Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:
|
Buildings
|
30 years
|
|
Building improvements
|
30 years
|
|
Machinery & equipment
|
5-10 years
|
|
Furniture & fixtures and vehicles
|
5-10 years
|
Property and equipment consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
3,539,652
|
|
|
$
|
3,515,301
|
|
Building improvements
|
|
|
1,969,840
|
|
|
|
1,956,289
|
|
Machinery & equipment
|
|
|
1,167,414
|
|
|
|
1,131,235
|
|
Furniture & fixtures
|
|
|
66,741
|
|
|
|
66,282
|
|
Vehicle
|
|
|
130,202
|
|
|
|
157,239
|
|
Construction in progress
|
|
|
2,083,964
|
|
|
|
2,065,116
|
|
|
|
|
8,957,813
|
|
|
|
8,891,462
|
|
Less: Accumulated depreciation
|
|
|
(1,977,292
|
)
|
|
|
(1,511,480
|
)
|
|
|
$
|
6,980,521
|
|
|
$
|
7,379,982
|
|
As of December 31, 2012 and December 31, 2011, expenditures incurred for the construction of a new production plant were $2.1 million.
As of December 31, 2012, all buildings of Aoxing Pharmaceutical and Shaanxi Weinan have been pledged to a financial institution in the PRC to secure short term bank loans. (note – 5b)
Intangible Assets
Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from ten to fifty years. Management evaluates the recoverability of intangible assets periodically and takes into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. During the year ended December 31, 2011, the Company made impairment loss on land use right of $1,784,072, and no impairment of intangible assets have been identified for the year ended December 31, 2012. The Company’s land use rights will expire between 2053 and 2056. The Company’s proprietary technologies, including drug approvals and permits, were mainly contributed by four ex-owners of Aoxing Pharmaceutical and acquired from Shaanxi Weinan acquisition in last year. All of the Company’s intangible assets are subject to amortization with estimated useful lives of:
|
Land use rights
|
50 years
|
|
Proprietary technologies
|
10 years
|
The components of finite-lived intangible assets are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Land use rights
|
|
$
|
3,430,002
|
|
|
$
|
3,406,406
|
|
Proprietary technologies
|
|
|
8,913,131
|
|
|
|
8,851,814
|
|
|
|
|
12,343,133
|
|
|
|
12,258,220
|
|
Less: Accumulated amortization
|
|
|
(3,206,694
|
)
|
|
|
(1,851,289
|
)
|
|
|
$
|
9,136,439
|
|
|
$
|
10,406,931
|
|
The estimated future amortization expenses related to intangible assets as of December 31, 2012 are as follows:
Years Ending December 31,
|
|
|
|
2013
|
|
$
|
1,355,405
|
|
2014
|
|
|
1,355,405
|
|
2015
|
|
|
1,355,405
|
|
2016
|
|
|
1,355,405
|
|
2017
|
|
|
172,338
|
|
Thereafter
|
|
|
3,542,481
|
|
As of December 31, 2012, all land use rights of Aoxing Pharmaceutical and Shaanxi Weinan are pledged to a financial institution in the PRC to secure short term bank loans. (note – 5b)
Long-Lived Assets
The Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, included in the Codification as ASC 360,
Property, Plant, and Equipment
, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets.
The Company periodically evaluates the carrying value of long-lived assets to be held and used. Impairment loss is recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. No loss on disposal occurred during any of the periods presented.
Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, included in the Codification as ASC 825,
Financial Instruments
, requires that the Company discloses estimated fair values of financial instruments. The carrying amounts reported in the balance sheets for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.
Value-added Tax Payable
The Company is subject to a value-added tax rate of 17% on product sales in the PRC. Value-added tax payable is computed net of value-added tax paid on purchases for sales in the PRC.
Revenue Recognition
The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (“SAB”) 104, included in the Codification as ASC 605,
Revenue Recognition
. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
The Company does not allow its customers to return products. The Company’s customers can exchange products only if they are damaged in transportation.
Revenue reported is net of value-added tax.
Stock-Based Compensation
The Company has elected to use the Black-Scholes-Merton (“BSM”) pricing model to determine the fair value of stock options on the dates of grant. Also, the Company recognizes stock-based compensation using the straight-line method over the requisite service period.
