Attached files
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EX-32.1 - SKYSTAR BIO-PHARMACEUTICAL CO | v179475_ex32-1.htm |
EX-32.2 - SKYSTAR BIO-PHARMACEUTICAL CO | v179475_ex32-2.htm |
EX-31.2 - SKYSTAR BIO-PHARMACEUTICAL CO | v179475_ex31-2.htm |
EX-99.6 - SKYSTAR BIO-PHARMACEUTICAL CO | v179475_ex99-6.htm |
EX-31.1 - SKYSTAR BIO-PHARMACEUTICAL CO | v179475_ex31-1.htm |
EX-10.17 - SKYSTAR BIO-PHARMACEUTICAL CO | v179475_ex10-17.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31, 2009
OR
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ________________ to ________________
Commission
file number: 001-15643
SKYSTAR
BIO-PHARMACEUTICAL COMPANY
(Exact
name of registrant as specified in its charter)
Nevada
|
33-0901534
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
Rm.
10601, Jiezuo Plaza, No.4, Fenghui Road South,
Gaoxin District, Xian Province, P.R.
China
|
N/A
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number: (8629)
8819-3188
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each Class
|
Name
of Each Exchange on Which Registered
|
|
Common
Stock $0.001 Par Value
|
NASDAQ
Capital Market
|
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 o No þ
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 o No
þ
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 þ No o
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained herein, 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. 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” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No þ
As of
June 30, 2009, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $46.6 million based on a
closing price of $8.97 per share of common stock as reported on the NASDAQ Stock
Market on such date.
On March
24, 2010, we had 7,097,708 shares of common stock issued and
outstanding.
TABLE
OF CONTENTS
TO
ANNUAL REPORT ON FORM 10-K
FOR
YEAR ENDED DECEMBER 31, 2009
PART
I
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Page
|
|
Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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15
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Item
1B.
|
Unresolved
Staff Comments
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28
|
Item
2.
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Properties
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28
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Item
3.
|
Legal
Proceedings
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29
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PART
II
|
||
Item
5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
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31
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Item
6.
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Selected
Financial Data
|
32
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Conditions and Results of
Operations
|
32
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
|
39
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Item
8.
|
Financial
Statements
|
39
|
Item
9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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40
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Item
9A.
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Controls
and Procedures
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40
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Item
9B.
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Other
Information
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42
|
PART
III
|
||
Item
10.
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Directors,
Executive Officers and Corporate Governance
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42
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Item
11.
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Executive
Compensation
|
46
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
51
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
54
|
Item
14.
|
Principal
Accounting Fees and Services
|
56
|
PART
IV
|
||
Item
15.
|
Exhibits,
and Financial Statement Schedules
|
56
|
Signatures
|
60
|
This
report contains forward-looking statements. All forward-looking statements are
inherently uncertain as they are based on current expectations and assumptions
concerning future events or future performance of the Company. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
are only predictions and speak only as of the date hereof. Forward-looking
statements usually contain the words “estimate,” “anticipate,” “believe,”
“expect,” or similar expressions, and are subject to numerous known and unknown
risks and uncertainties. In evaluating such statements, prospective investors
should carefully review various risks and uncertainties identified in this
Report, including the matters set forth under the captions “Risk Factors” and in
the Company’s other SEC filings. These risks and uncertainties could cause the
Company’s actual results to differ materially from those indicated in the
forward-looking statements. The Company undertakes no obligation to update or
publicly announce revisions to any forward-looking statements to reflect future
events or developments.
Although
forward-looking statements in this annual report on Form 10-K reflect the good
faith judgment of our management, such statements can only be based on facts and
factors currently known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties, and actual results and outcomes
may differ materially from the results and outcomes discussed in or anticipated
by the forward-looking statements. Factors that could cause or contribute to
such differences in results and outcomes include, without limitation, those
specifically addressed under the heading “Risks Relating to Our Business” below,
as well as those discussed elsewhere in this annual report on Form 10-K. Readers
are urged not to place undue reliance on these forward-looking statements, which
speak only as of the date of this annual report on Form 10-K. We file reports
with the Securities and Exchange Commission (“SEC”). You can read and copy any
materials we file with the SEC at the SEC’s Public Reference Room, 100 F.
Street, NE, Washington, D.C. 20549 on official business days during the hours of
10 a.m. to 3 p.m. You can obtain additional information about the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the
SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC, including the Company.
We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
annual report on Form 10-K. Readers are urged to carefully review and consider
the various disclosures made throughout the entirety of this annual report,
which attempt to advise interested parties of the risks and factors that may
affect our business, financial condition, results of operations and
prospects.
PART
I
ITEM
1. BUSINESS
Overview
Skystar
Bio-Pharmaceutical Company (“Skystar” or the “Company”), formerly known as The
Cyber Group Network Corporation, was incorporated in Nevada on September 24,
1998. The Company is a holding company that, through its variable interest
entity (“VIE”) Xian Tianxing Bio-Pharmaceutical Co., Ltd. (“Xian Tianxing”),
researches, develops, manufactures and distributes veterinary health care and
medical care products in the People’s Republic of China (“PRC”).
All of
the Company’s operations are carried out by Xian Tianxing which the Company
controls through contractual arrangements between Xian Tianxing and Sida
Biotechnology (Xian) Co., Ltd. (“Sida”), the wholly owned subsidiary of
Fortunate Time International Limited, the wholly-owned subsidiary of Skystar
Bio-Pharmaceutical (Cayman) Holdings Co., Ltd. (“Skystar Cayman”), which became
our wholly-owned subsidiary subsequent to a share exchange transaction on
November 7, 2005.
1
Such
contractual arrangements are necessary to comply with Chinese laws limiting
foreign ownership of certain companies. Through these contractual arrangements,
we have the ability to substantially influence Xian Tianxing’s daily operations
and financial affairs, appoint its senior executives and approve all matters
requiring shareholder approval. As a result of these contractual arrangements,
which enable us to control Xian Tianxing, we are considered the primary
beneficiary of Xian Tianxing.
Corporate
Organization and History
We were originally incorporated in Nevada under the name Hollywood
Entertainment Network, Inc. on September 24, 1998, with a principal business
objective to operate as an independent film company in the business of motion
picture production and distribution. On May 23, 2000, we underwent a reverse merger and abandoned this
enterprise to become a developer of computer security software and hardware and
changed our name to The Cyber Group Network Corporation to reflect this change
in business.
In September 2005, we executed a Share
Exchange Agreement
(“Exchange
Agreement”) by and among R.
Scott Cramer, Steve Lowe, David Wassung (all hereinafter collectively referred
to as the “CGPN
Stockholders”) and us on
the one hand, and Skystar Bio-Pharmaceutical (Cayman) Holdings Co., Ltd., a
Cayman Island Company (“Skystar Cayman”), and the stockholders of 100% of
Skystar Cayman’s common stock (the “Skystar Cayman Stockholders”), on the other hand. (This transaction
is referred to hereinafter as the “Share Exchange Transaction”). Under the Exchange Agreement, on the Closing Date, we
issued shares of our Series B preferred stock (the “CGPN Shares”) to the Skystar Cayman Stockholders in
exchange for 100% of the common stock of Skystar. The CGPN Shares issued were
convertible, in the aggregate, into a number of shares of our common stock
that would equal 89.5% of the outstanding shares of our common stock, if the
shares were to be converted on the Closing Date. In addition, on the Closing
Date, Skystar Cayman paid us $120,000, which was used to pay our liabilities.
The closing of the Share Exchange
Transaction (the “Closing”) occurred on November 7, 2005 (the
“Closing Date”). From and after the Closing Date, our
primary operations consist of the operations of Skystar Cayman. The Share
Exchange Transaction was accounted for as a reverse merger
(recapitalization) with Skystar Cayman deemed to be the accounting acquirer, and
us as the legal acquirer. Accordingly, the historical financial information
presented in future financial statements will be that of Skystar
Cayman as adjusted to give effect to any
difference in the par value of ours and Skystar Cayman’s stock with an offset to capital in
excess of par value. The basis of the assets, liabilities and retained earnings
of Skystar Cayman, the accounting acquirer, have been carried over in the
recapitalization. Upon the closing of the Exchange Transaction, we became a
Chinese bio-pharmaceutical company that develops, manufactures and markets a
wide range of veterinary healthcare and medical care
products.
Skystar Cayman was incorporated under the laws of the
Cayman Islands on January 24, 2005. Mr. Weibing Lu and Mr. Wei Wen are the
Directors of Skystar Cayman. On October 28, 2005, Skystar Cayman entered into a
series of contractual arrangements with Xian Tianxing Bio-Pharmaceutical Co., Ltd. (“Xian Tianxing”) and its stockholders, pursuant to
which Skystar Cayman would have the ability to substantially influence Xian
Tianxing’s daily operations and financial
affairs, appoint its senior executives and approve all matters requiring stockholder approval. For a
description of these contractual arrangements, see “Contractual Arrangements with Xian
Tianxing and its Stockholders” below.
Xian Tianxing was incorporated on July
3, 1997, in China as a limited liability company without shares, but restructured as a joint
stock company limited by shares on December 31, 2003. Mr. Weibing Lu, who is our
Chief Executive Officer, is General Manager (equivalent to Chief Executive
Officer) and Chairman of Xian Tianxing. Mr. Zugang Guo, Mr. Wei Wen, Mr. Xinya Zhang, Ms. Erna Gao
and Mr. Lun Shen are Vice Chairman, Vice-General Manager and Director, Chairman
of the Board of Supervisors, Financial Director, and Supervisor of Xian
Tianxing, respectively. The paid-in capital of Xian Tianxing was funded by individuals who were majority
stockholders of Skystar Cayman immediately prior to the closing of the Share
Exchange Transaction.
On August 21, 2007, Xian Tianxing
invested $68,550 (RMB 500,000) to establish Shanghai Siqiang Biotechnological
Company Limited
(“Shanghai
Siqiang”). Shanghai Siqiang
was established in Putuo District, Shanghai, with a registered capital of
$68,550 (RMB 500,000) and Xian Tianxing is the 100% shareholder. Shanghai
Siqiang serves as a research and development center for Xian Tianxing to engage in research,
development, production and sales of feed additives and veterinary disease
diagnosis equipments. The management of Shanghai Siqiang includes: Mr. Lun Shen
as Executive Director, Mr. Wei Shen as General Manager and Ms. Erna Gao as Supervisor.
2
On October 16, 2007, our board of
directors approved the acquisition of all of the issued and outstanding shares
of Fortunate Time, a Hong Kong company owned 100% by Mr.
R. Scott Cramer, a member of our board of directors. Fortunate Time’s management consists solely of Mr. Wei
Wen as Director.
On July 10, 2007, Fortunate Time established Sida in the
High Technology District in Xi’an as its wholly owned subsidiary with
$5,000,000 in registered capital. On July 13, 2009, the High Technology District approved
Sida’s application to increase its registered
capital to $15,000,000, which amount has been fully capitalized.
As the wholly owned subsidiary of a
non-Chinese company (Fortunate Time), Sida is deemed a wholly foreign
owned enterprise
(“WFOE”). On March 10, 2008, all of the rights and
obligations of Skystar Cayman under the contractual arrangements were
transferred to Sida. As
described below under “Transfer of the Contractual Arrangements
with Xian Tianxing and its Stockholders”, Sida’s principal business is to carry out the
terms of the contractual arrangements with Xian Tianxing and its shareholders.
Sida’s management includes: Mr. Wei Wen (who
is a member of our Board), Mr. Xinya Zhang, Ms. Erna Gao and Mr. Lun Shen as
General Manger,
Vice-General Manager and Director, Supervisor, and Director,
respectively.
As a result of these contractual arrangements, which
obligates Sida to absorb a majority of the risk of
loss from Xian Tianxing’s activities and enable Sida to receive a majority of its expected residual
returns, we believe Xian
Tianxing is a VIE under FASB Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest Entities, an Interpretation of
ARB No. 51”, because the equity investors in Xian
Tianxing do not have the
characteristics of a controlling financial interest and we should be considered
the primary beneficiary of Xian Tianxing. Accordingly, although neither we nor our
subsidiaries own any equity
interests in Xian Tianxing, we consolidate Xian Tianxing’s results, assets and liabilities in the
accompanying financial statements.
On September 18, 2009, Skystar
Bio-Pharmaceutical Inc., a California corporation (“Skystar California”), was established to facilitate our
exploring of business opportunities in California, and we seeded the
venture with $200,000 of initial capital for such purpose.
Name
Change and Changes in Authorized Shares of Common Stock
On
December 19, 2005, our board of directors and the majority holders of the
Company’s capital stock jointly approved amendments to our Articles of
Incorporation by written consent, including: (1) a change of our corporate name
to our current name, Skystar Bio-Pharmaceutical Company, (2) a 1-for-397 reverse
stock split; and a (3) decrease in the authorized common stock of the Company
from 500,000,000 to 50,000,000 shares. The Certificate of Amendment and
Certificate of Change to our Articles of Incorporation to effect the name
change, reverse split and decrease of authorized shares was filed with Nevada’s
Secretary of State on February 15, 2006.
On July
11, 2008, we filed another Certificate of Amendment to our Articles of
Incorporation with Nevada’s Secretary of State after stockholders approved a
proposal at a special meeting of the stockholders held on June 30, 2008, to
increase the number of authorized shares of common stock from 50,000,000 to
200,000,000.
On May 12, 2009, we effected a 1-for-10
reverse stock split of the Company’s issued and outstanding shares of common stock and concurrently reduced the number of
authorized shares of common stock from 200,000,000 to 20,000,000. Under Section
78.2055 of the Nevada Revised Statues (“NRS”), to decrease the numbers of issued and
outstanding shares of a class or series of a corporation's capital stock requires the
approval of stockholders holding a majority of the voting power of the affected
class or series, or such greater proportion as may be provided in the articles
of incorporation, regardless of limitations or restrictions on the voting power of the affected class
or series. However, under NRS Section 78.207, a corporation may change the
number of shares of a class of its authorized stock by increasing or decreasing
the number of authorized shares of the class and correspondingly increasing or decreasing the number
of issued and outstanding shares of the same class held by each stockholder of
record by a resolution adopted by the board of directors without obtaining the
approval of the stockholders. Accordingly, we effected the 1-for-10 reverse stock split without the
approval of our stockholders by concurrently effecting a corresponding reduction
in the number of shares of our authorized common stock pursuant to NRS Section
78.207.
3
On
November 16, 2009, we effected a 2-for-1 forward stock split of the Company’s
issued and outstanding shares of common stock and a proportional increase of the
Company’s authorized shares of common stock from 20,000,000 to 40,000,000,
pursuant to NRS Section 78.209.
Contractual
Arrangements with Xian Tianxing and Its Stockholders
Our
relationships with Xian Tianxing and its stockholders are governed by a series
of contractual arrangements, as we (including our direct and indirect
subsidiaries) do not own any equity interests in Xian Tianxing. PRC law
currently has limits on foreign ownership of certain companies. To comply with
these restrictions, Skystar Cayman entered into the following contractual
arrangements with Xian Tianxing and its owners on October 28, 2005:
Consulting Services
Agreement. Pursuant to the consulting services agreement with Xian
Tianxing, Skystar Cayman has the exclusive right to provide to Xian Tianxing
general services related to veterinary healthcare and medical care products
business operations as well as consulting services related to the technological
research, development, design and manufacturing of veterinary healthcare and
medical care products (the “Services”). Skystar Cayman also sends employees to
Xian Tianxing for whom Xian Tianxing bears the costs and expenses. Under this
agreement, Skystar Cayman owns the intellectual property rights developed or
discovered through research and development providing the Services for Xian
Tianxing. Xian Tianxing pays a quarterly consulting service fees in Renminbi
(“RMB”) to Skystar Cayman that is equal to all of Xian Tianxing’s revenue for
such quarter. The consulting services agreement is in effect unless and until
terminated by written notice of either party in the event that: (a) the other
party causes a material breach of this agreement, provided that if the breach
does not relate to a financial obligation of the breaching party, that party may
attempt to remedy the breach within 14 days following the receipt of the written
notice; (b) the other party becomes bankrupt, insolvent, is the subject of
proceedings or arrangements for liquidation or dissolution, ceases to carry on
business, or becomes unable to pay its debts as they become due; (c) Skystar
Cayman terminates its operations; (d) Xian Tianxing’s business license or any
other license or approval for its business operations is terminated, cancelled
or revoked; or (e) circumstances arise which would materially and adversely
affect the performance or the objectives of the consulting services agreement.
