common stock are issuable to independent directors as
of December 31, 2008.
NOTE
19 - COMMITMENTS
As of
December 31, 2008, the Company entered into unconditional capital
commitments for the purchase of land use rights and construction of
manufacturing facilities in the PRC for $7,666,839 within one year and
$11,734,773 after one year.
As of
December 31, 2008, the Company has no material unconditional purchase
commitments for raw materials, packing materials and advertising.
NOTE
20 - INCOME TAX
(a)
Corporation Income Tax (“CIT”)
The
Company has not recorded a provision for U.S. federal income tax for the year
ended December 31, 2008 due to the net operating loss carry forward in the
United States. Net operating loss carry forward in the United States as of
December 31, 2008 was $11,737,378 and it will expire in year 2024 and will
end in 2027.
On
March 16, 2007, the National People’s Congress of China approved the new
Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”),
which is effective from January 1, 2008.
Prior to
January 1, 2008, CIT rate applicable to our subsidiaries in the PRC range
from 0% to 33%. GLP is entitled to a full exemption from CIT in year 2006 and
2007. Three Happiness, on the other hand, enjoys a favorable tax rate of 15% as
it is located in a special economic development zone and is considered a high
technology company by the Chinese government. Boke also enjoys a favorable tax
rate of 15% as it is located in a Western province of China. HSPL, HQPL and CCXA
do not qualify for any tax concession and have a 33% tax rate.
After
January 1, 2008, under the new CIT Law, the corporate income tax rate
applicable to most companies is 25% instead of the old tax rate of 33%. The new
CIT Law also provides certain tax concession to selective eligible companies
based on their location and enterprise status. GLP and Boke enjoy a favorable
tax rate of 15% as they are located in the Western province of China. Three
Happiness, HSPL and CCXA were granted high-tech enterprise status and also enjoy
a favorable tax rate of 15% from 2008 to 2010. High-tech enterprise status is
renewable and re-application should be done prior to the tax preferences expire.
HQPL, Nuo Hua and GHK do not qualify for any tax concession and they have a 25%
tax rate.
Since the
Company decided to reinvest the earnings from foreign subsidiaries indefinitely,
we have no temporary differences or unrecognized deferred tax liabilities
related to investments in foreign subsidiaries
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
The
Company’s tax expense differs from the “expected” tax expense as
follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Income
tax computed at the statutory tax rate at 33% for year 2006 and 2007 and
25% for year 2008
|
|
$
|
14,923,772
|
|
|
$
|
17,119,518
|
|
|
$
|
12,083,960
|
|
Changes
in valuation allowance
|
|
|
3,174,394
|
|
|
|
1,813,132
|
|
|
|
1,322,400
|
|
Preferential
tax rate effect
|
|
|
(8,424,544
|
)
|
|
|
(10,013,546
|
)
|
|
|
(6,088,647
|
)
|
Effect
of tax rate changes on deferred tax
|
|
|
-
|
|
|
|
(1,042,151
|
)
|
|
|
-
|
|
Permanent
difference:
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
off IPR&D expenses
|
|
|
3,063,812
|
|
|
|
-
|
|
|
|
-
|
|
Others
|
|
|
(101,962
|
)
|
|
|
134,295
|
|
|
|
99,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$
|
12,635,472
|
|
|
$
|
8,011,248
|
|
|
$
|
7,416,915
|
|
Preferential
tax effect reflects the difference between enacted tax rate and favorable tax
concession granted to certain subsidiaries of the Company.