The Company values stock awards using the market price on or around the date the shares were awarded and includes the amount of compensation as a period compensation expense over the requisite service period.
For the years ended December 31, 2012 and 2011, the Company recognized stock-based compensation of $821,709 and $1,721,006, respectively.
Advertising
Advertising expense consists primarily of costs of promoting the Company’s corporate image and product marketing and costs of direct advertising. The Company expenses all advertising costs as incurred. For the years ended December 31, 2012 and 2011, the Company incurred advertising expense of approximately $14.2 million and $21.2 million, respectively.
Research and Development
The remuneration of the Company’s research and development staff, materials used in internal research and development activities, and payments made to third parties in connection with collaborative research and development arrangements, are all expensed as incurred. Where the Company makes a payment to a third party to acquire the right to use a product formula which has received regulatory approval, that payment is accounted for as the acquisition of a license or patent and is capitalized as an intangible asset and amortized over the shorter of the remaining license period or patent life (See above “Intangible Assets”).
Income Taxes
The Company adopts SFAS No. 109, Accounting for Income Taxes, included in the Codification as ASC 740,
Income Taxes,
which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
On January 1, 2007, The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), included in the Codification as ASC 740,
Income Taxes.
The topic addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
Earnings per Share
Basic earnings per share is computed on the basis of the weighted average number of common stock outstanding during the period.
Diluted earnings per share is computed on the basis of the weighted average number of common stock and common stock equivalents outstanding. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation.
Dilution is computed by applying the treasury stock method for options and warrants. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
Dilution is computed by applying the if-converted method for convertible preferred stocks. Under this method, convertible preferred stock is assumed to be converted at the beginning of the period (or at the time of issuance, if later), and preferred dividends (if any) will be added back to determine income applicable to common stock. The shares issuable upon conversion will be added to weighted average number of common stock outstanding. Conversion will be assumed only if it reduces earnings per share (or increases loss per share).
Comprehensive income
Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income and foreign currency translation adjustments.
Statement of Cash Flows
In accordance with SFAS No. 95, Statement of Cash Flows, included in the Codification as ASC 230,
Statement of Cash Flows,
cash flows from the Company’s operations is based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company has a diversified customer base, most of which are in the PRC. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
Segment Reporting
SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, included in the Codification as ASC 280,
Segment Reporting,
requires use of the management approach model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
Business Combinations
Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805,
Business Combinations.
Under the acquisition method the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets, exceed the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the statement of earnings from the date of acquisition. Acquisition-related costs, including conversion and restructuring charges, are expensed as incurred. We adopted this guidance as of January 1, 2010 and applied it to the Shaanxi Weinan acquisition in last year.
Recent accounting pronouncements
In December 2011, the FASB issued guidance on offsetting assets and liabilities and disclosure requirements in Accounting Standards Update No. 2011-11,
Disclosures about Offsetting Assets and Liabilities
(“Update 2011-11”). Update 2011-11 requires that entities disclose both gross and net information about instruments and transactions eligible for offsetting the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting agreement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. Update 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods with those annual periods. The implementation of the disclosure requirement is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.
In February 2013, the FASB issued ASU No. 2013-02, which amends the authoritative accounting guidance under ASC Topic 220
“Comprehensive Income.”
The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under generally accepted accounting principles in the United States of America (“GAAP”) to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. Adoption of this update is not expected to have a material effect on the Company’s consolidated results of operations or financial condition.
As of December 31, 2012, there are no recently issued accounting standards not yet adopted that would have a material effect on the Company’s financial statements.