Additionally, Skystar Cayman may terminate the consulting services agreement
without cause.
Operating Agreement.
Pursuant to the operating agreement with Xian Tianxing and the stockholders of
Xian Tianxing who collectively hold the majority of the outstanding shares of
Xian Tianxing (collectively “Tianxing Majority Stockholders”), Skystar Cayman
provides guidance and instructions on Xian Tianxing’s daily operations,
financial management and employment issues. The Tianxing Majority Stockholders
must designate the candidates recommended by Skystar Cayman as their
representatives on Xian Tianxing’s board of directors. Skystar Cayman has the
right to appoint senior executives of Xian Tianxing. In addition, Skystar Cayman
agrees to guarantee Xian Tianxing’s performance under any agreements or
arrangements relating to Xian Tianxing’s business arrangements with any third
party. Xian Tianxing, in return, agrees to pledge its accounts receivable and
all of its assets to Skystar Cayman. Moreover, Xian Tianxing agrees that without
the prior consent of Skystar Cayman, Xian Tianxing will not engage in any
transactions that could materially affect the assets, liabilities, rights or
operations of Xian Tianxing, including, without limitation, incurrence or
assumption of any indebtedness, sale or purchase of any assets or rights,
incurrence of any encumbrance on any of its assets or intellectual property
rights in favor of a third party or transfer of any agreements relating to its
business operation to any third party. The term of this agreement is ten (10)
years from October 28, 2005 and may be extended only upon Skystar Cayman’s
written confirmation prior to the expiration of the this agreement, with the
extended term to be mutually agreed upon by the parties.
Equity Pledge
Agreement. Under
the equity pledge agreement with the Tianxing Majority Stockholders, the
Tianxing Majority Stockholders pledged all of their equity interests in Xian
Tianxing to Skystar Cayman to guarantee Xian Tianxing’s performance of its
obligations under the consulting services agreement. If Xian Tianxing or the
Tianxing Majority Stockholders breaches their respective contractual
obligations, Skystar Cayman, as pledgee, will be entitled to certain rights,
including but not limited to the right to sell the pledged equity interests, the
right to vote and control the pledged assets. The Xian Majority Stockholders
also agreed that upon occurrence of any event of default, Skystar Cayman shall
be granted an exclusive, irrevocable power of attorney to take actions in the
place and stead of the Tianxing Majority Stockholders to carry out the security
provisions of the equity pledge agreement and take any action and execute any
instrument that Skystar Cayman may deem necessary or advisable to accomplish the
purposes of the equity pledge agreement. The Tianxing Majority Stockholders
agreed not to dispose of the pledged equity interests or take any actions that
would prejudice Skystar Cayman’s interest. The equity pledge agreement will
expire two (2) years after Xian Tianxing obligations under the exclusive
consulting services agreement have been fulfilled.
4
Option Agreement. Under the option
agreement with the Tianxing Majority Stockholders, the Tianxing Majority
Stockholders irrevocably granted Skystar Cayman or its designee an exclusive
option to purchase, to the extent permitted under Chinese law, all or part of
the equity interests in Xian Tianxing for the cost of the initial contributions
to the registered capital or the minimum amount of consideration permitted by
applicable Chinese law. Skystar Cayman or its designee has sole discretion to
decide when to exercise the option, whether in part or in full. The term of this
agreement is ten (10) years from October 28, 2005 and may be extended prior to
its expiration by written agreement of the parties.
Proxy Agreement. Pursuant to the proxy
agreement with the Tianxing Majority Stockholders and Xian Tianxing, the
Tianxing Majority Stockholders agreed to irrevocably grant a designee of Skystar
Cayman with the right to exercise their voting and other rights, including the
rights to attend and vote at stockholder’s meetings (or by written consent in
lieu of such meetings) in accordance with applicable laws and Xian Tianxing’s
Article of Association, as well as the rights to sell or transfer all or any of
their equity interests of the Company. The term of this Proxy Agreement is ten
(10) years from October 28, 2005 and may be extended prior to its expiration by
written agreement of the parties.
Transfer
of the Contractual Arrangements with Xian Tianxing and its
Shareholders
On March
10, 2008, we were made a party to a series of agreements (collectively the
“Transfer Agreements”) transferring the contractual arrangements governing the
relationship among Skystar Cayman, Xian Tianxing and the Tianxing Majority
Stockholders. Pursuant to the Transfer Agreements, from and after March 10,
2008, all of the rights and obligations of Skystar Cayman under the contractual
arrangements were transferred to Sida. We were made a party to the Transfer
Agreements for the sole purpose of acknowledging the Transfer Agreements. In
effect, Skystar Cayman assigned the contractual rights it had with Xian Tianxing
to an indirectly wholly-owned subsidiary, Sida.
Under our
corporate structure with the contractual arrangements, the ability to transfer
funds to and from Xian Tianxing expeditiously through a foreign currency bank
account is necessary for the running of our business operations. Under current
applicable Chinese law, only a company that is classified as either a wholly
foreign owned enterprise (WFOE) or a Sino-foreign joint venture may maintain a
foreign currency bank account. Because Sida is wholly owned by Fortunate Time, a
Hong Kong company, Sida is deemed a WFOE and may therefore maintain a foreign
currency account. The Transfer Agreements amend the contractual arrangements so
that funds are required to be transferred to and from Xian Tianxing through
Sida’s foreign currency account and, through Sida, allow the Company to continue
to control Xian Tianxing and its business operations.
The
Transfer Agreements have transferred all of the rights and obligations of
Skystar Cayman under the contractual arrangements to Sida. Thus, pursuant to the
Amendment to Consulting Services Agreement, Sida now provides exclusive
technology and general business consulting services to Xian Tianxing in exchange
of a consulting fee equivalent to all of Xian Tianxing’s revenue; pursuant to
the Amendment to Equity Pledge Agreement, the Tianxing Majority Stockholders now
pledge their equity interests in Xian Tianxing to Sida; pursuant to the
Agreement to Transfer of Operating Agreement, Sida now provides guidance and
instructions on Xian Tianxing’s daily operations, financial management and
employment issues; pursuant to the Designation Agreement, the Tianxing Majority
Stockholders have entrusted all the rights to exercise their voting power to
appointee(s) of Sida; and pursuant to the Agreement to Transfer of Option
Agreement, the Tianxing Majority Stockholders have irrevocably granted Sida an
exclusive option to purchase, to the extent permitted under PRC law, all or part
of their equity interests in Xian Tianxing.
5
The
Transfer Agreements and the transfer of the rights and obligations of Skystar
Cayman under the contractual arrangements to Sida comply with applicable PRC law
and do not in any way affect our business operations. Additionally, we believe
that Xian Tianxing’s status as a VIE under FASB Interpretation No. 46R (“FIN
46R”), “Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51,” is unaffected by the Transfer Agreements. Under the contractual
arrangements, we viewed Xian Tianxing as a VIE of Skystar Cayman because the
contractual arrangements obligated Skystar Cayman to absorb a majority of the
risk of loss from Xian Tianxing’s activities and enabled Skystar Cayman to
receive a majority of its expected residual returns. The Transfer Agreements
merely substitute Skystar Cayman with Sida, an indirect wholly owned subsidiary
of Skystar Cayman, such that the equity investors of Xian Tianxing continue to
not have the characteristics of a controlling financial interest (just as under
the contractual arrangements) and we continue to be the primary beneficiary of
Xian Tianxing. Accordingly, we continue to consolidate Xian Tianxing’s results,
assets and liabilities in the financial statements accompanying this annual
report.
Current
Corporate Structure
We conduct substantially all of our
business operations through Xian Tianxing. Chinese law currently has limits on
foreign ownership of
certain businesses which prohibit non-Chinese persons from having direct
ownership interests. To comply with these foreign ownership restrictions, we do
not own any equity interests in Xian Tianxing or its wholly-owned subsidiary,
Shanghai Siqiang, but control and receive the economic
benefits of their business operations through contractual arrangements. Xian
Tianxing holds the licenses and approvals necessary to operate its business in
China. We have contractual arrangements with Xian Tianxing and its stockholders pursuant to which we
provide technology consulting and other general business operation services to
Xian Tianxing. Through these contractual arrangements, we also have the ability
to substantially influence Xian Tianxing’s daily operations and financial affairs, since we are
able to appoint its senior executives and approve all matters requiring
stockholder approval. As a result of these contractual arrangements, which
enable us to control Xian Tianxing (and through Xian Tianxing,
Shanghai Siqiang) and to receive, through our
direct and indirect wholly owned subsidiaries, all of Xian Tianxing’s profits, we are considered the primary
beneficiary of Xian Tianxing. Accordingly, we consolidate Xian
Tianxing’s results, assets and liabilities in
our financial
statements.
However, Chinese laws and regulations
concerning the validity of the contractual arrangements are uncertain, as many
of these laws and regulations are relatively new and may be subject to change,
and their official interpretation and enforcement by the Chinese
government may involve substantial uncertainty. Additionally, the contractual
arrangements may not be as effective in providing control over Xian Tianxing as
direct ownership, which we are restricted from under current Chinese law. Due to such uncertainty, we may
take such additional steps in the future as may be permitted by the then
applicable law and regulations in China to further strengthen our control over
or toward actual ownership of Xian Tianxing or its assets or business operations, which could include
direct ownership of selected assets without jeopardizing any favorable
government policies toward domestic owned enterprises. Because we rely on Xian
Tianxing for our revenue, any termination of or disruption to these contractual arrangements could
detrimentally affect our business.
6
Set forth below is our current corporate
structure:
(1)
|
The
management of Skystar includes: Mr. Weibing Lu as Chairman and Chief
Executive Officer, Mr. Bennet P. Tchaikovsky as Chief Financial Officer,
and Mr. Wei Wen, Mr. R. Scott Cramer, Mr. Mark D. Chen, Mr. Qiang Fan, Dr.
Shouguo Zhao and Dr. Chengtun Qu as members of the board of directors. As
of March 24, 2010: Upform Group Limited, a British Virgin Islands company
of which Mr. Lu is a director, owns approximately 13.2% of Skystar’s
issued and outstanding common stock; Clever Mind International Limited, a
British Virgin Islands company of which Mr. Wen is director, owns
approximately 0.6%; Mr. Cramer owns and/or controls approximately 2.2%,
and Mr. Tchaikovsky owns approximately 0.3% and Mr. Chen owns
approximately 0.08%. Mr. Fan, Dr. Zhao and Dr. Qu do not own any shares of
Skystar’s common stock.
|
(2)
|
The
management of Skystar Cayman is comprised of Mr. Weibing Lu and Mr. Wei
Wen as its Directors. Skystar is the sole shareholder of Skystar
Cayman.
|
(3)
|
The
management of Fortunate Time is comprised solely of Mr. Wei Wen as its
Director. Skystar Cayman is the sole shareholder of Fortunate
Time.
|
(4)
|
The
management of Sida includes: Mr. Wei Wen as General Manager, Mr. Xinya
Zhang as Vice-General Manager and Director, Mr. Lun Shen as Director and
Ms. Erna Gao as Supervisor. Fortunate Time is the sole shareholder of
Sida.
|
(5)
|
Sida
controls Xian Tianxing through contractual arrangements designed to mimic
equity ownership of Xian Tianxing by Sida. These contracts include a
consulting services agreement, operating agreement, equity pledge
agreement, option agreement, and proxy agreement. Sida is a wholly-foreign
owned enterprise or “WFOE.” Most foreign entities such as us control or
hold ownership of Chinese enterprises indirectly through WFOEs because it
eliminates the need for a Chinese
partner.
|
7
(6)
|
The
management of Xian Tianxing includes: Mr. Weibing Lu as Chairman and
General Manager (equivalent to Chief Executive Officer), Mr. Zugang Guo as
Vice Chairman, Mr. Wei Wen as Vice-General Manager and Director, Mr. Xinya
Zhang as Chairman of Board of Supervisors, Ms. Erna Gao as Finance
Director and Mr. Lun Shen as Supervisor. As of the date of this
prospectus: Mr. Lu owns approximately 41%, and Mr. Wen approximately 5%,
of the issued and outstanding stock of Xian Tianxing; Mr. Guo, Mr. Zhang,
Ms. Gao and Mr. Shen do not own any equity interests in Xian
Tianxing.
|
(7)
|
The
management of Shanghai Siqiang includes: Mr. Lun Shen as Executive
Director, Mr. Wei Shen as General Manager and Ms. Erna Gao as Supervisor.
Xian Tianxing is the sole shareholder of Shanghai
Siqiang.
|
Our
Business
As
discussed above, we conduct our business through Xian Tianxing. After nine (9)
years of development, we have become a high-tech enterprise with registered
capital of RMB 42,000,000 (approximately $5,082,000), and are engaged in
research, development, production, marketing and sales of bio-pharmaceutical and
veterinary products. Our business divisions currently include a
bio-pharmaceutical products division, a veterinary drugs division, a fodder and
feed additive division, and a microorganism preparation division.
Our
Products
Currently,
we have four major product lines:
·
|
Our
bio-pharmaceutical veterinary vaccine line currently includes over 10
products and accounted for 4% of our revenue in
2009;
|
·
|
Our
veterinary medicine line for poultry and livestock currently includes over
159 products and accounted for 68% of our revenue in
2009;
|
·
|
Our
feed additives line currently includes over 10 products and accounted for
4% of our revenue in 2009;
and
|
·
|
Our
micro-organism products line currently includes over 16 products and
accounted for 24% of our revenue in
2009.
|
Industry and Market
Overview
Management believes there is significant
demand for veterinary medicines and vaccines in China. Statistics from the
Chinese Ministry of Agriculture show that China vaccinated six billion poultry and 850
million livestock in the first half of 2006. According to the Chinese Ministry
of Agriculture, the addressable market in China in 2004 for veterinary,
livestock and poultry vaccines was over 70 billion doses; however the market supply was only 32 billion
doses.
We also believe that there is a
substantial market for micro-organisms which are fed to animals and result in
healthier livestock and reduced feed requirements for our customers. According
to the Chinese Ministry of
Agriculture, the addressable market in China in 2004 for such micro-organisms
was 3 million tons, while the supply output was only 200,000
tons.
Distribution
Methods of Our Products and Our Customers
As of
December 31, 2009, we had over 1,983 customers in 29 provinces in China,
including 1,465 distributors and 518direct customers. Of the 1,465 distributors,
350 are physical stores which have outer signage with our logo and sell products
from our four product lines exclusively (“Franchise Distributors”). We intend to
enter into agreements with additional distributors in order to strengthen our
distribution network and convert some of these distributors to Franchise
Distributors.
8
We
recognize the importance of branding as well as packaging. All of our products
have uniform branding while being specifically designed to differentiate our
four product lines.
We
conduct promotional marketing activities within the provinces we operate to
publicize and enhance our image as well as to reinforce the recognition of our
brand name, including:
1.
|
publishing
advertisements and articles in national as well as specialized and
provincial newspapers, magazines, and in other media, including the
Internet;
|
2.
|
participating
in national meetings, seminars, symposiums, exhibitions for
bio-pharmaceutical and other related
industries;
|
3.
|
organizing
cooperative promotional activities with distributors;
and
|
4.
|
sending
direct mail to major farms.
|
None of
our customers accounted for 10% or more of our total revenues in
2009.
Competition
We have
three major competitors in China: Jielin Bio-Tech Production Co., Ltd., Qilu
Animal Health Production Co., Ltd., and Zhongmu Industrial Joint Stock Co., Ltd.
These companies have more assets and have a larger market share. Nevertheless,
we believe we are able to compete with these competitors because of our location
in northwestern China, a full range of product offerings, and lower prices.
Other than these three competitors, most of our other competitors produce only
one or two products.