The
provisions for income taxes for the year ended December 31, 2008, 2007 and
2006 are summarized as follows:
|
|
Year Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
Current
|
|
$
|
12,469,511
|
|
|
$
|
8,840,665
|
|
|
$
|
7,908,963
|
|
Deferred
|
|
|
165,961
|
|
|
|
(829,417
|
)
|
|
|
(492,048
|
)
|
Total
|
|
$
|
12,635,472
|
|
|
$
|
8,011,248
|
|
|
$
|
7,416,915
|
|
The tax
effects of temporary differences that give rise to the Company’s net deferred
tax liabilities as of December 31, 2008 and 2007 are as
follows:
|
|
Year Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Deferred
tax assets
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Bad
debts
|
|
$
|
9,651
|
|
|
$
|
—
|
|
Other
costs
|
|
|
337,565
|
|
|
|
15,297
|
|
Total
current deferred tax assets
|
|
|
347,216
|
|
|
|
15,297
|
|
Non-current
|
|
|
|
|
|
|
|
|
Bad
debts
|
|
|
216,094
|
|
|
|
211,551
|
|
Amortization
|
|
|
164,313
|
|
|
|
98,239
|
|
Other
costs
|
|
|
858,636
|
|
|
|
801,840
|
|
Stock
provision
|
|
|
32,083
|
|
|
|
289,511
|
|
Depreciation
|
|
|
42,706
|
|
|
|
97,340
|
|
Total
non-current deferred tax assets
|
|
|
1,313,832
|
|
|
|
1,498,481
|
|
Total
deferred tax assets
|
|
$
|
1,661,048
|
|
|
$
|
1,513,778
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Over
accrual of welfare
|
|
$
|
(114,842
|
)
|
|
$
|
—
|
|
Boke
acquisition
|
|
|
-
|
|
|
|
—
|
|
CCXA
acquisition
|
|
|
45,704
|
|
|
|
|
|
Other
|
|
|
(109,793
|
)
|
|
|
|
|
Total
current deferred tax liabilities
|
|
|
(178,931
|
)
|
|
|
-
|
|
Non-current
|
|
|
|
|
|
|
|
|
Over
accrual of welfare
|
|
|
(18,283
|
)
|
|
|
(146,154
|
)
|
Amortization
|
|
|
(291,034
|
)
|
|
|
(208,519
|
)
|
Depreciation
|
|
|
(130,803
|
)
|
|
|
(51,976
|
)
|
Government
grant
|
|
|
(1,019,319
|
)
|
|
|
(887,633
|
)
|
GLP
acquisition
|
|
|
(6,362,131
|
)
|
|
|
(6,049,506
|
)
|
CCXA
acquisition
|
|
|
(4,429,843
|
)
|
|
|
(4,340,893
|
)
|
Boke
acquisition
|
|
|
(5,334,072
|
)
|
|
|
(4,889,663
|
)
|
Other
|
|
|
(50,026
|
)
|
|
|
(97,280
|
)
|
Total
non-current deferred tax liabilities
|
|
|
(17,635,511
|
)
|
|
|
(16,671,624
|
)
|
Total
deferred tax liabilities
|
|
|
(17,814,442
|
)
|
|
|
(16,671,624
|
)
|
Net
deferred tax liabilities
|
|
$
|
(16,15
3,394
|
)
|
|
$
|
(15,1
57,846
|
)
|
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
The
Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109 ,” (“FIN 48”), on
January 1, 2007. The Company did not have any material unrecognized
tax benefits and there was no effect on its financial condition or results of
operations as a result of implementing FIN 48.
(b) Value
Added Tax (“VAT”)
Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
or export goods in the PRC are subject to a value added tax in accordance with
the PRC laws. The value added tax standard rate is 17% of the gross sales price
and the Company records its revenue net of VAT. A credit is available whereby
VAT paid on the purchases of semifinished products or raw materials used in
the production of the Company’s finished products can be used to offset the VAT
due on the sales of the finished products.
The VAT
payable balance of $6,262,715 and $3,722,621 at December 31, 2008 and 2007
respectively are included in Other Payables and Accrued Expenses in the
accompanying consolidated balance sheets.
(c) Tax
Holiday (Restated)
Income
before income tax expense was $59.7 million, $51.9 million and $36.6 million for
2008, 2007 and 2006 and was mainly attributed to subsidiaries with operations in
China. Income tax related to China income for 2008 was $12.7 million. The
combined unaudited pro forma effects of the income tax expense exemption and
reduction available to us are as follows:
|
|
Year Ended December 31,
(Unaudited)
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Tax
holiday effect
|
|
$
|
8,424,544
|
|
|
$
|
2,270,741
|
|
Basic
net income per share exclude tax holiday effect
|
|
$
|
0.51
|
|
|
$
|
0.60
|
|
NOTE
21 - NON-CASH TRANSACTIONS
2008
Issued
26,748 shares of common stock valued at $260,000 for consulting
services.