Note 3 –
DEPOSITS AND OTHER RECEIVABLES
Deposits and other receivables consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Current portion
|
|
|
|
|
|
|
Deposits paid for research and development
|
|
|
|
|
|
|
|
|
-
for clinical trials - note 12a)
|
|
$
|
-
|
|
|
$
|
1,298,743
|
|
-
of new medicine - note 12b)
|
|
|
3,170,275
|
|
|
|
-
|
|
Deposits paid for advertising
|
|
|
475,542
|
|
|
|
-
|
|
Other receivables - note 11)
|
|
|
4,094,856
|
|
|
|
5,831,168
|
|
Prepaid expenses and other receivables
|
|
$
|
7,740,673
|
|
|
$
|
7,129,911
|
|
|
|
|
|
|
|
|
|
|
Non-current portion
|
|
|
|
|
|
|
|
|
Deposits paid to former equity holders of Shaanxi Weinan to acquire drug approval numbers - notes 13 and 16)
|
|
$
|
8,718,258
|
|
|
|
-
|
|
Deposits paid for research and development of new medicine
|
|
|
-
|
|
|
|
3,148,466
|
|
|
|
$
|
8,718,258
|
|
|
$
|
3,148,466
|
|
Other receivable comprises mainly from two disposed land use rights. (“See Note 11 – Disposed Land Use Rights”)
During the year ended December 31, 2012, deposits of $1,298,743 and $3,148,466, for clinical trials and new medicine, respectively, were recognized as research and development expense.
Note 4 –
LOAN RECEIVABLES
On November 20, 2012, the Company advanced $9,510,826 to a third party as a commercial loan, interest bearing at 13% per annum. The principal and interest are to be repaid on December 31, 2013. As at December 31, 2012, carrying amount of the loan receivables approximate its fair value due to short maturity.
Note 5 –
SHORT-TERM BANK LOANS
Short-term bank loans consists of the followings:
|
|
|
|
Balance as at December 31,
|
|
Inception date
|
|
Details
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
March 21, 2011
|
|
RMB 3,000,000, one year term loan, annual interest rate at 7.88% (a)
|
|
$
|
-
|
|
|
$
|
472,269
|
|
May 25, 2011
|
|
RMB 2,000,000, one year term loan, annual interest rate at 8.20% (a)
|
|
|
-
|
|
|
|
314,847
|
|
October 24, 2012
|
|
RMB 10,000,000, one year term loan, annual interest rate at 7.80% (b)
|
|
|
1,585,137
|
|
|
|
-
|
|
November 8, 2012
|
|
RMB 10,000,000, one year term loan, annual interest rate at 7.80% (b)
|
|
|
1,585,138
|
|
|
|
-
|
|
December 5, 2012
|
|
RMB 10,000,000, one year term loan, annual interest rate at 7.80% (b)
|
|
|
1,585,138
|
|
|
|
-
|
|
|
|
Total
|
|
$
|
4,755,413
|
|
|
$
|
787,116
|
|
(a)
|
The loans were secured by (i) personal guarantee executed by a major shareholder of the Company and (ii) pledge of the Company’s buildings and land use rights with carrying amount of approximately $2.7 million as of December 31, 2011 and had been repaid on May 28, 2012 and April 1, 2012.
|
(b)
|
The loans are secured by (i) personal guarantee executed by a major shareholder of the Company and (ii) pledge of all buildings and land use rights of Aoxing Pharmaceutical and Shaanxi Weinan.
|
As of December 31, 2012 and 2011, the carrying amount of the short-term bank loans approximates the fair values due to short maturity.
Note 6 –
STOCKHOLDERS’ EQUITY
Reverse stock split
On April 3, 2012, the Company filed Articles of Amendment to the Company’s Articles of Incorporation with the Secretary of State of the State of Maryland to effect a one-for-three reverse stock split of the issued and outstanding common stock of the Company (the “Reverse Split”). Par value remained unchanged at $0.001 after the reverse split. The Reverse Split became effective on April 3, 2012. The Reverse Split was duly approved by the Board of Directors of the Company without shareholder approval, in accordance with the authority conferred by Section 2-309(e)(2) of the Maryland General Corporation Law.
In accordance with SEC Staff Accounting Bulletin Topic 4C “Equity Accounts: Changes in Capital Structure”, the changes in the capital structure arising from the Reverse Split must be given retroactive effect in the balance sheet, and an appropriately cross-referenced note should disclose the retroactive treatment, explain the change made and state the date the change became effective. Unless otherwise stated, the number and price of common stocks, including warrants and options and other related disclosures made throughout these consolidated financial statements retroactively reflected the effect of such Reverse Split.
(a) Common stock
As of December 31, 2012 and 2011, the Company has 100,000,000 shares of common stock authorized, 9,993,549 and 9,400,216 shares issued and outstanding at par value of $0.001 per share respectively.