Sources
and Availability of Raw Materials and Our Principal Suppliers
Xi’an Yanghua Chemical Co., Ltd.,
Xi’an Nanchen Trading Co., Ltd. and
Xi’an Fandike Chemical Technology Co., Ltd.
collectively supplied over forty-eight percent (48%) of the raw materials we used to
manufacture our products. We design, create prototypes and manufacture our
products at our manufacturing facilities located at Xi’an city, Shaanxi Province, China. Our
principal raw materials include various chemical compounds including dexamethasone sodium
phosphate (a glucocorticoid with anti-inflammatory property), stachyose (a
tetrasaccharide found naturally in many vegetables), praziquantel (which treats
schistosomiasis) and
thiamphenicol (an antibiotic). We also use Chinese herbs such as Huoxiang,
Huanglian, and Zhang Red Flowers as raw materials, which are supplied to us by
Wan Shou Bei Lu Zhong Kui
Cao Yao Xing. None of our
current products requires any raw materials that are scarce, and our raw
materials generally are
readily available from a wide range of sources. Accordingly, we do not have any
continuing or long term supply agreements with any of these suppliers, and
purchase our raw materials from them on a per purchase order basis. The prices
for these raw materials are nevertheless subject to market
forces largely beyond our control, including energy costs, organic chemical
feedstock, market demand, and freight costs. The prices for these raw materials
have varied significantly in the past and may vary significantly in the future.
As a result of our research and
development efforts in 2007 in cooperation with research institutes including
Shaanxi Microbial Research Institute, Jiangsu Microbial Research Institute,
China Northwestern University and China Northwest A&F University, we now also
internally produce microbial strains, which are key components of our
micro-organism products. Our ability to produce microbial strains has translated
into a significant cost reduction for these raw materials.
9
Intellectual
Properties and Licenses
We rely
on a combination of trademark, copyright and trade secret protection laws in
China and other jurisdictions, as well as confidentiality procedures and
contractual provisions to protect our intellectual property and our
brand.
We intend
to seek other licenses or apply for exclusivity as necessary in order to protect
our rights, and we also enter into confidentiality, non-compete and invention
assignment agreements with our employees and consultants and nondisclosure
agreements with third parties. The Chinese characters which transliterate as
“Jia Teng Jun”, “Liao Xiao Wang”, “An Jian”, “Hao Shou Yi” and “Xing Ge” are our
registered trademarks in China.
Additionally, Xian Tianxing is approved
by the Chinese Ministry of Agriculture for the manufacture and distribution
of 100 types of veterinary drugs. Such
approvals certify Xian Tianxing’s products as conforming to
government-mandated standards. The approvals are issued for a period of 5 years
and may be renewed 6 months prior to their expiration date. The 100 veterinary drugs and their approval
numbers are listed below:
Veterinary
Drug Products
|
Approval
Number
|
||
Metamizole
Sodium Injection
|
Veterinary
Drug (2007) 270261152
|
||
Antondine
Injection
|
Veterinary
Drug (2007) 270261160
|
||
Dexamethasone
Sodium Phosphate Injection
|
Veterinary
Drug (2007) 270262530
|
||
Enrofloxacin
Injection
|
Veterinary
Drug (2007) 270262518
|
||
Compoumd
Vitamin B Injection
|
Veterinary
Drug (2007) 270264572
|
||
Sulfamonomethoxine
Sodium Injection
|
Veterinary
Drug (2007) 270261616
|
||
Sulfadiazine
Sodium Injection
|
Veterinary
Drug (2007) 270261634
|
||
Kanamycin
Sulfate Injection
|
Veterinary
Drug (2007) 270261211
|
||
Gentamycin
Sulfate Injection
|
Veterinary
Drug (2007) 270261507
|
||
Gentamycin
Micronomicin Sulfate Injection (10 ml:100,000 parts)
|
Veterinary
Drug (2007) 270262751
|
||
Gentamycin
Micronomicin Sulfate Injection (10ml: 200,000 parts)
|
Veterinary
Drug (2007) 270262752
|
||
Mequindox
Injection (10ml:0.5g)
|
Veterinary
Drug (2007) 270261174
|
||
Mequindox
Injection (10ml:0.2g)
|
Veterinary
Drug (2007) 270264644
|
||
Vitamin
C Injection
|
Veterinary
Drug (2007) 270262795
|
||
Vitamin
B1 Injection
|
Veterinary
Drug (2007) 270261389
|
||
Lincomycin
Hydrochloride Injection (10ml:0.3g)
|
Veterinary
Drug (2007) 270262614
|
||
Lincomycin
Hydrochloride Injection (10ml:1.5g)
|
Veterinary
Drug (2007) 270262616
|
||
Danofloxacin
Mesylate Powder
|
Veterinary
Drug (2008) 270262036
|
||
Ofloxacin
Injection
|
Veterinary
Drug (2007) 270262126
|
||
Norfloxacin
Nicotinate Injection
|
Veterinary
Drug (2007) 270262593
|
||
Ciprofloxacin
Hydrochloride Injection
|
Veterinary
Drug (2007) 270262160
|
||
Pefloxacin
Mesylate Granules
|
Veterinary
Drug (2007) 270262042
|
||
Praziquantel
Tablets
|
Veterinary
Drug (2007) 270261174
|
||
Compound
Sulfamethoxazole Tablets
|
Veterinary
Drug (2007) 270261612
|
||
Ofloxacin
Tablets
|
Veterinary
Drug (2007) 270262123
|
||
Amoxicillin
Soluble Powder
|
Veterinary
Drug (2007) 270261199
|
10
Avermectin
Powder
|
Veterinary
Drug (2007) 270262066
|
||
Diclazuril
Premix (0.2%)
|
Veterinary
Drug (2007) 270261140
|
||
Diclazuril
Premix (5%)
|
Veterinary
Drug (2007) 270262528
|
||
Florfenicol
Powder
|
Veterinary
Drug (2007) 270262110
|
||
Compound
Amoxicillin Powder
|
Veterinary
Drug (2007) 270262092
|
||
Thiamphenicol
Powder
|
Veterinary
Drug (2007) 270262722
|
||
Erythromycin
Thiocyanate Soluble Powder
|
Veterinary
Drug (2007) 270261492
|
||
Apramycin
Sulfate Soluble Powder
|
Veterinary
Drug (2007) 270262745
|
||
Neomycin
Sulfate Soluble Powder
|
Veterinary
Drug (2007) 270262755
|
||
Colistin
Sulfate Soluble Powder
|
Veterinary
Drug (2007) 270262758
|
||
Salinomycin
Sodium Premix
|
Veterinary
Drug (2007) 270261379
|
||
Ciprofloxacin
Hydrochloride Soluble Powder
|
Veterinary
Drug (2007) 270262159
|
||
Spectinomycin
Hydrochloride and Lincomycin Hydrochloride Soluble Powder
|
Veterinary
Drug (2007) 270262602
|
||
Ofloxacin
Soluble Powder
|
Veterinary
Drug (2007) 270262124
|
||
Baitouweng
San
|
Veterinary
Drug (2007) 270265053
|
||
Baotai
Wuyou San
|
Veterinary
Drug (2007) 270265111
|
||
Chulijing
|
Veterinary
Drug (2007) 270265192
|
||
Danjibao
|
Veterinary
Drug (2007) 270265171
|
||
Feizhucai
|
Veterinary
Drug (2007) 270265100
|
||
Fuzheng
Jiedu San
|
Veterinary
Drug (2007) 270265076
|
||
Gongying
San
|
Veterinary
Drug (2007) 270265028
|
||
Houyanjing
San
|
Veterinary
Drug (2007) 270265179
|
||
Huanglian
Jiedu San
|
Veterinary
Drug (2007) 270265178
|
||
Jianji
San
|
Veterinary
Drug (2007) 270265133
|
||
Jianwei
San
|
Veterinary
Drug (2007) 270265134
|
||
Jingfang
Baidu San
|
Veterinary
Drug (2007) 270265127
|
||
Mubin
Xiaohuang San
|
Veterinary
Drug (2007) 270265035
|
||
Qingfei
Zhike San
|
Veterinary
Drug (2007) 270265157
|
||
Qingshu
San
|
Veterinary
Drug (2007) 270265162
|
||
Qingwen
Baidu San
|
Veterinary
Drug (2007) 270265165
|
||
Quchong
San
|
Veterinary
Drug (2007) 270265089
|
||
Tongru
San
|
Veterinary
Drug (2007) 270265156
|
||
Xiaoji
San
|
Veterinary
Drug (2007) 270265146
|
||
Yimu
Shenghua San
|
Veterinary
Drug (2007) 270265148
|
||
Yujin
San
|
Veterinary
Drug (2007) 270265102
|
||
Zhili
San
|
Veterinary
Drug (2007) 270265037
|
||
Compound
Sulfamethoxydiazine Sodium Injection
|
Veterinary
Drug (2007) 270261608
|
11
Lomefloxacin
Hydrochloride Soluble Powder
|
Veterinary
Drug (2008) 270262166
|
||
Danofloxacin
Mesylate Injection
|
Veterinary
Drug (2008) 270262033
|
||
Sulfathiazole
Sodium Injection
|
Veterinary
Drug (2008) 270261645
|
||
Buzhong
Yiqi San
|
Veterinary
Drug (2008) 270265082
|
||
Fangji
San
|
Veterinary
Drug (2008) 270265072
|
||
Shenling
Baishu San
|
Veterinary
Drug (2008) 270265093
|
||
Qibu
San
|
Veterinary
Drug (2008) 270265220
|
||
Sulfaquinoxaline
Sodium Soluble Powder (10%)
|
Veterinary
Drug (2008) 270261624
|
||
Sulfaquinoxaline
Sodium Soluble Powder (5%)
|
Veterinary
Drug (2008) 270262580
|
||
Fenbendazole
Powder
|
Veterinary
Drug (2008) 270261189
|
||
Sulfachloropyrazin
Sodium Soluble Powder
|
Veterinary
Drug (2008) 270262703
|
||
Huoxiang
Zhengqi San
|
Veterinary
Drug (2008) 270265200
|
||
Cuiqing
San
|
Veterinary
Drug (2008) 270265188
|
||
Longdan
Xiegan San
|
Veterinary
Drug (2008) 270265057
|
||
Maxing
Shigan San
|
Veterinary
Drug (2008) 270265174
|
||
Qumai
San
|
Veterinary
Drug (2008) 270265067
|
||
Shengru
San
|
Veterinary
Drug (2008) 270265051
|
||
Xiaoshi
Pingwei San
|
Veterinary
Drug (2008) 270265145
|
||
Xiaochaihu
San
|
Veterinary
Drug (2008) 270265018
|
||
Yinqiao
San
|
Veterinary
Drug (2008) 270265172
|
||
Pefloxacin Mesylate
Injection
|
Veterinary
Drug (2008) 270262665
|
||
Enrofloxacin
Injection (10ml:250mg)
|
Veterinary
Drug (2008) 270261295
|
||
Florfenicol
Injection
|
Veterinary
Drug (2008) 270262546
|
||
Lomefloxacin Hydrochloride
Injection
|
Veterinary
Drug (2008) 270262169
|
||
Berberine Sulfate
Injection
|
Veterinary
Drug (2008) 270264595
|
||
Gentamycin
Sulfate
Injection
(10ml:0.2g)
|
Veterinary
Drug (2008) 270261506
|
||
Promethazine Hydrochloride
Injection
|
Veterinary
Drug (2008) 270262126
|
||
Bailong
San
|
Veterinary
Drug (2008) 270265055
|
||
Feizhu
San
|
Veterinary
Drug (2009) 270265101
|
||
Ivermectin
Premix
|
Veterinary
Drug (2009) 270263059
|
||
Kitasamycin
Premix
|
Veterinary
Drug (2008) 270262043
|
||
Pefloxacin Mesylate Soluble
Powder
|
Veterinary
Drug (2008) 270262040
|
||
Ciprofloxacin Lactate Soluble
Powder
|
Veterinary
Drug (2008) 270262073
|
||
Norfloxacin Nicotinic Soluble
Powder
|
Veterinary
Drug (2008) 270262178
|
||
Tylosin Tartrate Soluble
Powder
|
Veterinary
Drug (2008) 270262731
|
||
Lincomycin Hydrochloride Soluble
Powder
|
Veterinary
Drug (2008) 270262620
|
||
Tilmicosin
Premix
|
Veterinary
Drug (2010) 270262263
|
12
Bio-pharmaceutical companies are at
times involved in litigation based on allegations of infringement or other
violations of intellectual property rights. Furthermore, the application of laws
governing intellectual property rights in China and abroad is uncertain and evolving and could
involve substantial risks to us.
Government
Approval and Regulation of Our Principal Products or Services
Government
approval is required for the production of bio-pharmaceutical products. The
Chinese Ministry of Agriculture has granted Xian Tianxing three government
permits to produce the following products: Forage Additive Products, Additive
and Mixed Forage Products and Veterinary Medicine Products. For the production
of the veterinary medicine, there is a national standard known as the Good
Manufacturing Practice (“GMP”) standard. A company must establish its facility
according to GMP standards, including both the facility and the production
process. After establishing such facility, the company files an application to
operate the facility with the PRC Ministry of Agriculture, which then sends a
team of specialists to conduct an on-site inspection of the facility. A company
cannot start production at the facility until it receives approval from the
Ministry of Agriculture to begin operations. Xian Tianxing currently
has the requisite approval and licenses from the Ministry of Agriculture in
order to operate our production facilities.
Research
and Development
We place great emphasis on product
research and development, and are currently working closely with two research
institutes in the veterinary science field. With Shanghai Poultry Verminosis
Institution, which is a
part of the Chinese Academy of Agricultural Sciences, we have jointly
established the Skystar Research and Development Center in Shanghai. We have
also established a research and development center, located on our premises in
Huxian, with Shaanxi Microbial Institute, the only
microbial research institute in northwest China.
In July
2005, we entered into a cooperation agreement with Shaanxi Microbial Institute
pursuant to which we established a R&D center at our Huxian plant to
facilitate opportunities for us to develop commercially viable products based on
the Institute’s research conducted at our research center. Under the cooperation
agreement, we provide for the running and operation of the research center,
including research equipment and materials. In exchange, we have exclusive
rights to any technology derived from any research project that we solely fund.
The cooperation agreement also provides for our mutual staffing of research
personnel at, and joint-appointment of the director for, the research center.
The Institute, however, is not obligated to us with respect to a specific amount
of time or a specific project under the cooperation agreement. Currently, we are
undertaking the following projects at this research center:
1.
|
Development of protein
technology and enzyme mechanism. Introducing the
technology in polypeptides, we are working to develop new products to cure
piglet diarrhea. The products are expected to stimulate the release of
growth hormones in piglets, improve their ability to produce antibody and
excrete stomach acidity, enhance the activity of albumen enzyme and adjust
the activity of T.B. cells, thereby improving their all-around
disease-resistance ability. We expect these new products will greatly
reduce the use of traditional chemical drugs and lead to more
environmentally-friendly livestock raising. These products are now in the
interim stage of development. We are also developing complex enzyme
preparations as new feed additives and aim to use anti-inflammatory
enzyme, polyase, and cellulose to form the best combination to effectively
dissolve and cause the additive to be absorbed in the feed. Our goal is to
drastically improve the absorption rate of the feed, thereby reducing the
ratio of usage of feed versus meat, while concurrently reducing the
incidence of disease in livestock and poultry. We are looking to outsource
certain aspects of these research projects to Shaanxi Jiuzhou
Biotechnology Co., Ltd., a member of Shaanxi Jiuzhou Biomedicine Park,
although we have not entered into any definitive
agreement.
|
2.
|
Development of non-pathogenic
micro-organisms. We are also developing, in cooperation
with the Institute, non-pathogenic micro-organisms and, based upon current
products of microbe preparations, lactobacillus, bacillus, bifid bacterium
baceroid, and combined with the most appropriate oligosaccharide
preparations to produce living bacterium which will be applied to cure
gastrointestinal tract diseases resulting from the maladjustment of flora.