2007
Assets of
$2,126,189 were transferred from construction in progress to property, plant and
equipment at completion.
Issued
20,000 shares of common stock valued at $260,000 for investment banking
services.
2006
Assets of
$3,836,919 were transferred from construction in progress to property, plant and
equipment at completion.
Issued
30,000 shares of common stock valued at $142,200 for consulting
services.
Issued
1,200,000 shares of common stock valued at $5,640,000 as part of the
consideration for the acquisition of GLP.
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
NOTE
22 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The
tables below list the quarterly financial information.
|
|
Quarters
Ended
(Restated)
|
|
|
|
31-Mar
|
|
|
30-Jun
|
|
|
30-Sep
|
|
|
31-Dec
|
|
Year
Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
38,768,598
|
|
|
$
|
59,010,005
|
|
|
$
|
70,593,949
|
|
|
$
|
96,270,506
|
|
GROSS
PROFIT
|
|
$
|
26,290,962
|
|
|
$
|
40,081,558
|
|
|
$
|
47,191,542
|
|
|
$
|
60,047,722
|
|
NET
INCOME
|
|
$
|
9,241,723
|
|
|
$
|
13,706,350
|
|
|
$
|
16,283,053
|
|
|
$
|
7,828,489
|
|
Basic
net income per common share
|
|
$
|
0.12
|
|
|
$
|
0.18
|
|
|
$
|
0.22
|
|
|
$
|
0.10
|
|
Diluted
net income per common share
|
|
$
|
0.12
|
|
|
$
|
0.18
|
|
|
$
|
0.21
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
25,722,577
|
|
|
$
|
33,913,234
|
|
|
$
|
43,514,049
|
|
|
$
|
57,332,523
|
|
GROSS
PROFIT
|
|
$
|
17,704,317
|
|
|
$
|
23,702,749
|
|
|
$
|
30,680,797
|
|
|
$
|
39,030,034
|
|
NET
INCOME
|
|
$
|
6,446,267
|
|
|
$
|
9,573,210
|
|
|
$
|
11,742,459
|
|
|
$
|
16,104,142
|
|
Basic
net income per common share
|
|
$
|
0.10
|
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
|
$
|
0.22
|
|
Diluted
net income per common share
|
|
$
|
0.10
|
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
|
$
|
0.20
|
|
The
Company has restated certain applicable financial statements as of and for the
years ended December 31, 2008 and 2007 and 2006 as discussed in Note 4.
The
unaudited interim financial statements for the year ended 2006 are not disclosed
separately as the overall impact of the restatement to the periods is not
significant. The following tables present the effects of the restatement
on the Company’s unaudited interim financial statements for 2008 and
2007.
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
As
of March 31, 2007
|
|
|
As
of June 30, 2007
|
|
|
As
of September 30, 2007
|
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
Deferred
tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Goodwill