During the year ended December 31, 2011
|
|
Shares issued
|
|
|
Value
|
|
|
|
|
|
|
|
|
i
issued to an outside consultant valued at $6.09 per shares
|
|
|
10,000
|
|
|
$
|
60,900
|
|
ii
awarded to employees based on 2009 Stock Plan, fair value at $4.23 per share
|
|
|
259,731
|
|
|
|
1,098,662
|
|
Total common stock issued during the year ended December 31, 2011
|
|
|
269,731
|
|
|
$
|
1,159,562
|
|
During the year ended December 31, 2012
|
|
Shares issued
|
|
|
Value
|
|
|
|
|
|
|
|
|
iii
issued to a former consultant based on previous agreement, valued at $1.17 per share
|
|
|
33,333
|
|
|
$
|
39,000
|
|
iv
awarded to employees based on 2011 Incentive Stock Plan, fair value at $1.17 per share
|
|
|
560,000
|
|
|
|
655,200
|
|
Total common stock issued during the year ended December 31, 2012
|
|
|
593,333
|
|
|
$
|
694,200
|
|
All shares of common stock issued above were fully vested and not subject to forfeiture when issued. The Company recognized $694,200 and $1,159,562 as stock-based compensation expense, which was included in general and administrative expense, for the years ended December 31, 2012 and 2011.
(b) Warrants
As at December 31, 2012 and 2011, the Company has 195,784 warrants outstanding, with weighted average exercise price of $8.67 and $8.67.
During the year ended December 31, 2011, the Company issued 10,784 warrants to an investor relations firm. The warrants are exercisable by June 30, 2014 at $8.22 per share. The Company recognized $6,395 as stock-based compensation expense in the year ended December 31, 2011, which was included in general and administrative expense. No warrants were issued during the year ended December 31, 2012.
The following table summarizes the Company’s outstanding warrants as of December 31, 2012 and 2011.
|
|
|
|
|
Outstanding as at December 31,
|
|
Expiry date
|
|
Exercise Price
|
|
|
2012
|
|
|
2011
|
|
May 31, 2013
|
|
$
|
6.00
|
|
|
|
18,333
|
|
|
|
18,333
|
|
June 30, 2014
|
|
|
8.22
|
|
|
|
10,784
|
|
|
|
10,784
|
|
November 1, 2014*
|
|
|
9.00
|
|
|
|
166,667
|
|
|
|
166,667
|
|
|
|
|
|
|
|
|
195,784
|
|
|
|
195,784
|
|
* The Company has the right at any time, on at least forty-five (45) day written notice, to redeem the outstanding warrants at a price of one cent ($0.03) per share provided the market price of the Company’s common stock equals to or exceeds $13.5 on each trading day for twenty (20) consecutive trading days ending on the trading day prior to the date that the Company intends to redeem the warrants.
(c) Stock Options
The Company’s board of directors approved its 2009 stock plan (“2009 Stock Plan”) under which it may grant incentive and nonqualified stock options, stock awards or restricted stocks to eligible participants. Options are generally granted for a term of 5 years. Except for the options granted to the Company’s existing management on October 22, 2009, options granted under the 2009 Stock Plan generally vest annually in 3 equal installments, the first being on the first anniversary of the grant contingent upon employment with the Company on the vesting date. Options granted on October 22, 2009 vest annually in 3 equal installments, the first being on the grant date. Options granted on October 27, 2010 vested in one year from the issuance date of such options. Except for the cancelled options, the remaining options were fully vested during the year ended December 31, 2011.
In April 2011, the Company issued 30,000 stock options under the 2009 Stock Plan to its officer and director, among which 23,333 options vest in one year and expire in five years, and 6,667 vest annually in 3 equal installments and expire in three years.
In August 2011, the Company’s board of directors approved the 2011 Stock Option Plan (“2011 Stock Plan”) and it was subsequently approved by shareholders at the Company’s annual shareholders’ meeting in October 2011. According to the 2011 Stock Plan all of employees, officers, and directors, and consultants are eligible to be granted options or restricted stock awards (each, an “Award”) under the plan. The plan is currently administered by the Board of Directors, which has all the power to administer the plan according to its terms, including the power to grant Awards, determine who may be granted Awards and the types and amounts of Awards to be granted, prescribe Award agreements, and establish programs for granting Awards. Awards may be made under the 2011 Stock Plan for up to 850,000 shares of the Company’s stock.