If successful, micro-organism preparations can be effective cure and
prevention for livestock disease, and can greatly reduce the use of
antibiotic and other drugs.
|
13
At the
Skystar Research and Development Center in Shanghai, we have an arrangement with
Shanghai Poultry Verminosis Institution, which is a part of the Chinese Academy
of Agricultural Sciences, that is similar to our agreement with Shaanxi
Microbial Institute, although we have not entered into any written agreement
with the Institution. Currently, we are undertaking the following projects at
this research center:
1.
|
Development of new products
for animal immunization by employing new technologies in micro-organism
and bacterium. We expect to be placing greater resources
into our research and development with the Institution of toxoid,
multivalent inactivated vaccines and attenuated live vaccine, which we
believe will gradually replace traditional chemical drugs and which will
greatly impact the animal vaccination
industry.
|
2.
|
Development of veterinary
medicines for pets. We believe that markets for
pet-related products, including vaccines have been experiencing growth at
a rate reflective of the growth rate for the general economy in China. We
believe that this niche market is being overlooked by local manufacturers.
To attempt to take advantage of this opportunity, we have over 20 products
of veterinary medicines for pets that are in the course of
development.
|
During the first quarter of 2008, Xian
Tianxing contracted with Northwestern Agricultural Technology
University to jointly work on an R&D project concerning the application of
nano-technology in the prevention of major milk cow disease. We expect to obtain
veterinary permit for a new product based on the
project from government sometime in 2010.
On September 23, 2009, we purchased an exclusive aquaculture
vaccine technology from and signed a collaborative research and development
agreement with China’s Fourth Military Medical University
(“FMMU”) for RMB 8 million (approximately $1.2
million), granting the Company exclusive rights to sell and market the patented
aquaculture vaccine through 2020. Under this patented technology, and in
collaboration with FMMU, we will produce the first vaccine in China designed to safely prevent
and treat certain bacterial infection and diseases in marine life without
causing harmful side effects. Based on its first-to-market status, the Chinese
Ministry of Agriculture has issued a Grade I Veterinary Certificate for our vaccine.
We have also worked with Northwest
A&F University in Shaanxi Province and Jiangsu Institute of Microbiology in
the past, and we continue to look for opportunities to collaborate with these
and other research institutes in the future.
In 2009, we spent $1,167,937, or
approximately 3.5%, of our revenue on R&D. In 2008, we spent $549,236, or
approximately 2.1%, of our revenue on R&D.
Costs and Effects of Compliance with
Environmental Laws
In compliance with Chinese environmental
regulations, we spent approximately $25,000 in 2008 and $30,000 in 2009, mainly
for the wastewater treatment in connection with our production
facilities.
Employees
As of December 31, 2009, we have
approximately 214
employees, of which 169
are full time employees. As
of December 31, 2008, we had 229 employees, of which 226 worked as full time
employees. None of these employees are represented by any collective bargaining
agreements. We have not experienced a work stoppage. Management believes
that our relations with our employees are
good.
14
ITEM
1A. RISK FACTORS
You
should carefully consider the risks described below together with all of the
other information included in this report before making an investment decision
with regard to our securities. The statements contained in or incorporated into
this report that are not historic facts are forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements. If
any of the following risks actually occurs, our business, financial condition or
results of operations could be harmed. In that case, the trading price of our
common stock could decline, and you may lose all or part of your
investment.
Risks Relating to Our
Business
Our relatively limited operating history
makes it difficult to evaluate our future prospects and results of
operations.
We have a relatively limited operating
history. Xian Tianxing, the variable interest entity through which we operate
our business, commenced operations in 1997 and first achieved profitability in
the quarter ended September 30, 1999. Accordingly, you should consider our future prospects
in light of the risks and uncertainties typically experienced by companies such
as ours in evolving industries such as the bio-pharmaceutical industry in China.
Some of these risks and uncertainties relate to our ability to:
·
|
offer
new and innovative products to attract and retain a larger customer
base;
|
·
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attract
additional customers and increase spending per
customer;
|
·
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increase
awareness of our brand and continue to develop user and customer
loyalty;
|
·
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raise
sufficient capital to sustain and expand our
business;
|
·
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maintain
effective control of our costs and
expenses;
|
·
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respond
to changes in our regulatory
environment;
|
·
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respond
to competitive market conditions;
|
·
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manage
risks associated with intellectual property
rights;
|
·
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attract,
retain and motivate qualified
personnel;
|
·
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upgrade
our technology to support additional research and development of new
products; and
|
·
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maintain
or improve our position as one of the market leaders in
China.
|
If we are unsuccessful in addressing any
of these risks and uncertainties, our business may be materially and adversely
affected.
If we fail to obtain additional
financing we will be unable
to execute our business plan.
Despite our recent financing, we may
need additional funds to build new production facilities; pursue further
research and development; obtain regulatory approvals; file, prosecute, defend
and enforce our intellectual property rights; and market our
products. Should such needs arise, we intend to seek additional funds through
public or private equity or debt financing, strategic transactions and/or from
other sources.
There are no assurances that future
funding will be available
on favorable terms or at all. If additional funding is not obtained, we will
need to reduce, defer or cancel development programs, planned initiatives or
overhead expenditures, to the extent necessary. The failure to fund our capital
requirements would have a material adverse
effect on our business, financial condition and results of
operations.
15
Our business will be materially and
adversely affected if our collaborative partners, licensees and other third
parties over whom we are very dependent fail to perform as
expected.
Due to the complexity of the process of
developing bio-pharmaceuticals, our core business depends on arrangements with
bio-pharmaceutical institutes, corporate and academic collaborators, licensors,
licensees and others for
the research, development, clinical testing, technology rights, manufacturing,
marketing and commercialization of our products. We have various research
collaborations and outsource other business functions. Our license agreements
could obligate us to diligently bring potential products to
market, make substantial milestone payments and royalties and incur the costs of
filing and prosecuting patent applications. There are no assurances that we will
be able to establish or maintain collaborations that are important to our business on favorable
terms, or at all. We could enter into collaborative arrangements for the
development of particular products that may lead to our relinquishing some or
all rights to the related technology or products. A number of risks arise from our dependence on
collaborative agreements with third parties. Product development and
commercialization efforts could be adversely affected if any collaborative
partner:
·
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terminates
or suspends its agreement with us;
|
·
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causes
delays;
|
·
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fails
to timely develop or manufacture in adequate quantities a substance needed
in order to conduct clinical trials;
|
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·
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fails
to adequately perform clinical
trials;
|
·
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determines
not to develop, manufacture or commercialize a product to which it has
rights; or
|
·
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otherwise
fails to meet its contractual
obligations.
|
Our collaborative partners could pursue
other technologies or develop alternative products that could compete with the products we are
developing.
Our products will be adversely affected
if we are unable to protect proprietary rights or operate without infringing the
proprietary rights of others.
The profitability of our products will
depend in part on our ability to obtain and maintain patents and licenses and
preserve trade secrets, and the period our intellectual property remains
exclusive. We must also operate without infringing the proprietary rights of third parties and without
third parties circumventing our rights. The patent positions of
bio-pharmaceutical and biotechnology enterprises, including ours, are uncertain
and involve complex legal and factual questions for which important legal
principles are largely unresolved. For
example, no consistent policy has emerged regarding the breadth of biotechnology
patent claims that are granted by the U.S. Patent and Trademark Office or
enforced by the U.S. federal courts. In addition, the scope of the originally claimed subject matter in
a patent application can be significantly reduced before a patent is issued. The
biotechnology patent situation outside the U.S. is even more uncertain, is
currently undergoing review and revision in many countries, and may not protect our intellectual
property rights to the same extent as the laws of the U.S. Because patent
applications are maintained in secrecy in some cases, we cannot be certain that
we or our licensors are the first creators of inventions described in our pending patent applications or
patents or the first to file patent applications for such
inventions.
Other companies may independently
develop similar products and design around any patented products we develop. We
cannot assure you that:
·
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any
of our patent applications will result in the issuance of
patents;
|
·
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we
will develop additional patentable
products;
|
·
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the
patents we have been issued will provide us with any competitive
advantages;
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·
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the
patents of others will not impede our ability to do business;
or
|
·
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third
parties will not be able to circumvent our
patents.
|
16
A number of pharmaceutical,
biotechnology, research and academic companies and institutions have developed
technologies, filed patent applications or received patents on technologies that
may relate to our business. If these technologies, applications or patents conflict with ours, the scope of
our current or future patents could be limited or our patent applications could
be denied. Our business may be adversely affected if competitors independently
develop competing technologies, especially if we do not obtain, or obtain only narrow, patent
protection. If patents that cover our activities are issued to other companies,
we may not be able to obtain licenses at a reasonable cost, or at all; develop
our technology; or introduce, manufacture or sell the products we have planned.
Patent litigation is becoming widespread
in the biotechnology industry. Such litigation may affect our efforts to form
collaborations, to conduct research or development, to conduct clinical testing
or to manufacture or market any products under development. There are no
assurances that our patents would be held valid or enforceable by a court or
that a competitor’s technology or product would be found
to infringe our patents in the event of patent litigation. Our business could be
materially affected by an adverse outcome
to such litigation. Similarly, we may need to participate in interference
proceedings declared by the U.S. Patent and Trademark Office or equivalent
international authorities to determine priority of invention. We could incur substantial costs and devote
significant management resources to defend our patent position or to seek a
declaration that another company’s patents are
invalid.
Much of our know-how and technology may
not be patentable, though it may constitute trade secrets. There are no assurances
that we will be able to meaningfully protect our trade secrets. We cannot assure
you that any of our existing confidentiality agreements with employees,
consultants, advisors or collaborators will provide meaningful protection for our trade secrets, know-how
or other proprietary information in the event of any unauthorized use or
disclosure. Collaborators, advisors or consultants may dispute the ownership of
proprietary rights to our technology, for example by asserting that they developed the technology
independently.
Difficulties in manufacturing our
products could have a material adverse effect on our
profitability.
Before our products can be profitable,
they must be produced in commercial quantities in a cost-effective manufacturing process that
complies with regulatory requirements, including China’s Good Manufacturing Practice (GMP),
production and quality control regulations. If we cannot arrange for or maintain
commercial-scale manufacturing on acceptable terms, or if there are delays or
difficulties in the manufacturing process, we may not be able to conduct
clinical trials, obtain regulatory approval or meet demand for our
products.
Failure or delays in obtaining an
adequate amount of raw material or other supplies would materially and adversely
affect our revenue
Production of our products could require
raw materials which are scarce or which can be obtained only from a limited
number of sources. If we are unable to obtain adequate supplies of such raw
materials, the development,
regulatory approval and marketing of our products could be
delayed.
Our
ability to generate more revenue would be adversely affected if we need more
clinical trials or take more time to complete our clinical trials than we have
planned.
Clinical trials vary in design by
factors including dosage, end points, length, and controls. We may need to
conduct a series of trials to demonstrate the safety and efficacy of our
products. The results of these trials may not demonstrate safety or efficacy sufficiently for regulatory
authorities to approve our products. Further, the actual schedules for our
clinical trials could vary dramatically from the forecasted schedules due to
factors including changes in trial design, conflicts with the schedules of participating clinicians and
clinical institutions, and changes affecting product supplies for clinical
trials.
We rely on collaborators, including
academic institutions, governmental agencies and clinical research
organizations, to conduct, supervise, monitor and design some or
all aspects of clinical trials involving our products. Since these trials depend
on governmental participation and funding, we have less control over their
timing and design than trials we sponsor. Delays in or failure to commence or complete any planned
clinical trials could delay the ultimate timelines for our product releases.
Such delays could reduce investors’ confidence in our ability to develop
products, likely causing the price of our common stock to
decrease.
17
If we are unable to obtain the
regulatory approvals or clearances that are necessary to commercialize our
products, we will have less revenue than expected.
China and other countries impose
significant statutory and regulatory obligations upon the manufacture and sale of bio-pharmaceutical
products. Each regulatory authority typically has a lengthy approval process in
which it examines pre-clinical and clinical data and the facilities in which the
product is manufactured. Regulatory submissions must meet complex criteria to demonstrate the
safety and efficacy of the ultimate products. Addressing these criteria requires
considerable data collection, verification and analysis. We may spend time and
money preparing regulatory submissions or applications without assurances as to whether they will be
approved on a timely basis or at all.
Our product candidates, some of which
are currently in the early stages of development, will require significant
additional development and pre-clinical and clinical testing prior to their commercialization. These
steps and the process of obtaining required approvals and clearances can be
costly and time-consuming. If our potential products are not successfully
developed, cannot be proven to be safe and effective through clinical trials, or do not receive applicable
regulatory approvals and clearances, or if there are delays in the
process:
•
|
the
commercialization of our products could be adversely
affected;
|
•
|
any
competitive advantages of the products could be diminished;
and
|
•
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revenues
or collaborative milestones from the products could be reduced or
delayed.
|
Governmental and regulatory authorities
may approve a product candidate for fewer indications or narrower circumstances
than requested or may condition approval on the performance of post-marketing
studies for a product candidate. Even if a product receives regulatory approval
and clearance, it may later exhibit adverse side effects that limit or prevent
its widespread use or that force us to withdraw the product from the market.
Any marketed product and its
manufacturer, including us, will continue to be subject to strict regulation
after approval. Results of post-marketing programs may limit or expand the
further marketing of products. Unforeseen problems with an approved product or any violation
of regulations could result in restrictions on the product, including its
withdrawal from the market and possible civil actions.
In manufacturing our products we will be required to
comply with applicable good manufacturing practices regulations, which include
requirements relating to quality control and quality assurance, as well as the
maintenance of records and documentation. We cannot comply with regulatory requirements, including
applicable good manufacturing practice requirements, we may not be allowed to
develop or market the product candidates. If we or our manufacturers fail to
comply with applicable regulatory requirements at any stage during the regulatory process, we may be
subject to sanctions, including fines, product recalls or seizures, injunctions,
refusal of regulatory agencies to review pending market approval applications or
supplements to approve applications, total or partial suspension of production, civil
penalties, withdrawals of previously approved marketing applications and
criminal prosecution.
Competitors may develop and market
bio-pharmaceutical products that are less expensive, more effective or safer,
making our products
obsolete or uncompetitive.
Some of our competitors and potential
competitors have greater product development capabilities and financial,
scientific, marketing and human resources than we do. Technological competition
from biopharmaceutical companies and biotechnology companies is
intense and is expected to increase. Other companies have developed technologies
that could be the basis for competitive products. Some of these products have an
entirely different approach or means of accomplishing the desired curative effect than products we
are developing. Alternative products may be developed that are more effective,
work faster and are less costly than our products. Competitors may succeed in
developing products earlier than us, obtaining approvals and clearances for such products more
rapidly than us, or developing products that are more effective than ours. In
addition, other forms of treatment may be competitive with our products. Over
time, our technology or products may become obsolete or uncompetitive.
18
Our revenue will be materially and
adversely affected if our products are unable to gain market
acceptance.
Our products may not gain market
acceptance in the agricultural community. The degree of market acceptance of any
product depends on a number
of factors, including establishment and demonstration of clinical efficacy and
safety, cost-effectiveness, clinical advantages over alternative products, and
marketing and distribution support for the products. Limited information
regarding these factors is available in connection with our
products or products that may compete with ours.
To directly market and distribute our
bio-pharmaceutical products, we or our collaborators require a marketing and
sales force with appropriate technical expertise and supporting distribution capabilities.
We may not be able to further establish sales, marketing and distribution
capabilities or enter into arrangements with third parties on acceptable terms.
If we or our partners cannot successfully market and sell our products, our ability to generate
revenue will be limited.
Our operations and the use of our
products could subject us to damages relating to injuries or accidental
contamination and thus reduce our earnings or increase our
losses.
Our research and development processes involve the controlled
use of hazardous materials. We are subject to federal, provincial and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of such materials and waste products. The risk of accidental contamination or injury from
handling and disposing of such materials cannot be completely eliminated. In the
event of an accident involving hazardous materials, we could be held liable for
resulting damages. We are not insured with respect to this liability. Such liability could exceed
our resources. In the future we could incur significant costs to comply with
environmental laws and regulations.
If
we were sued for product liability, we could face substantial liabilities that
may exceed our resources.
We may be held liable if any product we
develop, or any product which is made using our technologies, causes injury or
is found unsuitable during product testing, manufacturing, marketing, sale or
use. These risks are inherent in the development of agricultural and bio-pharmaceutical
products. We currently do not have product liability insurance. If we cannot
obtain sufficient insurance coverage at an acceptable cost or otherwise protect
against potential product liability claims, the commercialization of products that we develop may be
prevented or inhibited. If we are sued for any injury caused by our products,
our liability could exceed our total assets, whether or not we are
successful.