|
|
|
1,933,100
|
|
|
|
3,194,295
|
|
|
|
5,127,395
|
|
|
|
1,933,100
|
|
|
|
3,194,295
|
|
|
|
5,127,395
|
|
|
|
11,467,270
|
|
|
|
3,194,295
|
|
|
|
14,661,565
|
|
Total
assets
|
|
|
192,369,644
|
|
|
|
3,194,295
|
|
|
|
195,563,939
|
|
|
|
207,584,474
|
|
|
|
3,194,295
|
|
|
|
210,778,769
|
|
|
|
317,455,282
|
|
|
|
3,194,295
|
|
|
|
320,649,577
|
|
Deferred
tax liability - current
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred
tax liability - non current
|
|
|
4,614,058
|
|
|
|
3,308,228
|
|
|
|
7,922,286
|
|
|
|
4,656,198
|
|
|
|
3,358,601
|
|
|
|
8,014,799
|
|
|
|
8,882,761
|
|
|
|
3,406,494
|
|
|
|
12,289,255
|
|
Total
liabilities
|
|
|
25,879,369
|
|
|
|
3,308,228
|
|
|
|
29,187,597
|
|
|
|
28,370,763
|
|
|
|
3,358,601
|
|
|
|
31,729,364
|
|
|
|
47,240,993
|
|
|
|
3,406,494
|
|
|
|
50,647,487
|
|
Additional
paid-in capital
|
|
|
95,265,594
|
|
|
|
-
|
|
|
|
95,265,594
|
|
|
|
97,082,545
|
|
|
|
98,340
|
|
|
|
97,180,885
|
|
|
|
172,963,877
|
|
|
|
264,249
|
|
|
|
173,228,126
|
|
Retained
earnings
|
|
|
65,273,178
|
|
|
|
-
|
|
|
|
65,273,178
|
|
|
|
74,944,728
|
|
|
|
(98,340
|
)
|
|
|
74,846,388
|
|
|
|
86,853,096
|
|
|
|
(264,249
|
)
|
|
|
86,588,847
|
|
Accumulated
other comprehensive income
|
|
|
5,588,219
|
|
|
|
(113,933
|
)
|
|
|
5,474,286
|
|
|
|
7,779,627
|
|
|
|
(164,306
|
)
|
|
|
7,615,321
|
|
|
|
10,124,324
|
|
|
|
(212,199
|
)
|
|
|
9,912,125
|
|
Total
equity
|
|
|
166,490,275
|
|
|
|
(113,933
|
)
|
|
|
166,376,342
|
|
|
|
179,213,711
|
|
|
|
(164,306
|
)
|
|
|
179,049,405
|
|
|
|
270,214,289
|
|
|
|
(212,199
|
)
|
|
|
270,002,090
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
192,369,644
|
|
|
$
|
3,194,295
|
|
|
$
|
195,563,939
|
|
|
$
|
207,584,474
|
|
|
$
|
3,194,295
|
|
|
$
|
210,778,769
|
|
|
$
|
317,455,282
|
|
|
$
|
3,194,295
|
|
|
$
|
320,649,577
|
|
|
|
As
of March 31, 2008
|
|
|
As
of June 30, 2008
|
|
|
As
of September 30, 2008
|
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
$
|
-
|
|
|
$
|
27,882
|
|
|
$
|
27,882
|
|
|
$
|
-
|
|
|
$
|
40,703
|
|
|
$
|
40,703
|
|
|
$
|
529,813
|
|
|
$
|
-
|
|
|
$
|
529,813
|
|
Goodwill
|
|
|
22,566,767
|
|
|
|
4,620,895
|
|
|
|
27,187,662
|
|
|
|
22,566,768
|
|
|
|
4,620,895
|
|
|
|
27,187,663
|
|
|
|
22,566,768
|
|
|
|
4,620,895
|
|
|
|
27,187,663
|
|
Total
assets
|
|
|
370,700,557
|
|
|
|
4,648,777
|
|
|
|
375,349,334
|
|
|
|
396,552,073
|
|
|
|
4,661,598
|
|
|
|
401,213,671
|
|
|
|
503,907,426
|
|
|
|
4,620,895
|
|
|
|
508,528,321
|
|
Deferred
tax liability - current
|
|
|
232,572
|
|
|
|
(232,572