In April 2012, the Company issued 24,000 stock options under the 2011 Stock Plan to one of its officers at the exercise price of $1.68 per share. The options vest in one year and expire in five years.
The following table presents the weighted-average assumptions used to estimate the fair values of the stock options granted in the periods presented:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Weighted Risk-free interest rate (%)
|
|
|
0.86
|
%
|
|
|
2.1
|
%
|
Weighted Expected dividend yield (%)
|
|
|
-
|
|
|
|
-
|
|
Weighted Expected option life (years)
|
|
|
5.0
|
|
|
|
4.6
|
|
Weighted Expected volatility (%)
|
|
|
77.9
|
%
|
|
|
53.0
|
%
|
Weighted average grant date fair value
|
|
$
|
1.65
|
|
|
$
|
2.85
|
|
The following tables summarize activities for the Company’s options for the years ended December 31, 2012 and 2011.
|
|
|
|
|
Weighted Average
|
|
|
|
Number of options
|
|
|
Exercise Price ($)
|
|
|
Remaining Life (years)
|
|
Balance, December 31, 2011
|
|
|
362,222
|
|
|
|
8.22
|
|
|
|
2.94
|
|
Granted, April 20, 2012
|
|
|
24,000
|
|
|
|
1.68
|
|
|
|
4.27
|
|
Balance, December 31, 2012
|
|
|
386,222
|
|
|
|
7.81
|
|
|
|
2.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested as at December 31, 2012
|
|
|
357,777
|
|
|
|
7.40
|
|
|
|
1.59
|
|
Unvested as at December 31, 2012
|
|
|
28,445
|
|
|
|
2.64
|
|
|
|
3.80
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of options
|
|
|
Exercise Price ($)
|
|
|
Remaining Life (years)
|
|
Outstanding, December 31, 2010
|
|
|
355,555
|
|
|
|
8.39
|
|
|
|
2.92
|
|
Granted, April 7, 2011
|
|
|
23,333
|
|
|
|
5.91
|
|
|
|
4.27
|
|
Granted, April 7, 2011
|
|
|
6,667
|
|
|
|
7.80
|
|
|
|
2.27
|
|
Forfeited
|
|
|
(23,333
|
)
|
|
|
8.40
|
|
|
|
3.82
|
|
Balance, December 31, 2011
|
|
|
362,222
|
|
|
|
8.22
|
|
|
|
2.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested as at December 31, 2011
|
|
|
321,111
|
|
|
|
7.78
|
|
|
|
2.66
|
|
Unvested as at December 31, 2011
|
|
|
41,111
|
|
|
|
8.23
|
|
|
|
3.55
|
|
The Company recognized $127,510 and $555,048 as stock-based compensation expense, which was included in general and administrative expense, during the years ended December 31, 2012 and 2011. Unrecognized stock-based compensations as at December 31, 2012 was $6,147 and be fully recognized in 0.33 years.
Note 7 -
INCOME TAXES
The Company was incorporated in the United States of America (“USA”) and has operations in one tax jurisdiction, i.e. the PRC. The Company generated substantially all of its net income from its operations in the PRC for the years ended December 31, 2012 and 2011, and has recorded income tax provision for the periods.