We have no business liability or
disruption insurance coverage and therefore we are susceptible to
catastrophic or other events that may disrupt our business.
The insurance industry in China is still
at an early stage of development. Insurance companies in China offer limited
business insurance products. We do not have any business liability or
disruption insurance coverage for our operations in China. Any business
disruption, litigation or natural disaster may result in our incurring
substantial costs and the diversion of our resources.
We will be unsuccessful if we fail to attract and retain qualified
personnel.
We depend on a core management and
scientific team. The loss of any of these individuals could prevent us from
achieving our business objective of commercializing our product candidates. Our
future success will depend
in large part on our continued ability to attract and retain other highly
qualified scientific, technical and management personnel, as well as personnel
with expertise in clinical testing and government regulation. We face
competition for personnel from other companies,
universities, public and private research institutions, government entities and
other organizations. If our recruitment and retention efforts are unsuccessful,
our business operations could suffer.
19
Downturn in the global economy may slow
domestic growth in China, which in turn may affect our
business.
Due to the global downturn in the
financial markets, China may not be able to maintain its recent growth rates
mainly due to the lack of demand of exports to countries that are in
recessions. Although we do not presently export any of our products, our
earnings may become unstable if China’s domestic growth slows significantly
and the demand for meats and poultry declines.
Risks Related to Our
Corporate
Structure
Chinese laws and regulations governing
our businesses and the validity of certain of our contractual arrangements are
uncertain. If we are found to be in violation, we could be subject to sanctions.
In addition, changes in such Chinese laws and regulations may
materially and adversely affect our business.
There are substantial uncertainties
regarding the interpretation and application of Chinese laws and regulations,
including, but not limited to, the laws and regulations governing our business, or the enforcement and
performance of our contractual arrangements with our affiliated Chinese entity,
Xian Tianxing, and its stockholders. We are considered a foreign person or
foreign invested enterprise under Chinese law. As a result, we are subject to Chinese law
limitations on foreign ownership of Chinese companies. These laws and
regulations are relatively new and may be subject to change, and their official
interpretation and enforcement may involve substantial uncertainty. The
effectiveness of newly enacted laws,
regulations or amendments may be delayed, resulting in detrimental reliance by
foreign investors. New laws and regulations that affect existing and proposed
future businesses may also be applied retroactively.
The Chinese government has broad discretion in
dealing with violations of laws and regulations, including levying fines,
revoking business and other licenses and requiring actions necessary for
compliance. In particular, licenses and permits issued or granted to us
by relevant governmental bodies may be
revoked at a later time by higher regulatory bodies. We cannot predict the
effect of the interpretation of existing or new Chinese laws or regulations on
our businesses. We cannot assure you that our current ownership and operating structure would not be
found in violation of any current or future Chinese laws or regulations. As a
result, we may be subject to sanctions, including fines, and could be required
to restructure our operations or cease to provide certain services. Any of these or similar actions
could significantly disrupt our business operations or restrict us from
conducting a substantial portion of our business operations, which could
materially and adversely affect our business, financial condition and
results of operations.
We may be adversely affected by
complexity, uncertainties and changes in Chinese regulation of
bio-pharmaceutical business and companies, including limitations on our ability
to own key assets.
The Chinese government regulates the
bio-pharmaceutical industry
including foreign ownership of, and the licensing and permit requirements
pertaining to, companies in the bio-pharmaceutical industry. These laws and
regulations are relatively new and evolving, and their interpretation and
enforcement involve significant uncertainty. As
a result, in certain circumstances it may be difficult to determine what actions
or omissions may be deemed to be a violation of applicable laws and regulations.
Issues, risks and uncertainties relating to Chinese government regulation of the
bio-pharmaceutical industry include the following:
•
|
we
only have contractual control over Xian Tianxing. We do not own it due to
the restriction of foreign investment in Chinese businesses;
and
|
•
|
uncertainties
relating to the regulation of the bio-pharmaceutical business in China,
including evolving licensing practices, means that permits, licenses or
operations at our company may be subject to challenge. This may disrupt
our business, or subject us to sanctions, requirements to increase capital
or other conditions or enforcement, or compromise enforceability of
related contractual arrangements, or have other harmful effects on
us.
|
The interpretation and application of
existing Chinese laws, regulations and policies and possible new
laws, regulations or policies have created substantial uncertainties regarding
the legality of existing and future foreign investments in, and the businesses
and activities of, bio-pharmaceutical businesses in China, including our
business.
20
In order to comply with Chinese laws
limiting foreign ownership of Chinese companies, we conduct our
bio-pharmaceutical business through Xian Tianxing by means of contractual
arrangements. If the Chinese government determines that these contractual arrangements do not
comply with applicable regulations, our business could be adversely
affected.
The Chinese government restricts foreign
investment in bio-pharmaceutical businesses in China. Accordingly, we operate
our business in China
through Xian Tianxing, a Chinese joint stock company. Xian Tianxing holds the
licenses and approvals necessary to operate
our bio-pharmaceutical business in China. We have contractual
arrangements with Xian Tianxing and its stockholders that allow us
to substantially control Xian Tianxing. We
cannot assure you, however, that we will be able to enforce these
contracts.
Although we believe we comply with
current Chinese regulations, we cannot assure you that the Chinese government
would agree that these operating arrangements comply with
Chinese licensing, registration or other regulatory requirements, with existing
policies or with requirements or policies that may be adopted in the future. If
the Chinese government determines that we do not comply with applicable law, it could revoke our
business and operating licenses, require us to discontinue or restrict our
operations, restrict our right to collect revenues, require us to restructure
our operations, impose additional conditions or requirements with which we may not be able to comply, impose
restrictions on our business operations or on our customers, or take other
regulatory or enforcement actions against us that could be harmful to our
business.
Our contractual arrangements with Xian
Tianxing and its
stockholders may not be as effective in providing control over these entities as
direct ownership.
Since Chinese law limits foreign equity
ownership in bio-pharmaceutical companies in China, we operate our business
through Xian Tianxing. We have no equity ownership interest in Xian Tianxing
and rely on contractual arrangements to control and operate such businesses.
These contractual arrangements may not be as effective in providing control over
Xian Tianxing as direct ownership. For example, Xian Tianxing could fail to take actions required
for our business despite its contractual obligation to do so. If Xian Tianxing
fails to perform under their agreements with us, we may have to rely on legal
remedies under Chinese law, which may not be effective. In addition, we cannot assure you that
either of Xian Tianxing’s stockholders will act in our best
interests.
Because we rely on the consulting
services agreement with Xian Tianxing for our revenue, the termination of this
agreement will severely and detrimentally affect our continuing business
viability under our current corporate structure.
We are a holding company and do not have any assets or
conduct any business operations other than the contractual arrangements between
Sida and Xian Tianxing. As a result, we currently rely entirely for our revenues
on dividends payments from Sida after it receives payments from Xian Tianxing pursuant to the
consulting services agreement which forms a part of the contractual arrangements
between Sida and Xian Tianxing. The consulting services agreement may be
terminated by written notice of Sida or Xian Tianxing in the event that: (a) one party causes a material
breach of the agreement, provided that if the breach does not relate to a
financial obligation of the breaching party, that party may attempt to remedy
the breach within 14 days following the receipt of the written notice; (b) one party becomes bankrupt,
insolvent, is the subject of proceedings or arrangements for liquidation or
dissolution, ceases to carry on business, or becomes unable to pay its debts as
they become due; (c) Sida terminates its operations; (d) Xian Tianxing’s business license or any other license
or approval for its business operations is terminated, cancelled or revoked; or
(e) circumstances arise which would materially and adversely affect the
performance or the objectives of the agreement. Additionally, Sida may terminate the consulting
services agreement without cause.
Because neither we nor our direct and
indirect subsidiaries own equity interests of Xian Tianxing, the termination of
the consulting services agreement would sever our ability to continue receiving payments from Xian
Tianxing under our current holding company structure. While we are currently not
aware of any event or reason that may cause the consulting services agreement to
terminate, we cannot assure you that such an event or reason will not occur in the future. In the
event that the consulting services agreement is terminated, this may have a
severe and detrimental effect on our continuing business viability under our
current corporate structure, which in turn may affect the value of your investment.
21
Members of Xian Tianxing’s management have potential conflicts of
interest with us, which may adversely affect our business and your ability for
recourse.
Weibing Lu, our Chief Executive Officer,
is also the Chief Financial Officer and Chairman of the Board of Directors of
Xian Tianxing. Mr. Wei Wen, who is Xian Tianxing’s Vice-General Manager and Director, is
a member of Skystar’s board of directors. Conflicts of
interests between their respective duties to our company and Xian
Tianxing may arise. As our directors and
executive officer (in the case of Mr. Lu), they have a duty of loyalty and care
to us under U.S. and Cayman Islands law when there are any potential conflicts
of interests between our company and Xian Tianxing. We cannot assure you, however, that when
conflicts of interest arise, every one of them will act completely in our
interests or that conflicts of interests will be resolved in our favor. For
example, they may determine that it is in Xian Tianxing’s interests to sever the contractual arrangements with
Sida, irrespective of the effect such action may have on us. In addition, any
one of them could violate his or her legal duties by diverting business
opportunities from us to others, thereby affecting the amount of payment Xian Tianxing is obligated to remit
to us under the consulting services agreement.
Our board of directors is comprised of a
majority of independent directors (including two based in the United States).
These independent directors may be in a position to deter and counteract the actions of
our officers or non-independent directors that are against our interests, as the
independent directors do not have any position with, or interests in, our
affiliate entities, and should therefore not have any conflicts of interests such as those
potentially of our officers and directors who are management members of Xian
Tianxing. Additionally, the independent directors have fiduciary duties to act
in our best interests, and failure on their part to do so may
subject them to personal liabilities for breach
of such duties. We cannot, however, give any assurance as to how the independent
directors will act. Further, if we or the independent directors cannot resolve
any conflicts of interest between us and those of our officers and directors who are management
members of Xian Tianxing, we would have to rely on legal proceedings, which
could result in the disruption of our business.
In the event that you believe that your
rights have been infringed under the securities laws or otherwise as a result of any one
of the circumstances described above, it may be difficult or impossible for you
to bring an action against Xian Tianxing or our officers or directors who are
members of its management, the majority of whom reside within China. Even if you are successful in
bringing an action, the laws of China may render you unable to enforce a
judgment against the assets of Xian Tianxing and its management, all of which
are located in China.
Risks Related to Doing Business in
China
Adverse changes in economic and
political policies of the Chinese government could have a material adverse
effect on the overall economic growth of China, which could adversely affect our
business.
Substantially all of our business
operations are conducted in
China. Accordingly, our results of operations, financial condition and prospects
are subject to a significant degree to economic, political and legal
developments in China. China’s economy differs from the economies of
most developed countries in many respects, including with respect to
the amount of government involvement, level of development, growth rate, control
of foreign exchange and allocation of resources. While the Chinese economy has
experienced significant growth in the past 20 years, growth has been uneven across different
regions and among various economic sectors of China. The Chinese government has
implemented various measures to encourage economic development and guide the
allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a
negative effect on us. For example, our financial condition and results of
operations may be adversely affected by government control over capital
investments or changes in tax regulations that are applicable to us. Since early 2004, the Chinese
government has implemented certain measures to control the pace of economic
growth. Such measures may cause a decrease in the level of economic activity in
China, which in turn could adversely affect our results of operations and financial
condition.
22
If Chinese law were to phase out the
preferential tax benefits currently being extended to foreign invested
enterprises and “new or
high-technology enterprises” located in a high-tech zone, we would
have to pay more taxes, which could have a material and adverse effect
on our financial condition and results of operations.
Under Chinese laws and regulations, a
foreign invested enterprise may enjoy preferential tax benefits if it is
registered in a high-tech zone and also qualifies as “new or high-technology
enterprise”. As a foreign
invested enterprise as well as a certified “new or high-technology
enterprise” located in a
high-tech zone in Xian, the Company has been approved as a new technology
enterprise and under Chinese Income Tax Laws, it is entitled to a
preferential tax rate of 15%. If the Chinese law were to phase out preferential
tax benefits currently granted to “new or high-technology
enterprises” and technology
consulting services, we would be subject to the standard statutory tax rate, which currently is
25%, and we would be unable to obtain business tax refunds for our provision of
technology consulting services. Loss of these preferential tax treatments could
have a material and adverse effect on our financial condition and results of
operations.
Xian Tianxing is subject to restrictions
on making payments to us.
We are a holding company incorporated in
Nevada and do not have any
assets or conduct any business operations other than our indirect investments in
our affiliated entity in China, Xian Tianxing. As a result of our holding
company structure, we rely entirely on payments from Xian Tianxing under our
contractual arrangements. The Chinese
government also imposes controls on the conversion of the Chinese currency,
Renminbi (RMB), into foreign currencies and the remittance of currencies out of
China. We may experience difficulties in completing the administrative procedures necessary to obtain and
remit foreign currency. See “Government control of currency
conversion may affect the value of your investment.” Furthermore, if our affiliated entity
in China incurs debt on their own in the future, the instruments governing the debt may restrict their
ability to make payments. If we are unable to receive all of the revenues from
our operations through these contractual or dividend arrangements, we may be
unable to pay dividends on our ordinary shares.
Uncertainties
with respect to the Chinese legal system could adversely affect
us.
We conduct our business primarily
through our affiliated Chinese entity, Xian Tianxing. Our operations in China
are governed by Chinese laws and regulations. We are generally
subject to laws and
regulations applicable to foreign investments in China and, in particular, laws
applicable to wholly foreign-owned enterprises. The Chinese legal system is
based on written statutes. Prior court decisions may be cited for reference but
have limited precedential
value.
Since 1979, Chinese legislation and
regulations have significantly enhanced the protections afforded to various
forms of foreign investments in China. However, China has not developed a fully
integrated legal system and recently enacted laws and regulations may not
sufficiently cover all aspects of economic activities in China. In particular,
because these laws and regulations are relatively new, and because of the
limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of
these laws and regulations involve uncertainties. In addition, the Chinese legal
system is based in part on government policies and internal rules (some of which
are not published on a timely basis or at all) that may have a retroactive effect. As a
result, we may not be aware of our violation of these policies and rules until
some time after the violation. In addition, any litigation in China may be
protracted and result in substantial costs and diversion of resources and management
attention.
You may experience difficulties in
effecting service of legal process, enforcing foreign judgments or bringing
original actions in China based on United States or other foreign laws against
us, our management or the experts named in the
prospectus.
We conduct substantially all of our
operations in China and substantially all of our assets are located in China. In
addition, all of our senior executive officers reside within China. As a result,
it may not be possible to effect service of process within the United
States or elsewhere outside China upon our senior executive officers, including
with respect to matters arising under U.S. federal securities laws or applicable
state securities laws. Moreover, our Chinese counsel has advised us that China does not have
treaties with the United States or many other countries providing for the
reciprocal recognition and enforcement of judgment of
courts.
Governmental control of currency
conversion may affect the value of your investment.
The Chinese government imposes controls
on the convertibility of RMB into foreign currencies and, in certain cases, the
remittance of currency out of China. We receive substantially all of our
revenues in RMB. Under our current structure, our income is primarily derived from payments from Xian
Tianxing. Shortages in the availability of foreign currency may restrict the
ability of our Chinese subsidiaries and our affiliated entity to remit
sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign
currency denominated obligations. Under existing Chinese foreign exchange
regulations, payments of current account items, including profit distributions,
interest payments and expenditures from trade-related transactions, can be made in foreign currencies
without prior approval from China State Administration of Foreign Exchange by
complying with certain procedural requirements. However, approval from
appropriate government authorities is required where RMB is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of bank
loans denominated in foreign currencies. The Chinese government may also at its
discretion restrict access in the future to foreign currencies for current account transactions. If the
foreign exchange control system prevents us from obtaining sufficient foreign
currency to satisfy our currency demands, we may not be able to pay dividends in
foreign currencies to our stockholders.
23
Fluctuation in the value of RMB may have a material
adverse effect on your investment.