|
)
|
|
|
-
|
|
|
|
358,529
|
|
|
|
(358,529
|
)
|
|
|
-
|
|
|
|
680,544
|
|
|
|
(533,606
|
)
|
|
|
146,938
|
|
Deferred
tax liability - non current
|
|
|
15,480,108
|
|
|
|
2,014,800
|
|
|
|
17,494,908
|
|
|
|
16,713,352
|
|
|
|
1,271,543
|
|
|
|
17,984,895
|
|
|
|
16,390,430
|
|
|
|
1,465,495
|
|
|
|
17,85
5,925
|
|
Total
liabilities
|
|
|
40,845,533
|
|
|
|
1,782,228
|
|
|
|
42,627,761
|
|
|
|
47,281,615
|
|
|
|
913,014
|
|
|
|
48,194,629
|
|
|
|
167,078,962
|
|
|
|
931,889
|
|
|
|
168,010,851
|
|
Additional
paid-in capital
|
|
|
194,754,211
|
|
|
|
669,659
|
|
|
|
195,423,870
|
|
|
|
195,253,082
|
|
|
|
846,010
|
|
|
|
196,099,092
|
|
|
|
195,500,513
|
|
|
|
1,069,165
|
|
|
|
196,569,678
|
|
Retained
earnings
|
|
|
111,539,921
|
|
|
|
394,791
|
|
|
|
111,934,712
|
|
|
|
125,399,613
|
|
|
|
241,449
|
|
|
|
125,641,062
|
|
|
|
141,882,532
|
|
|
|
41,583
|
|
|
|
141,924,115
|
|
Accumulated
other comprehensive income
|
|
|
23,201,420
|
|
|
|
1,802,099
|
|
|
|
25,003,519
|
|
|
|
28,356,182
|
|
|
|
2,661,125
|
|
|
|
31,017,307
|
|
|
|
29,085,454
|
|
|
|
2,578,258
|
|
|
|
31,663,712
|
|
Total
equity
|
|
|
329,855,024
|
|
|
|
2,866,549
|
|
|
|
332,721,573
|
|
|
|
349,270,458
|
|
|
|
3,748,584
|
|
|
|
353,019,042
|
|
|
|
336,828,464
|
|
|
|
3,689,006
|
|
|
|
340,517,470
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
370,700,557
|
|
|
$
|
4,648,777
|
|
|
$
|
375,349,334
|
|
|
$
|
396,552,073
|
|
|
$
|
4,661,598
|
|
|
$
|
401,213,671
|
|
|
$
|
503,907,426
|
|
|
$
|
4,620,895
|
|
|
$
|
508,528,321
|
|
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
|
Three
Months Ended March 31, 2007
|
|
|
Three
Months Ended June 30, 2007
|
|
|
Three
Mmonths Ended September 30, 2007
|
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$
|
2,933,066
|
|
|
$
|
-
|
|
|
$
|
2,933,066
|
|
|
$
|
2,557,805
|
|
|
$
|
98,340
|
|
|
$
|
2,656,145
|
|
|
$
|
3,742,363
|
|
|
$
|
165,909
|
|
|
$
|
3,908,272
|
|
Income
from operations
|
|
|
7,912,527
|
|
|
|
-
|
|
|
|
7,912,527
|
|
|
|
11,504,308
|
|
|
|
(98,340
|
)
|
|
|
11,405,968
|
|
|
|
13,981,641
|
|
|
|
(165,909
|
)
|
|
|
13,815,732
|
|
Income
before income tax
|
|
|
7,969,370
|
|
|
|
-
|
|
|
|
7,969,370
|
|
|
|
11,608,196
|
|
|
|
(95,161
|
)
|
|
|
11,513,035
|
|
|
|
14,329,815
|
|
|
|
(201,167
|
)
|
|
|
14,128,648
|
|
Income
tax
|
|
|
1,523,103
|
|
|
|
-
|
|
|
|
1,523,103
|
|
|
|
1,939,825
|
|
|
|
-
|
|
|
|
1,939,825
|
|
|
|
2,386,189
|
|
|
|
-
|
|
|
|
2,386,189
|
|
Net
income
|
|
|
6,446,267
|
|
|
|
-
|
|
|
|
6,446,267
|
|
|
|
9,668,371
|
|
|
|
(95,161
|
)
|
|
|
9,573,210
|
|
|
|