The provision for income taxes consists of the following:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Current:
|
|
|
|
|
|
|
USA
|
|
$
|
-
|
|
|
$
|
-
|
|
PRC
|
|
|
459,711
|
|
|
|
6,180,200
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
USA
|
|
|
-
|
|
|
|
-
|
|
PRC
|
|
|
(2,036,090
|
)
|
|
|
(287,563
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
(1,576,379
|
)
|
|
$
|
5,892,637
|
|
The reconciliation of USA statutory income tax rate to the Company’s effective income tax rate is as follows:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Income tax at USA statutory rate (34%)
|
|
$
|
(7,335,059
|
)
|
|
$
|
6,142,491
|
|
Foreign rate differential
|
|
|
1,838,521
|
|
|
|
(1,088,522
|
)
|
Tax effect of permanent differences due to:
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
279,381
|
|
|
|
-
|
|
Disallowed research and development expense
|
|
|
1,118,985
|
|
|
|
-
|
|
Penalty
|
|
|
400,253
|
|
|
|
-
|
|
Disallowed portion of impairment of accounts receivable
|
|
|
874,807
|
|
|
|
-
|
|
Other
|
|
|
406,297
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
840,469
|
|
|
|
838,668
|
|
Provision for income taxes
|
|
$
|
(1,576,379
|
)
|
|
$
|
5,892,637
|
|
The deferred tax assets for the USA operation as of December 31, 2012 and 2011 consists mainly of net operating loss carry-forwards and for which a full valuation allowance has been provided, as the management believes it is more likely than not that these assets will not be realized in the future. Components of deferred tax assets in the USA were as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
USA Tax benefit on net operating loss carry forward
|
|
$
|
1,685,031
|
|
|
|
1,574,877
|
|
Valuation allowance
|
|
|
(1,685,031
|
)
|
|
|
(1,574,877
|
)
|
Deferred tax asset - USA
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2012 and 2011, the Company had federal and state net operating loss carry-forwards of $4,955,974 and $4,631,990 available to offset future taxable income in the USA respectively. The net operating loss carry-forwards will expire, if unused, in varying amounts through the year ending December 31, 2032.
The Company’s subsidiaries and VIE were incorporated in the PRC and are governed by the Income Tax Law of the PRC and various local income tax laws. Effective January 1, 2008, China adopted a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises). Components of deferred tax assets in the PRC were as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
PRC Tax benefit on net operating loss carry forward
|
|
$
|
1,146,673
|
|
|
|
-
|
|
Tax effect of temporary differences due to
|
|
|
|
|
|
|
|
|
Taxation book value of long-term assets
|
|
$
|
1,411,563
|
|
|
$
|
1,772,270
|
|
Provision of bad debts
|
|
|
875,223
|
|
|
|
-
|
|
Provision of commission expense
|
|
|
764,522
|
|
|
|
-
|
|
Other temporary differences
|
|
|
198,285
|
|
|
|
(155,032
|
)
|
Valuation allowance
|
|
|
(730,315
|
)
|
|
|
-
|
|
Deferred tax asset - PRC
|
|
$
|
3,665,951
|
|
|
$
|
1,617,688
|
|
As at December 31, 2012, the Company had net operating loss carry-forward of approximately $4.6 million (RMB28.9 million) available to offset future taxable income in the PRC. The net operating loss carry-forward will expire, if unused, in the year ending December31, 2019.
Uncertain Tax Positions
Interest associated with unrecognized tax benefits are classified as income tax, and penalties are classified in selling, general and administrative expenses in the statements of operations.
For the years ended December 31, 2012 and 2011, the Company had no unrecognized tax benefits and related interest and penalties expenses. Currently, the Company is not subject to examination by major tax jurisdictions.
Note 8 -
STATUTORY RESERVES
The Company’s subsidiaries and VIE in the PRC are required to make appropriations to certain non-distributable reserve funds. In accordance with the laws and regulations applicable to China’s foreign investment enterprises and with China’s Company Laws, an enterprise’s income, after the payment of the PRC income taxes, must be allocated to the statutory surplus reserves. The proportion of allocation for reserves is 10 percent of the profit after tax to the surplus reserve fund, and the cumulative amount shall not to exceed 50 percent of registered capital.
Use of the statutory reserve fund is restricted to set offs against losses, expansion of production and operation or increase in the registered capital of a company. Use of the statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of December 31, 2012 and December 31, 2011, the Company’s VIE had allocated $6,737,368 and $6,490,600, respectively, to these non-distributable reserve funds.