The value of RMB against the U.S. dollar
and other currencies may fluctuate and is affected by, among other things,
changes in political and economic conditions. Our revenues and costs
are mostly denominated in
RMB, while a significant portion of our financial assets are denominated in U.S.
dollars. We rely entirely on fees paid to us by our affiliated entity in China.
Any significant fluctuation in the value of RMB may materially and adversely affect our cash flows, revenues,
earnings and financial position, and the value of, and any dividends payable on,
our stock in U.S. dollars. For example, an appreciation of RMB against the U.S.
dollar would make any new RMB denominated investments or expenditures more costly to us, to
the extent that we need to convert U.S. dollars into RMB for such purposes. An
appreciation of RMB against the U.S. dollar would also result in foreign
currency translation losses for financial reporting purposes when we translate our U.S. dollar denominated
financial assets into RMB, as RMB is our reporting currency.
We
face risks related to health epidemics and other outbreaks.
Our business could be adversely affected
by the effects of an epidemic outbreak, such as the SARS epidemic in April 2004. Any
prolonged recurrence of such adverse public health developments in China may
have a material adverse effect on our business operations. For instance, health
or other government regulations adopted in response may require temporary closure of our production
facilities or of our offices. Such closures would severely disrupt our business
operations and adversely affect our results of operations. We have not adopted
any written preventive measures or contingency plans to combat any future outbreak of SARS or any
other epidemic.
Risks Related to an Investment in Our
Securities
To date, we have not paid any cash
dividends and no cash dividends are expected to be paid in the foreseeable
future.
We do not anticipate paying cash
dividends on our common stock in the foreseeable future and we may not have
sufficient funds legally available to pay dividends. Even if the funds are
legally available for distribution, we may nevertheless decide not to
pay any dividends. We intend to retain all
earnings for our operations.
The NASDAQ Capital Market may delist our
common stock from trading on its exchange, which could limit
investors’ ability to effect transactions in our
common stock and subject us to additional trading
restrictions.
Our common stock is listed on the NASDAQ
Capital Market. We cannot assure you that our common stock will continue to be
listed on the NASDAQ Capital Market in the future. If the NASDAQ
Capital Market delists our common stock from trading on its exchange, we
could face significant material adverse consequences
including:
•
|
a
limited availability of market quotations for our common
stock;
|
•
|
a
limited amount of news and analyst coverage for our company;
and
|
•
|
a
decreased ability to issue additional securities or obtain additional
financing in the future.
|
24
The
market price of our common stock is volatile, and its value may be depressed at
a time when you want to sell your holdings.
The
market price of our common stock is volatile due to market and industry factors,
many of which are beyond our control. Additionally, the price and trading volume
for our common stock may be highly volatile for specific business reasons.
Factors such as variations in our revenues, earnings and cash flow,
announcements of new investments, cooperation arrangements or acquisitions, and
fluctuations in market prices for our products could cause the market price for
our shares to change substantially.
Securities
class action litigation is often instituted against companies following periods
of volatility in their stock price. This type of litigation could result in
substantial costs to us and divert our management’s attention and
resources.
Moreover,
the trading market for our common stock will be influenced by research or
reports that industry or securities analysts publish about us or our business.
If one or more analysts who cover us downgrade our common stock, the market
price for our common stock would likely decline. If one or more of these
analysts cease coverage of us or fail to regularly publish reports on us, we
could lose visibility in the financial markets, which, in turn, could cause the
market price for our common stock or trading volume to decline.
Furthermore,
securities markets may from time to time experience significant price and volume
fluctuations for reasons unrelated to operating performance of particular
companies. These market fluctuations may adversely affect the price of our
common stock and other interests in our company at a time when you want to sell
your interest in us.
Although
publicly traded, the trading market in our common stock may be substantially
less liquid than the average stock quoted on the NASDAQ Capital Market, and such
low trading volume may adversely affect the price of our common
stock.
Although
our common stock is traded on the NASDAQ Capital Market, the trading volume of
our common stock has generally been very low. Reported average daily trading
volume in our common stock for the three month period ended March 31, 2010 was
approximately 54,510 shares. Limited trading volume will subject our shares
of common stock to greater price volatility and may make it difficult for you to
sell your shares of common stock at a price that is attractive to
you.
Our corporate actions are substantially
controlled by our management stockholders and affiliated
entities.
As of March 24, 2010, our management and
their affiliated entities own approximately 16.4% of our outstanding common shares,
representing approximately 16.4% of our voting power. These stockholders, acting
individually or as a group, could exert substantial influence over matters such
as electing directors and approving mergers or other business combination transactions. In
addition, because of the percentage of ownership and voting concentration in
these principal stockholders and their affiliated entities, elections of our
board of directors will generally be within the control of these
stockholders and their affiliated entities.
While all of our stockholders are entitled to vote on matters submitted to our
stockholders for approval, the concentration of shares and voting control
presently lies with these principal stockholders and their affiliated entities. As such, it would be
difficult for stockholders to propose and have approved proposals not supported
by management. There can be no assurances that matters voted upon by our
officers and directors in their capacity as stockholders will be viewed favorably by all stockholders of
the company.
The elimination of monetary liability
against our directors, officers and employees under Nevada law and the existence of
indemnification rights to our directors, officers and employees may result in
substantial expenditures by our company and may discourage lawsuits against our
directors, officers and employees.
Our articles of incorporation do
not contain any specific
provisions that eliminate the liability of our directors for monetary damages to
our company and stockholders, however we are prepared to give such
indemnification to our directors and officers to the extent provided by Nevada
law. We also have contractual indemnification
obligations under our employment agreements with our chief executive officer,
chief financial officer and certain of our directors. The foregoing
indemnification obligations could result in our company incurring
substantial expenditures to cover the cost of
settlement or damage awards against directors and officers, which we may be
unable to recoup. These provisions and resultant costs may also discourage our
company from bringing a lawsuit against directors and officers for breaches of their fiduciary
duties, and may similarly discourage the filing of derivative litigation by our
stockholders against our directors and officers even though such actions, if
successful, might otherwise benefit our company and stockholders.
25
Legislative actions, higher insurance
costs and potential new accounting pronouncements may impact our future
financial position and results of operations.
There have been regulatory changes,
including the Sarbanes-Oxley Act of 2002, and there may potentially be new accounting
pronouncements or additional regulatory rulings that will have an impact on our
future financial position and results of operations. The Sarbanes-Oxley Act of
2002 and other similar rule changes are likely to increase general
and administrative costs and expenses.
Additionally, we currently maintain directors’ and officers insurance (“D&O Insurance”) as we are contractually obligated to
do so. In light of the high claims rates in recent years, we expect that the
premium for such insurance will increase. Further, there
could be changes in certain accounting rules. These and other potential changes
could materially increase the expenses we report under generally accepted
accounting principles, and adversely affect our operating results.
Past company activities prior to the
reverse merger may lead to future liability for the company.
Prior to our acquisition of Skystar
Cayman in November 2005, we were engaged in businesses unrelated to our current
operations. Although the prior business owners provided certain
indemnifications against any loss, liability, claim, damage or expense arising
out of or based on any breach of or inaccuracy in any of their representations
and warranties made regarding such acquisition, any liabilities
relating to such prior business against which
Skystar is not completely indemnified may have a material adverse effect on
Skystar.
The market price for our stock may be
volatile.
The market price for our stock may be
volatile and subject to wide fluctuations in response to factors including the
following:
•
|
actual
or anticipated fluctuations in our quarterly operating
results;
|
•
|
changes
in financial estimates by securities research
analysts;
|
•
|
conditions
in bio-pharmaceutical and agricultural
markets;
|
•
|
changes
in the economic performance or market valuations of other
bio-pharmaceutical companies;
|
•
|
announcements
by us or our competitors of new products, acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
•
|
addition
or departure of key personnel;
|
•
|
fluctuations
of exchange rates between RMB and the U.S.
dollar;
|
•
|
intellectual
property litigation; and
|
•
|
general
economic or political conditions in
China.
|
In addition, the securities market has
from time to time experienced significant price and volume fluctuations that are
not related to the operating performance of particular companies. These market
fluctuations may also materially and adversely affect the market price of our
stock.
26
We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our
stockholders.
We believe that our current cash and
cash equivalents, anticipated cash flow from operations and the net proceeds
from our recent financing will be sufficient to meet our anticipated cash needs
for the foreseeable future. We may, however, require additional cash resources
due to changed business conditions or other future developments, including any investments or
acquisitions we may decide to pursue. If our resources are insufficient to
satisfy our cash requirements, we may seek to sell additional equity or debt
securities or obtain a credit facility. The sale of additional equity securities could result in additional
dilution to our stockholders. The incurrence of indebtedness would result in
increased debt service obligations and could result in operating and financing
covenants that would restrict our operations. We cannot assure you that financing will be available
in amounts or on terms acceptable to us, if at all.
If we fail to maintain an effective
system of internal controls, we may not be able to accurately report our
financial results or prevent fraud.
We are subject to reporting obligations under the U.S.
securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act
of 2002, adopted rules requiring every public company to include a management
report on such company’s internal controls over financial
reporting in its annual report, which
contains management’s assessment of the effectiveness of our
internal controls over financial reporting. In addition, an independent
registered public accounting firm must attest to and report on
management’s assessment of the effectiveness of our internal
controls over financial reporting. Our management may conclude that our internal
controls over our financial reporting are not effective. Our reporting
obligations as a public company will place a significant strain on our management, operational and
financial resources and systems for the foreseeable future. Effective internal
controls, particularly those related to revenue recognition, are necessary for
us to produce reliable financial reports and are important to help prevent fraud. As a result, our
failure to achieve and maintain effective internal controls over financial
reporting could result in the loss of investor confidence in the reliability of
our financial statements, which in turn could harm our business and negatively impact the trading price of
our stock. Furthermore, we anticipate that we will incur considerable costs and
use significant management time and other resources in an effort to comply with
Section 404 and other requirements of the Sarbanes-Oxley Act.
Shares eligible for future sale may
adversely affect the market.
From time to time, certain of our
stockholders may be eligible to sell all or some of their shares of common stock by
means of ordinary brokerage transactions in the open market pursuant to Rule
144, promulgated under the Securities Act, subject to certain limitations. In
general, pursuant to amended Rule 144, non-affiliate stockholders may sell freely after six months
subject only to the current public information requirement (which disappears
after one year). Affiliates may sell after six months subject to the Rule 144
volume, manner of sale (for equity securities), current public information and notice requirements. Of
the approximately 7.10 million shares of our common stock outstanding as of
March 24, 2010, approximately 5.91 million shares are, or will be, freely
tradable without restriction, as of March 24, 2010. Any substantial sale of our common stock pursuant to
Rule 144 may have a material adverse effect on the market price of our common
stock.
The issuance of our series “A” preferred stock may subject us to
certain claims by the holder of series “A” preferred shares as well as indemnification obligations to the
directors who authorized the issuance.
In 2001, 2,000,000 shares of our series
“A” preferred stock were issued to a
corporation wholly owned by our then Chief Executive Officer and director for
services purportedly
rendered by him. The resolutions of the board of directors approving such
issuance stated that the series “A” preferred shares carries a
“super voting power of
five.” No certificate of
designation was ever filed with the Nevada Secretary of State for
these shares and we do not believe any
certificate evidencing such shares was issued by any transfer agent. As a
result, the board of directors believes that the issuance was not valid under
Nevada law and thus has adopted resolutions that resolve voiding all outstanding shares of the series
“A” preferred stock and barring any
re-issuance or authorization of our series “A” preferred stock unless such matter was
submitted to a vote of our shareholders and approved by a disinterested vote of
a majority of each class of our outstanding stock. On
December 21, 2009, we instructed our transfer agent to remove the series “A”
preferred shares officially from our shareholder records. As a result, the
series “A” preferred shares will no longer be reported as part of our issued and
outstanding capital stock.
27
Notwithstanding the cancellation of the
series “A” preferred shares, our former
Chief Executive Officer may
potentially assert claims against us or the directors who authorized the
issuance, in law or equity, for the proper issuance or reissuance of those
shares. In a lawsuit, he may assert any number of legal or equitable theories in
a forum with proper jurisdiction over the
matter, but the substance would likely rest on whether he is entitled to the
shares or, alternatively, whether he should be entitled to some form of damage
payment from the Company for the services that he purportedly rendered to our company. In the event
of any legal action, adequate insurance coverage may not be available to us to
cover the cost of litigation, indemnification of any of our officers or
directors named in such action or of any award or other resolution. If a court were to order the
issuance of any shares of series “A” preferred stock, such shares could
increase the total number of our shares outstanding and thereby dilute the
interests of our other shareholders in our company, could control a
significant voting interest in our company and
possess other rights determined by a court which we are unable to
predict.
The eventual development, outcome and
cost of legal proceedings are by their nature uncertain and subject to many
factors, including but not limited to, the discovery of facts not
presently known to us or determinations by judges, juries or other finders of
fact which do not accord with our evaluation of the merits or facts of the case.
As a result, we can provide no assurance that we will succeed against any such challenge or as to
the results if it were ever made.
Should we fail to prevail in our defense
of such a claim, we may be subject to restitution or other forms of monetary
damages, the amount of which is difficult to determine but may take into consideration the then and
current fair market value of the series “A” preferred shares. Additionally,
although the directors who authorized the issuance of the series “A” preferred shares are no longer members
of our board of directors, we may nevertheless be obligated in certain
circumstances to indemnify and defend these directors.
Not
applicable.
ITEM
2. PROPERTIES
Our administrative headquarters is
currently located in approximately 3,700 square feet of office space at Rm.
10601, Jiezuo Plaza, No.4, Fenghui Road South, Gaoxin District, Xi’an, Shaanxi Province, China. This
property belongs to Mr. Weibing Lu, director and chief executive officer of the
Company. This property was provided free for the use of the Company’s administrative division in 2006 and
2005. In January 2007, we entered into a 5-year lease agreement with Mr. Lu for
the premises on terms of RMB 165,600 (approximately $24,000) per
year.
On June 26, 2009, we entered into a
3-year lease for an office
space in Sacramento, California, commencing on July 1, 2009, on terms of $1,100
per month. Our intent for this office is to facilitate the exploration of
business opportunities in the region.
Shanghai Siqiang, wholly owned
subsidiary of Xian
Tianxing, leases its office and facility space in Shanghai from Mr. Lu pursuant
to a 10-year lease agreement entered into in August 2007 on terms of RMB 144,000
(approximately $21,000) per year.
Production
Facilities
Currently, Xian Tianxing has two
manufacturing sites that are located in Xi’an city, Shaanxi Province, China. One
site is located in the town of at Sanqiao and the other site in the town of
Huxian.
The Sanqiao Plant
Xian Tianxing entered into a tenancy
agreement for the lease of
factory premises underlying its Sanqiao plant for a period of ten years from
October 1, 2004 to September 30, 2014. The annual rent for the factory premises
is $13,869 (RMB94,600) and is also subject to a 10% increase every four
subsequent years. The Company’s production facilities are currently
described as follows:
28
(1)
|
Micro-Organism
Plant. This production plant is run in cooperation with
experts from Japan Kato Microbiology Institute, Microbiology Institute of
Shaanxi Province and Northwest Agro-Forestry Sci-tech University. This
facility was expanded in 2007 from approximately 16,100 square feet to
approximately 21, 500 square feet in accordance with Chinese national Good
Manufacturing Practice (“GMP”) standards, and has been issued production
permit and certain product approval numbers by the Chinese Ministry of
Agriculture.
|
(2)
|
Feed Additive
Plant. This production facility occupies an area of
approximately 10,700 square feet.
|
The Huxian Plant
In 2003, Xian Tianxing received approval
from the State Council of China to expand its production facilities and
construct a new GMP standard plant. In connection with the
approval, Xian Tianxing acquired a long-term land use right for the land now
underlying its Huxian plant. The Company's total investment in this project thus
far is estimated at $11,846,479. Because Xian Tianxing has been accredited
as a high-tech enterprise, its Huxian plant has the full support of both the
Shaanxi provincial government and the Xi’an municipal
government.