11,943,626
|
|
|
|
(201,167
|
)
|
|
|
11,742,459
|
|
Foreign
currency translation gain
|
|
|
810,798
|
|
|
|
366,933
|
|
|
|
1,177,731
|
|
|
|
1,468,243
|
|
|
|
672,792
|
|
|
|
2,141,035
|
|
|
|
1,992,992
|
|
|
|
303,812
|
|
|
|
2,296,804
|
|
Comprehensive
income
|
|
|
7,257,065
|
|
|
|
366,933
|
|
|
|
7,623,998
|
|
|
|
11,136,614
|
|
|
|
577,631
|
|
|
|
11,714,245
|
|
|
|
13,936,618
|
|
|
|
102,645
|
|
|
|
14,039,263
|
|
Basic
EPS
|
|
|
0.10
|
|
|
|
-
|
|
|
|
0.10
|
|
|
|
0.15
|
|
|
|
-
|
|
|
|
0.15
|
|
|
|
0.16
|
|
|
|
-
|
|
|
|
0.16
|
|
Diluted
EPS
|
|
$
|
0.10
|
|
|
$
|
-
|
|
|
$
|
0.10
|
|
|
$
|
0.15
|
|
|
$
|
-
|
|
|
$
|
0.15
|
|
|
|
0.16
|
|
|
$
|
-
|
|
|
$
|
0.16
|
|
|
|
Three
Months Ended March 31, 2008
|
|
|
Three
Months Ended June 30, 2008
|
|
|
Three
Months Ended September 30, 2008
|
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$
|
3,912,683
|
|
|
$
|
202,705
|
|
|
$
|
4,115,388
|
|
|
$
|
5,253,274
|
|
|
$
|
176,351
|
|
|
$
|
5,429,625
|
|
|
$
|
4,467,638
|
|
|
$
|
223,155
|
|
|
$
|
4,690,793
|
|
Income
from operations
|
|
|
11,977,020
|
|
|
|
(202,705
|
)
|
|
|
11,774,315
|
|
|
|
18,677,700
|
|
|
|
(176,351
|
)
|
|
|
18,501,349
|
|
|
|
21,846,863
|
|
|
|
(223,155
|
)
|
|
|
21,623,708
|
|
Income
before income tax
|
|
|
11,892,077
|
|
|
|
(202,705
|
)
|
|
|
11,689,372
|
|
|
|
17,751,306
|
|
|
|
(176,351
|
)
|
|
|
17,574,955
|
|
|
|
20,845,253
|
|
|
|
(223,155
|
)
|
|
|
20,622,098
|
|
Income
tax
|
|
|
2,469,948
|
|
|
|
(22,299
|
)
|
|
|
2,447,649
|
|
|
|
3,891,614
|
|
|
|
(23,009
|
)
|
|
|
3,868,605
|
|
|
|
4,362,334
|
|
|
|
(23,289
|
)
|
|
|
4,339,045
|
|
Net
income
|
|
|
9,422,129
|
|
|
|
(180,406
|
)
|
|
|
9,241,723
|
|
|
|
13,859,692
|
|
|
|
(153,342
|
)
|
|
|
13,706,350
|
|
|
|
16,482,919
|
|
|
|
(199,866
|
)
|
|
|
16,283,053
|
|
Foreign
currency translation gain
|
|
|
6,934,434
|
|
|
|
2,148,769
|
|
|
|
9,083,203
|
|
|
|
5,154,761
|
|
|
|
859,027
|
|
|
|
6,013,788
|
|
|
|
729,272
|
|
|
|
(82,867
|
)
|
|
|
646,405
|
|
Comprehensive
income
|
|
|
16,356,563
|
|
|
|
1,968,363
|
|
|
|
18,324,926
|
|
|
|
19,014,453
|
|
|
|
705,685
|
|
|
|
19,720,138
|
|
|
|
17,212,191
|
|
|
|
(282,733
|
)
|
|
|
16,929,458
|
|
Basic
EPS
|
|
|
0.12
|
|
|
|
-
|
|
|
|
0.12
|
|
|
|
0.18
|
|
|
|
-
|
|
|
|
0.18
|
|
|
|
0.22
|
|
|
|
-
|
|
|
|
0.22
|
|
Diluted
EPS
|
|
$
|
0.12
|
|
|
$
|
-
|
|
|
$
|
0.12
|
|
|
$
|
0.18
|
|
|
$
|
-
|
|
|
$
|
0.18
|
|
|
$
|
0.21
|
|
|
$
|
-
|
|
|
$
|
0.21
|
|
AMERICAN
ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED STATEMENTS
AS
OF DECEMBER 31, 2008, 2007 AND 2006