Note 9 -
OTHER COMPREHENSIVE INCOME
Balance of related after-tax components comprising accumulated other comprehensive income included in stockholders’ equity as of December 31, 2012 and 2011 were as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, beginning of period
|
|
$
|
3,982,206
|
|
|
$
|
1,975,022
|
|
Change in cumulative translation adjustment
|
|
|
546,662
|
|
|
|
2,007,184
|
|
Accumulated other comprehensive income, end of period
|
|
$
|
4,528,868
|
|
|
$
|
3,982,206
|
|
Note 10 –
ACQUISITION
Shaanxi Weinan Acquisition
In October 2011, Aoxing Pharmaceutical entered into a Share Transfer Agreement to acquire Shaanxi Weinan from the holders of 100% of equity interests in Shaanxi Weinan. The aggregate purchase price is RMB 61 million (approximately $9.55 million), in cash and payable in several tranches. As of December 31, 2012 and 2011, the unpaid amount were nil and $818,601.
Shaanxi Weinan owns approvals and permits for a portfolio of 86 pharmaceutical products and one health product, all of which, were added to the Company’s current pharmaceutical product portfolio following the completion of this acquisition. The Company completed this acquisition on October 25, 2011, and the name of the acquired company was changed to Shaanxi Weinan Aoxing Pharmaceuticals, LLC.
The assets acquired from Shaanxi Weinan have been accounted for under the acquisition method of accounting (formerly referred to as the purchase method) in accordance with FASB ASC 805,
Business Combinations
. The assets were recorded at their estimated fair values as of the acquisition date. A summary of the net assets received from Shaanxi Weinan and the estimated fair value adjustments resulting in the bargain purchase are present below:
|
|
Received from Shaanxi Weinan
|
|
|
Fair Value Adjustments
|
|
|
Recorded by the Company
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
397,443
|
|
|
$
|
-
|
|
|
$
|
397,443
|
|
Property and equipment
|
|
|
1,103,385
|
|
|
|
486,815
|
|
|
|
1,590,200
|
|
Intangible assets
|
|
|
5,190,781
|
|
|
|
2,351,318
|
|
|
|
7,542,099
|
|
Deferred tax assets
|
|
|
2,027,262
|
|
|
|
(709,534
|
)
|
|
|
1,317,728
|
|
|
|
$
|
8,718,871
|
|
|
$
|
2,128,599
|
|
|
$
|
10,847,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase consideration (RMB 61,000,000)
|
|
|
|
|
|
|
$
|
9,548,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from bargain purchase
|
|
|
|
|
|
|
|
|
|
$
|
1,299,063
|
|
As agreed between the management of the Company and the then stockholders of Shaanxi Wainan, the then shareholders shall be entitled to the cash and cash equivalents as well as accounts receivable and be responsible for the liabilities of Shaanxi Wainan upon completion of the acquisition. For details, refer to the Company’s SEC filing on December 23, 2011 for the Audited Financial Statements of the Business Acquired, and the Unaudited Pro Forma Condensed Combined Financial Statements.
Results for the year ended December 31, 2011 include operating results of Shaanxi Weinan from the date of the acquisition. Shaanxi Weinan contributed $836,378 of incremental sales and $197,345 of incremental operating income for the year ended December 31, 2011. Acquisition related costs for the year ended December 31, 2011 amounted to approximately $200,000 and are included in the general and administrative expenses in the Company’s consolidated Statements of Operations. The acquired property and equipment and intangible assets are depreciated and amortized based on its estimated useful life.
The following unaudited pro forma information presents our consolidated results of operation as if the Shaanxi Weinan acquisition has occurred on January 1, 2010, after the effect of certain adjustment, including increased amortization and depreciation expenses resulting from fair value adjustments on intangible assets and plant and equipment with related deferred tax adjustments.
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
96,791,387
|
|
|
$
|
86,104,586
|
|
Net income
|
|
$
|
12,297,587
|
|
|
$
|
17,994,774
|
|
Earnings per share -basic
|
|
$
|
1.32
|
|
|
$
|
2.04
|
|
Earnings per share -diluted
|
|
$
|
1.32
|
|
|
$
|
2.04
|
|
Note 11 –
DISPOSED LAND USE RIGHTS
During the 4th quarter of 2011, following the protracted negotiations with the local government of Zouan Town, Xi’an City, the Company determined to give up the land use right for the construction of raw materials processing plant in Zouan Town. The land use right for the 34,803 square meter facility was acquired in 2009 in consideration for RMB 20 million (approximately $3.1 million). The Company’s determination was preceded by ongoing attempts to resolve a labor dispute with the local government relating to a previous paper mill labor force on this site to be retained by the Company following its acquisition of the property and business, which attempts yielded no positive results. In March 2012, the Company reached an agreement with the local government by obtaining a refund on part of the consideration paid for the land (RMB 12.5 million, approximately $1.9 million). The foregoing refund was recorded as “Other Receivable” in the fiscal year 2011. During the year ended December 31, 2012, the Company has received amounts totaling approximately $1.8 million.