Construction of the Huxian plant
commenced in late 2004 and parts of the plant has been fully operational since
the end of the second quarter of 2007. Remaining construction work is expected
to be completed in the second quarter of 2010, rather than the fourth
quarter of 2009 as previously anticipated. When fully completed, the Huxian plant will occupy approximately
7.7 acres and have a total area of approximately 151,700 square feet. The table
below lists the primary facilities at the plant and their status as of
December 31, 2009:
Description
|
Approximate
Size
|
Status
|
||
GMP
standard veterinary medicine facility
|
45,200
square feet
|
Completed
|
||
Quality
control, research and development, and administration
building
|
36,600
square feet
|
Completed
|
||
GMP
standard bio-pharmaceutical facility with the production lines for active
bacteria, inactivated vaccines, coccidiosis vaccines and aquaculture
vaccines.
|
59,201
square feet
|
Completion
expected in the second quarter of 2010
|
||
Animal
laboratory complying with Animal Bio-safety Level 2 (ABSL-2)
requirements
|
10,700
square feet
|
Completion
expected in the second quarter of
2010
|
We believe that the general physical
condition of the plants and production facilities of the company can completely
satisfy our current production orders of the company in terms of quantity and
production quality.
We believe that these facilities after
construction is completed
will be able to meet our operational needs for three to five
years.
29
Other
than the matter discussed below, we are not aware of any material pending legal
proceedings involving us.
Andrew
Chien v. Skystar Bio-Pharmaceutical Company, et. al. (US. District Court,
District of Connecticut, Case No. 3:2007cv00781). Andrew Chien filed suit
against the Company, R. Scott Cramer, Steve Lowe, David Wassung and Weibing Lu
in United States District Court for the District of Connecticut, alleging causes
of action for violation of Sections 10(b) and 20(a) of the Exchange Act. In or
around November 2007, the defendants filed motions to dismiss the complaint for
failure to state a claim and for lack of personal jurisdiction. Mr. Chien
agreed to voluntarily amend the complaint after the motions were filed, and an
amended complaint was subsequently filed on or around January 4, 2008. The
amended complaint dropped Weibing Lu (who is a resident of China and was never
served) as a defendant. The remaining defendants contended that the amended
complaint failed to correct the deficiencies of the original complaint, and
filed a renewed motion to dismiss for failure to state a claim, also preserving
their challenge to personal jurisdiction. The defendants denied all claims
and moved the Court to dismiss the amended complaint in its entirety in their
motion to dismiss. The motion to dismiss also requested that the Court award
sanctions against Mr. Chien under Federal Rule of Civil Procedure Rule 11 ("Rule
11") and the Private Securities Litigation Reform Act ("PSLRA"). On July 17,
2008, in a decision that is now published, the Court granted
defendants' motion and subsequently dismissed the lawsuit, entering judgment on
behalf of the defendants. Chien filed a Notice of Appeal of the
Court's dismissal of his lawsuit, opposed by the defendants, which remains
pending. Defendants were invited by Judge Kravitz to bring a post-judgment
motion for sanctions pursuant to Rule 11 and the PSLRA, which they did. On
February 5, 2009, Judge Kravitz issued a ruling on defendants' Motion for
Sanctions. He found the action filed by Chien to have been entirely
frivolous, and to have constituted a "substantial" violation of Rule 11, and
imposed significant monetary sanctions on both Chien and his former
attorney. As part of the basis for imposing sanctions on Mr. Chien
personally, the Court specifically found that Chien had knowledge of facts
directly contradicting the allegations of his complaint, as evident in internet
postings he made on online message boards. Chien subsequently filed
motions seeking to "re-open" this case and to recuse Judge Kravitz, but both
motions were denied. A Notice of Appeal concerning the ruling awarding
sanctions against him was also filed by Chien. All appeals, including the
one referenced below concerning Chien's second lawsuit, were subsequently
consolidated and remain pending.
Andrew
Chien v. Skystar Bio-Pharmaceutical Company, et. al. (formerly Superior
Court, State of Connecticut, Case No. NNH-CV-09-5025938-S, now U.S.
District Court, District of Connecticut, Case No. 3:09-CV-00149 (MRK)). Andrew
Chien, proceeding pro se, filed another lawsuit against the
Company, Scott Cramer, Steve Lowe, David Wassung and Weibing Lu in Connecticut
Superior Court, alleging causes of action similar to those alleged in his
federal complaint described above as well as state law causes of action. The
Company argued in response that the new complaint was just as
frivolous as Mr. Chien's earlier federal action, which the new complaint
substantially duplicated. The earlier federal action, described above, was found
to be completely frivolous and dismissed in its entirety, with substantial
monetary sanctions awarded against both Chien and his former attorney. A Notice
of Removal to the U.S. District Court, District of Connecticut was filed in the
state case on January 27, 2009, and the case was assigned to Judge Kravitz, the
federal judge in the related federal case previously dismissed. The
Company filed a Motion to Dismiss Chien's new action. In their motion to
dismiss, defendants argued that all the claims asserted by Chien were frivolous,
including among other grounds that they were time-barred and otherwise
substantively meritless, and that sanctions against Mr. Chien under Federal
Rule of Civil Procedure Rule 11 ("Rule 11") and the Private Securities
Litigation Reform Act ("PSLRA") were again warranted. Rather than file an
opposition to Defendants' motion to dismiss, Chien filed a motion seeking to
amend his complaint along with a proposed First Amended Complaint ("FAC"), which
the Court ultimately granted. The FAC purported to drop all eleven claims
for securities fraud asserted by Chien, all of which defendants had contended
were frivolous and meritless. The Court ruled that these claims, abandoned
in the wake of Defendants' motion to dismiss, were all deemed dismissed with
prejudice, and that no further briefing on defendants' pending Motion to Dismiss
the action was required. Subsequently, the Court granted the defendants'
Motion to Dismiss, dismissing the action and all claims asserted in their
entirety. In the ruling, the Court held that all claims asserted against
the defendants were barred and failed to state a claim on a multiplicity of
grounds, including on the basis of res judicata as well as other
substantive defects.
Defendants filed a second Motion for Sanctions under Rule 11 and
the PSLRA. The Motion was subsequently granted by Judge Kravitz, and Chien
was again ordered to pay additional monetary sanctions to the Company.
Chien filed a Notice of Appeal concerning the ruling dismissing his second
lawsuit. In it's filings with the Court of Appeal, the Company has argued
that the appeals are groundless and the earlier rulings by Judge Kravitz should
be upheld, including the two awards of sanctions against Mr. Chien. The
Court of Appeals for the Second Circuit has consolidated all of Chien's appeals
from both of his lawsuits. Briefing has been
completed in these consolidated appeals and a final appellate decision is
awaited by the Company.
30
ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASE OF EQUITY SECURITIES
Market
Information
Our common stock has been trading on the
Nasdaq Capital Market under
the symbol “SKBI” since June 26, 2009. Our common stock was previously
quoted on the Over-The-Counter Bulletin Board, or OTCBB, under the trading
symbol “SKBO.OB” until June 25, 2009.
The following table sets forth the high
and low bid prices for our common stock on the OTCBB through June 25, 2009 and our common stock on the Nasdaq
Capital Market since June 26, 2009 for the periods indicated. The high and
low bid prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual
transactions.
The
OTCBB
Bid
Price
per Share (1)
|
The
Nasdaq
Capital
Market
Price
per Share (2)
|
|||||||||||||||
High
|
Low
|
High
|
Low
|
|||||||||||||
Quarter
ended
|
||||||||||||||||
March
31, 2010
|
$
|
N/A
|
$
|
N/A
|
$
|
12.00
|
$
|
8.00
|
||||||||
December
31, 2009
|
$
|
N/A
|
$
|
N/A
|
$
|
13.50
|
$
|
6.805
|
*
|
|||||||
September
30, 2009
|
$
|
N/A
|
$
|
N/A
|
$
|
8.60
|
*
|
$
|
5.555
|
*
|
||||||
June
30, 2009
|
$
|
18.50
|
$
|
0.30
|
$
|
11.245
|
*
|
$
|
7.65
|
*
|
||||||
March
31, 2009
|
$
|
0.90
|
$
|
0.25
|
$
|
N/A
|
$
|
N/A
|
||||||||
December
31, 2008
|
$
|
0.75
|
$
|
0.30
|
$
|
N/A
|
$
|
N/A
|
||||||||
September
30, 2008
|
$
|
1.10
|
$
|
0.51
|
$
|
N/A
|
$
|
N/A
|
||||||||
June
30, 2008
|
$
|
1.15
|
$
|
0.90
|
$
|
N/A
|
$
|
N/A
|
||||||||
March
31, 2008
|
$
|
1.40
|
$
|
0.90
|
$
|
N/A
|
$
|
N/A
|
(1) Through
June 25, 2009.
(2) From
June 26, 2009 forward.
* Actual price adjusted to take into account 2-for-1 forward stock
split effected on November 16, 2009.
As of
March 24, 2010, we had approximately 7,097,708 shares of common stock issued and
outstanding.
As of
March 24, 2010, we have outstanding warrants that were issued in conjunction the
private placement of our convertible debentures on February 27, 2007, as well as
outstanding options that were issued to our underwriters in connection with our
public offering in July 2009. These warrants and options, if exercised, would
permit their holders to purchase approximately an additional 190,204 shares of
our common stock.
As of
March 24, 2010, one of our directors is owed 47,334 shares of common stock for
his services as our U.S. Representative through December 31,
2009.
Assuming
exercise of all warrants and options, and issuance of shares owed to the
director, we would have approximately 7,335,246 shares of common stock
outstanding.
Holders
As of March 24, 2010, we had approximately 401 registered stockholders of our common
stock on record. This number does not include shares held by brokerage clearing
houses, depositories or otherwise in unregistered
form.
31
Dividends
While
there are no restrictions that limit our ability to pay dividends, we have not
paid, and do not currently intend to pay cash dividends on our common stock in
the foreseeable future. Our policy is to retain all earnings, if any, to provide
funds for operation and expansion of our business. The declaration of dividends,
if any, will be subject to the discretion of our board of directors, which may
consider such factors as our results of operations, financial condition, capital
needs and acquisition strategy, among others.
Securities
Authorized for Issuance under Equity Compensation Plans
Please
see the discussion in Item 12 titled “Equity Compensation Plan Information”
below.
Recent
Sales of Unregistered Securities
None for the three months ended December
31, 2009.
Not
applicable.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and
analysis of our results of operations and financial condition
for the fiscal years ended December 31, 2009 and 2008
should be read in conjunction with Selected Consolidated Financial Data and our
financial statements and the notes to those financial statements that are
included elsewhere in this report. Our discussion includes forward-looking
statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations and intentions. Actual results and
the timing of events could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including those
set forth under the “Risk Factors”, “Cautionary Notice Regarding Forward-Looking
Statements” and “Description of Business” sections and elsewhere in this report.
We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,”
“predict,” and similar expressions to identify forward-looking
statements. Although we
believe the expectations expressed in these forward-looking statements are based
on reasonable assumptions within the bound of our knowledge of our business, our
actual results could differ materially from those discussed in these statements.
Factors that could contribute to such differences include, but are not limited
to, those discussed in the “Risk Factors” section of this report. We undertake
no obligation to update publicly any forward-looking statements for any reason
even if new information becomes available or other events occur in the
future.
Our
financial statements are prepared in US Dollars and in accordance with
accounting principles generally accepted in the United States of America. See
“Exchange Rates” below for information concerning the exchanges rates at which
Renminbi (“RMB”) were translated into US Dollars (“USD”) at various pertinent
dates and for pertinent periods.
Overview
Skystar Bio-Pharmaceutical Company
(“Skystar” or the “Company”), formerly known as The Cyber Group
Network Corporation, was incorporated in Nevada on September 24, 1998. The
Company is a holding company that, through its variable interest entity
(“VIE”) Xian Tianxing Bio-Pharmaceutical
Co., Ltd. (“Xian Tianxing”), researches, develops, manufactures
and distributes veterinary health care and medical care products in the
People’s Republic of China (“PRC”).
All of the Company’s operations are carried out by Xian
Tianxing, a PRC company, which the Company controls through contractual
arrangements originally between Xian Tianxing and Skystar Bio-Pharmaceutical
(Cayman) Holdings Co., Ltd. (“Skystar Cayman”), a Cayman Islands company that became
the Company’s wholly owned subsidiary subsequent to
a share exchange transaction on November
7, 2005. On
March 10, 2008, all of the rights and obligations of Skystar Cayman under the
contractual arrangements were transferred to Sida Biotechnology (Xian) Co., Ltd.
(“Sida”), a PRC company and wholly owned
subsidiary of Fortunate Time International
Limited, a Hong Kong company and wholly owned subsidiary of Skystar Cayman. Xian
Tianxing also has a wholly owned subsidiary, Shanghai Siqiang Biotechnological
Co., Ltd., a PRC company.
32
Such contractual arrangements
are necessary to comply
with Chinese laws limiting foreign ownership of certain companies. Through these
contractual arrangements, we have the ability to substantially influence Xian
Tianxing’s daily operations and financial
affairs, appoint its senior executives and approve all matters
requiring shareholder approval. As a result of these contractual arrangements,
which enable us to control Xian Tianxing, we are considered the primary
beneficiary of Xian Tianxing. Please see Note 1 to our consolidated
financial statements for year ended December 31, 2009, for the impact of the contractual
arrangements on our consolidated financial statements.
Currently, we have four major product
lines:
·
|
Our
bio-pharmaceutical veterinary vaccine line currently includes over 10
products;
|
·
|
Our
veterinary medicine line for poultry and livestock currently includes over
159 products;
|
|
·
|
Our
feed additives line currently includes over 10 products;
and
|
·
|
Our
micro-organism products line currently includes over 16
products.
|
All of our revenue is derived
from the sale of veterinary healthcare and medical care products in
China, which are distributed through a distribution
channel covering 29 provinces. As of December 31, 2009, we had over 1,465
distributors and 518 direct customers.
Completion of Public
Offering
On July 7, 2009, we completed a
registered public offering of 3.22 million shares of common stock at a price of
$6.49 per share, resulting in gross proceeds to the Company, prior to deducting
underwriting discounts, commissions and offering expenses, of approximately $21
million.
In preparing the consolidated financial
statements in accordance with accounting principles generally accepted
in the United States of America, we make estimates and assumptions about the
effect of matters that are inherently uncertain and may change in subsequent
periods. The resulting accounting estimates will, by definition, vary from the related actual results.
We consider the following to be the most critical accounting
policies:
•
|
Revenue
recognition: Revenues of the Company include sales of bio-pharmaceutical
and veterinary products in China. Sales are recognized when the following
four revenue criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred, the selling price is fixed or determinable,
and collectability is reasonably assured. Sales are recorded net of value
added tax (“VAT”). No return allowance is made as product returns are
insignificant based on historical
experience.
|
(a)
|
Credit
sales: Revenue is recognized when the products have been
delivered to the customers.
|
(b)
|
Full payment before
delivering: Revenue is
recognized when the products have been delivered to
customers.
|
•
|
Accounts
receivable: We perform ongoing credit evaluations of our customers and
adjust credit limits based upon payment history and the customers’ current
credit worthiness, as determined by a review of their current credit
information. We continuously monitor collections and payments from our
customers and maintain a provision for estimated credit losses based upon
historical experience and any specific customer collection issues that
have been identified. While such credit losses have historically been
within our expectations and the provisions established, we cannot
guarantee that we will continue to experience the same credit loss rates
that have been experienced in the
past.
|
33
Our accounts receivable aging was as
follows for the periods below:
From
Date of Invoice to Customer:
|
December
31,
2009
|
December
31,
2008
|
||||||
0 – 30
days
|
$ | 4,073,214 | $ | 1,311,692 | ||||
31 – 60
days
|
177,416 | 543,153 | ||||||
61 – 90
days
|
21,868 | 156,153 | ||||||
91 – 120
days
|
23,865 | 299,828 | ||||||
121 – 150
days
|
86,824 | 113,276 | ||||||
Total
|
$ | 4,383,187 | $ | 2,424,102 |
On average, we collect our receivables
within 90 days. Historically, we have collected all of our accounts receivable
and have had no write offs. This is attributed to the steps that we take prior
to extending credit to our customers as discussed above. If we are having difficulty
collecting from a customer, we take the following steps: cease existing
shipments to the customer, our sales force actively calls and goes to the
customer’s site reminding the customer of their
past due invoice and requesting payment, and if those methods are
unsuccessful we use our outside legal counsel. If, in the future, those steps
are unsuccessful, management would determine whether or not the receivable
should be written off.