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Three
Months Ended March 31, 2007
|
|
|
Six
Months Ended June 30, 2007
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
6,446,267
|
|
|
$
|
-
|
|
|
$
|
6,446,267
|
|
|
$
|
16,117,817
|
|
|
$
|
(95,161
|
)
|
|
$
|
16,019,477
|
|
|
$
|
28,026,185
|
|
|
$
|
(296,328
|
)
|
|
$
|
27,761,936
|
|
Deferred
tax
|
|
|
172,782
|
|
|
|
32,416
|
|
|
|
205,198
|
|
|
|
192,865
|
|
|
|
82,789
|
|
|
|
275,654
|
|
|
|
245,609
|
|
|
|
130,682
|
|
|
|
376,291
|
|
Stock
option compensation expense
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65,340
|
|
|
|
98,340
|
|
|
|
163,680
|
|
|
|
175,720
|
|
|
|
264,249
|
|
|
|
439,969
|
|
Net
cash provided by operating activities
|
|
|
4,534,617
|
|
|
|
32,416
|
|
|
|
4,567,033
|
|
|
|
16,007,441
|
|
|
|
85,968
|
|
|
|
16,093,409
|
|
|
|
26,989,761
|
|
|
|
98,603
|
|
|
|
27,088,364
|
|
Effect
of exchange rate change on cash
|
|
|
677,937
|
|
|
|
(32,416
|
)
|
|
|
645,521
|
|
|
|
2,039,014
|
|
|
|
(85,968
|
)
|
|
|
1,953,046
|
|
|
|
3,394,762
|
|
|
|
(98,603
|
)
|
|
|
3,296,159
|
|
Cash
and cash equivalents, end of period
|
|
$
|
93,442,093
|
|
|
$
|
-
|
|
|
$
|
93,442,093
|
|
|
$
|
108,449,801
|
|
|
$
|
-
|
|
|
$
|
108,449,801
|
|
|
$
|
170,624,005
|
|
|
$
|
-
|
|
|
$
|
170,624,005
|
|
|
|
Three
Months Ended March 31, 2008
|
|
|
Six
Months Ended June 30, 2008
|
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
9,422,129
|
|
|
$
|
(180,406
|
)
|
|
$
|
9,241,723
|
|
|
$
|
23,281,820
|
|
|
$
|
(333,748
|
)
|
|
$
|
22,948,073
|
|
|
$
|
39,764,740
|
|
|
$
|
(533,614
|
)
|
|
$
|
39,231,126
|
|
Deferred
tax
|
|
|
2,744,506
|
|
|
|
(2,171,068
|
)
|
|
|
573,438
|
|
|
|
714,100
|
|
|
|
206,135
|
|
|
|
920,235
|
|
|
|
705,006
|
|
|
|
192,883
|
|
|
|
897,889
|
|
Stock
option compensation expense
|
|
|
135,121
|
|
|
|
202,705
|
|
|
|
337,826
|
|
|
|
374,019
|
|
|
|
379,056
|
|
|
|
753,075
|
|
|
|
621,450
|
|
|
|
602,211
|
|
|
|
1,223,661
|
|
Net
cash provided by operating activities
|
|
|
10,676,287
|
|
|
|
(2,148,769
|
)
|
|
|
8,527,518
|
|
|
|
28,374,749
|
|
|
|
251,443
|
|
|
|
28,626,192
|
|
|
|
48,569,653
|
|
|
|
261,480
|
|
|
|
48,831,133
|
|
Effect
of exchange rate change on cash
|
|
|
2,314,557
|
|
|
|
2,148,769
|
|
|
|
4,463,326
|
|
|
|
8,187,869
|
|
|
|
(251,443
|
)
|
|
|
7,936,426
|
|
|
|
8,644,302
|
|
|
|
(261,480
|
)
|
|
|
8,382,822
|
|
Cash
and cash equivalents, end of period
|
|
$
|
159,031,217
|
|
|
$
|
-
|
|
|
$
|
159,031,217
|
|
|
$
|
144,473,275
|
|
|
$
|
-
|
|
|
$
|
144,473,275
|
|
|
$
|
219,727,043
|
|
|
$
|
-
|
|
|
$
|
219,727,043
|
|
F-38