In December 2011, Xianyang Land Reserve Center, the governmental entity that holds the title to all land in the Shaanxi Province, reclaimed approximately a 33,228 square meter portion of the real estate (with carrying amount of RMB 28.5 million or approximately $4.5 million) at our Xianyang, Shaanxi Province headquarters, none of which have been used by our Company. We leased all 52,264 square meters of real estate in Xianyang under 50-year land use right expiring in June 2056. At the time of the lease commencement in 2006, all of the land was designated for industrial use; however, in 2011, the local Municipal Construction Planning Department repurposed a portion of the real estate for residential use.
The Company has reached an agreement with the local government, whereby the Company will be reimbursed RMB 24.8 million (approximately $3.9 million) for the reclaimed portion of its building and land use right. As a result of the foregoing, the Company recorded $3.9 million as Other Receivable, and recognized an impairment loss of $0.6 million. As at December 31, 2012, these amounts were still outstanding.
Note 12 -
COMMITMENTS
a)
|
Research and Development on clinical trials
|
The Company has previously entered into three agreements with certain research institutes to conduct clinical trials for two new and one existing drug. The Company’s total commitment for these agreements is approximately $2.1 million. As at December 31, 2012 and 2011, the Company’s total accumulated progress payment towards these clinical trials were approximately $1.3 million. Upon completion of these clinical trials, the company will be obligated to pay approximately an additional $0.8 million.
In December 2010, the Company entered into an agreement with a research institution to jointly develop a new drug for treatment of cardiovascular disease. The development is to be carried out by the research institute. Pursuant to the agreement, the Company’s total commitment is $11.5 million, in exchange for 60% share of the intellectual property upon successful development of the drug. In the event that the research institute fail to successfully develop the drug, the Company’s contribution is fully refundable. As at December 31, 2012 and 2011, the Company’s total accumulated contribution was approximately $8.8 million and $5.6 million, respectively. The Company is obligated to contribute approximately an additional $2.7 million in January 2014.
Note 13 -
RELATED PARTY TRANSACTIONS
During the year ended December 31, 2012, the Company obtained an advance of RMB 10,000,000 (approximately $1.6 million) from a major shareholder. The funds were used as part of the deposit for the acquisition of drug patents from former equity holders of Shaanxi Weinan. The amount is unsecured, interest-free and repayable upon demand.
Note 14 -
SEGMENT INFORMATION
For the years ended December 31, 2012 and 2011, all revenues of the Company represented the net sales of pharmaceutical products. No financial information by business segment is presented. Furthermore, as all revenues are derived from the PRC, no geographic information by geographical segment is presented. All tangible and intangible assets are located in the PRC.
Note 15 -
ADMINISTRATIVE PENALTY AND COMPENSATION
During the year ended December 31, the Company was imposed a non-disputable administrative penalty of approximately $1.6 million by the SFDA.
During the year ended December 31, the Company also paid $8.0 million as compensation to its customers, for costs of holding the Company’s product during the sales suspension, of which approximately $6.7 million was paid in cash and approximately $1.3 million as credits to accounts receivable.
Note 16 –
SUBSEQUENT EVENTS
The Company has evaluated subsequent events for potential recognition and disclosure through the date of financial statements was issued.
On March 11, 2013, Aoxing Pharmaceutical entered into an agreement with all the former equity holders (“Former Equity Holders”) of Shaanxi Weinan, to acquire 13 drug approval numbers for total consideration of RMB 55 million (approximately $8.7 million) and 1,602,564 shares of the Company’s common stock. Deposit of RMB 55 million (approximately $8.7 million) was paid during the year ended December 31, 2012 (note 3). The transaction was completed on April 3, 2013.