•
|
Convertible
debentures and warrants: We have adopted the accounting standards of
accounting for convertible debt and debt issued with stock purchase
warrants and other related derivative accounting standards for valuation
and accounting treatment of our outstanding convertible debentures and
warrants.
|
•
|
Liquidated
damages: We have adopted the FASB’s accounting standard of accounting for
contingencies and the EITF’s accounting standard of accounting for
derivative financial instruments indexed to, and potentially settled in, a
company’s own stock, in connection with the liquidated damages, we accrued
pursuant to the terms of our Registration Rights Agreement with certain
investors dated February 27, 2007.
|
Recently
Issued Accounting Pronouncements
In January 2009, the Financial
Accounting Standards Board (“FASB”) issued an accounting standard amending
the Impairment Guidance of recognition of interest income and impairment on
purchased and retained beneficial interests in securitized financial
assets. The newly issued
accounting standard changes the impairment model included to be more consistent
with the impairment model of another accounting standard for accounting for
securities. The
new accounting standard remove its exclusive reliance on “market participant” estimates of future cash flows used in
determining fair value. Changing the cash flows used to analyze
other-than-temporary impairment from the “market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows
companies to apply reasonable judgment in assessing whether an
other-than-temporary impairment has occurred. The adoption of this FASB Staff
Positions did not have a material impact the Company’s consolidated financial statements.
In April 2009, the FASB issued three
related FASB Staff Positions: (i) Recognition of Presentation of
Other-Than-Temporary Impairments, (ii) Interim Disclosures about Fair Value of
Financial Instruments, and (iii) Determining the Fair Value When the Volume and Level of Activity for
the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly, which are effective for interim and annual reporting
periods ending after June 15, 2009. The first Staff Position modifies the requirement for
recognizing other-than-temporary impairments, changes the existing impairment
model, and modifies the presentation and frequency of related disclosures. The
second Staff Position requires disclosures about fair value of financial instruments for interim reporting
periods as well as in annual financial statements. The third Staff
Position requires new disclosures regarding the categories of fair value
instruments, as well as the inputs and valuation techniques utilized to
determine fair value and any changes to the
inputs and valuation techniques during the period. The adoption of these
FASB Staff Positions did not have a material impact the Company’s consolidated financial
statements.
34
In May
2009, the FASB an accounting standard which provides guidance to establish
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The standard also requires entities to disclose the date
through which subsequent events were evaluated as well as the
rationale for why that date was selected. The standard is effective for
interim and annual periods ending after June 15, 2009, and accordingly, the
Company adopted this Standard as of December 31, 2009. The standard requires
that public entities evaluate subsequent events through the date that the
financial statements are issued.
In June
2009, the FASB issued an accounting standard which establishes the FASB
Accounting Standards Codification™ (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in
one place. The Codification is effective for interim and annual periods ending
after September 15, 2009, and as of the effective date, all existing
accounting standard documents will be superseded. The Codification is effective
for the Company in the third quarter of 2009, and accordingly, the
Company’s Annually Report on Form 10-K for the year ended December 31, 2009 and
all current and subsequent public filings will reference the Codification
as the sole source of authoritative literature.
In August 2009, the FASB issued an
Accounting Standards Update (“ASU”) regarding measuring liabilities at fair value. This ASU
provides additional guidance clarifying the measurement of liabilities at fair
value in circumstances in which a quoted price in an active market for the
identical liability is not available; under those circumstances, a reporting entity is required to measure
fair value using one or more of valuation techniques, as defined. This ASU is
effective for the first reporting period, including interim periods, beginning
after the issuance of this ASU. The adoption of this ASU did not have a material impact the
Company’s consolidated financial
statements.
In October 2009, the FASB issued an ASU
regarding accounting for own-share lending arrangements in contemplation of
convertible debt issuance or other financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an
offset to additional paid-in capital.
Further, loaned shares are excluded from basic and diluted earnings per share
unless default of the share-lending arrangement occurs, at which time the loaned
shares would be included in the basic and diluted earnings-per-share calculation. This ASU is
effective for fiscal years beginning on or after December 15, 2009, and interim
periods within those fiscal years for arrangements outstanding as of the
beginning of those fiscal years. The Company is currently assessing
the impact of this ASU on its consolidated
financial statements.
In
January 2010, the FASB issued ASU No. 2010-02 regarding accounting and reporting
for decreases in ownership of a subsidiary. Under this guidance, an
entity is required to deconsolidate a subsidiary when the entity ceases to have
a controlling financial interest in the subsidiary. Upon
deconsolidation of a subsidiary, an entity recognizes a gain or loss on the
transaction and measures any retained investment in the subsidiary at fair
value. In contrast, an entity is required to account for a decrease
in its ownership interest of a subsidiary that does not result in a change of
control of the subsidiary as an equity transaction. This ASU
clarifies the scope of the decrease in ownership provisions, and expands the
disclosures about the deconsolidation of a subsidiary or de-recognition of a
group of assets. This ASU is effective beginning in the first interim
or annual reporting period ending on or after December 31, 2009. The
adoption of this ASU did not have a material impact the Company’s consolidated
financial statements.
In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure to include transfers in and out of Levels 1 and 2 and
activity in Level 3 fair value measurements. Further, this update
clarifies existing disclosures on level of disaggregation and Disclosures about
inputs and valuation techniques. A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities and
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company is currently evaluating the impact of this ASU;
however, the Company does not expect the adoption of this ASU to have a material
impact on its consolidated financial statements.
35
Results
of Operations – Comparison of Two Years Ended December 31, 2009 and
2008.
The
following table summarizes our results of operations for the years ended
December 31, 2009 and 2008.
Years
Ended December 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Amount
|
Percentage
of
total
revenue
|
Amount
|
Percentage
of
total
revenue
|
|||||||||||||
Revenues
|
$
|
33,778,305
|
100.0
|
%
|
$
|
25,584,446
|
100.0
|
%
|
||||||||
Gross
Profit
|
$
|
17,257,316
|
51.1
|
%
|
$
|
12,775,550
|
49.9
|
%
|
||||||||
Operating
Expense
|
$
|
5,562,848
|
16.5
|
%
|
$
|
4,594,563
|
18.0
|
%
|
||||||||
Income
from Operations
|
$
|
11,694,468
|
34.6
|
%
|
$
|
8,180,987
|
32.0
|
%
|
||||||||
Other
Expenses
|
$
|
813,162
|
2.4
|
%
|
$
|
1,055,116
|
4.1
|
%
|
||||||||
Income
Tax Expenses
|
$
|
2,029,374
|
6.0
|
%
|
$
|
1,529,688
|
6.0
|
%
|
||||||||
Net
Income
|
$
|
8,851,932
|
26.2
|
%
|
$
|
5,596,183
|
21.9
|
%
|
Revenues. All of
our revenues are derived from the sale of veterinary healthcare and medical care
products in the PRC. For the year ended December 31, 2009, we had revenues of
$33,778,305 as compared to revenues of $25,584,446 for the year ended December
31, 2008, an increase of approximately 32.0%.
Revenues — Veterinary
Medications. Revenues from sales of our veterinary medications
product line increased from $17,535,757for the year ended December 31, 2008 to
$22,920,479 for the year ended December 31, 2009 for an increase of $5,384,722
or 30.7%. The increase in veterinary medication sales was primarily due to our
increased utilization of our 2007 veterinary medicine facility expansion of 200%
and increased sales efforts. We were able to utilize this capacity expansion as
our customers increased the use of products for the treatment of livestock and
poultry diseases during the year ended December 31, 2009. Of total revenues from
veterinary medications during the year ended December 31, 2009, approximately
$6,800,574 or 20% of total revenue resulted from the sale of
Praziquantel tablets which treats schistosomiasis.
Revenues — Micro-Organism. Revenues
from sales of our micro-organism product line increased from $5,868,623 for the
year ended December 31, 2008 to $8,021,139 for the year ended December 31, 2009
for an increase of $ 2,152,516 or 36.7%. The increase was the result of
increased sales efforts of our probiotics micro-organism products during the
year ended December 31, 2009.
Revenues — Feed
Additives. Revenues from sales of our feed additives product
line increased from $1,189,108 for the year ended December 31, 2008 to
$1,411,222 for the year ended December 31, 2009 for an increase of $222,114 or
18.7%. The increase of $222,114 was the result of increased sales efforts
of our multi-enzyme feed additive products.
Revenues — Vaccines. Revenues
from sales of our vaccines product line increased from $990,958 for the year
ended December 31, 2008 to $1,425,465 for the year ended December 31, 2009 or an
increase of $434,507 or 43.8%. This increase was a result of increased demand
for our vaccine products during the year ended December 31, 2009. We are
presently operating at full production capacity for our
vaccine product line and therefore cannot significantly increase sales until we
expand our production capabilities which we presently have underway and
anticipate completion during the second quarter of 2010.
36
Cost
of Revenue
Cost of
revenue. For the year ended December 31, 2009, we had cost of
revenues, which consists of raw materials, direct labor, and manufacturing
overhead, of $16,520,989 as compared to cost of sales of $ 12,808,896 for the
year ended December 31, 2008, an increase of approximately 29.0%. Our cost of
sales consists of four product lines: veterinary medications, micro-organism,
feed additives, and vaccines. The increase was due to our overall sales increase
of 32.0%.
Cost of Sales — Veterinary
Medications. Cost of sales of our veterinary medications
product line increased from $10,389,726 for the year ended December 31, 2008 to
$13,672,332 for the year ended December 31, 2009, for an increase of
$3,282,607or approximately 31.6%. This increase was mainly due to the
corresponding increase in veterinary medication sales.
Cost of
Sales — Micro-Organism. Cost of sales of our
micro-organism product line increased from $1,781,598 for the year ended
December 31, 2008 to $2,129,945 for the year ended December 31, 2009 for an
increase of $348,346 or approximately 19.6%. This increase was mainly due
to a corresponding increase in micro-organism sales.
Cost of Sales — Feed
Additives. Cost of sales of our feed additives product
line increased from $525,653 for the year ended December 31, 2008 to
$568,007 for the year ended December 31, 2009 for an increase of $42,354 or
8.1%. This increase was mainly due to a corresponding increase in feed additive
sales.
Cost of
Sales — Vaccines. Cost of sales of our vaccines
product line increased from $111,919 for the year ended December 31, 2008 to
$150,705 for the year ended December 31, 2009, for an increase
of $38,786 or 34.7%. This increase was the result of an
increase of vaccine product sales during the year ended December 31, 2009. We
are presently operating at full production capacity for our vaccine product line
and therefore cannot significantly increase sales until we expand our production
capabilities which we presently have underway and anticipate completion during
the second quarter of 2010.
Operating
Expenses
Years
Ended December 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Amount
|
Percentage
of
total
revenue
|
Amount
|
Percentage
of
total
revenue
|
|||||||||||||
Gross
Profit
|
$
|
17,256,316
|
51.1
|
%
|
$
|
12,775,550
|
49.9
|
%
|
||||||||
Operating
Expenses
|
$
|
5,562,848
|
16.5
|
%
|
$
|
4,594,563
|
18.0
|
%
|
||||||||
Selling
Expenses
|
$
|
1,928,441
|
5.7
|
%
|
$
|
1,381,807
|
5.4
|
%
|
||||||||
General
and Administrative Expenses
|
$
|
2,466,470
|
7.3
|
%
|
$
|
2,663,520
|
10.4
|
%
|
||||||||
Research
and Development Costs
|
$
|
1,167,937
|
3.5
|
%
|
$
|
549,236
|
2.1
|
%
|
||||||||
Income
from Operations
|
$
|
11,694,468
|
34.6
|
%
|
$
|
8,180,987
|
32.0
|
%
|
Selling
Expenses. Selling expenses, which consist of commissions,
advertising and promotion expenses, freight charges, and salaries, totaled
$1,928,441 for the year ended December 31, 2009 as compared to $1,381,807 for
the year ended December 31, 2008, an increase of approximately 546,634 or 39.6%.
This increase is the result of our increased sales during the year ended
December 31, 2009.
General and Administrative
Expenses. General and administrative expenses totaled
$2,466,470 for the year ended December 31, 2009, as compared to $2,663,520 for
the year ended December 31, 2008, a decrease of approximately 7.4%. Although our
general and administrative expenses decreased slightly, we anticipate that our
general and administrative expenses will increase due to the increasing costs of
being a U.S. public company, including, but not limited to, our annual NASDAQ
Capital Market fees, fees related to investor relations and costs of complying
with Sarbanes-Oxley.
Research and Development
Costs. Research and development costs, which consist of
salaries, professional fees, and technical support fees, totaled $1,167,937 for
the year ended December 31, 2009, as compared to $549,236 for the year ended
December 31, 2008, an increase of approximately 112.6%. This increase is primarily attributable to increased
research activities with certain outside experts and institutions with whom we
cooperate on research and development of both existing and new products. We
anticipate that our research and development costs will continue to increase as
we continue improve existing products and develop new products.
37
Liquidity
For the
twelve months ended December 31, 2009, cash provided by operating activities was
$1,265,727 compared to cash provided by operating activities of $3,700,428 for
the same period in 2008. For the year ended December 31, 2009, net
cash provided by operating activities other than net income was primarily due to
an increase of $3,662,661 in deposits and prepaid expenses. However, this
decrease was offset by an increase of $898,213 in taxes payable and $499,158 in
deposits from customers. Collectively this decreased cash used in operating
activities by $2,434,701 for the year ended December 31, 2009 as compared to the
year ended December 31, 2008. As of December 31, 2009 we had approximately forty
six suppliers that we have made advances to in order to secure our raw materials
and obtain favorable pricing.
We used
$7,853,439 in investing activities for the year ended December 31, 2009, as
compared to using $5,076,346 in investing activities for the year ended December
31, 2008. Net cash used in investing increased as a result of deposits made for
two potential acquisitions as of December 31, 2009.
Cash
provided by financing activities was $17,709,238 for the year ended December 31,
2009 as compared to $1,136,127 generated for the year ended December 31, 2008.
Cash generated by financing activities for the year ended December 31, 2009 was
the result of the financing that the Company completed in July 2009. Cash
provided by financing activities for the year ended December 31, 2008 was the
result of advances from shareholders and short term bank loans.
As of
December 31, 2009, we had cash of $11,699,398. Our total current assets were
$32,548,256, and our total current liabilities were $4,055,388, which resulted
in a net working capital of $28,492,868.
Capital
Resources
In July
2009, we completed a public offering of 3,220,000 shares of our common stock at
a price of $6.49 per share resulting in net proceeds of $18,411,496. However, if
we are to acquire another business or further expand our operations, we may need
additional capital.
Over the
next 12 months, we plan to continue to market and sell our current products and
to develop new products.
In 2003,
we received approval from the State Council of China to expand our production
facilities and construct a new GMP standard plant. We have invested $10,501,000
(RMB 82,000,000) into this project, which is our Huxian plant, including
approximately $9,700,000 for the facilities and $800,000 for working capital.
The construction work commenced in 2005, and we completed the veterinary
medicine facility and the building that houses quality control, research and
development and administration during 2007, both of which are fully operational.
The remaining facilities of the Huxian plant are expected to be completed in the
second quarter of 2010, rather than the fourth quarter of 2009 as previously
anticipated. We anticipate that the new factory will generate sufficient cash
flows; thus, management has concluded that there is no impairment loss on the
construction in progress.
We
believe that Xian Tianxing will be developing new products including animal
immunization products, non-pathogenic micro-organisms for the cure and
prevention of livestock disease, complex enzyme preparations as animal feed
additives, and several new veterinary medicine products within the next 12
months.
38
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
Payments
Due by Period
|
||||||||||||||||||||
Contractual
Obligations
|
Total
|
Less
than
1
year
|
1
– 3 years
|
3
– 5 years
|
More
than
5
years
|
|||||||||||||||
R&D
Project Obligation
|
$
|
908,396
|
$
|
908,396
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Operating
Lease Obligations
|
284,599
|
61,195
|
97,144
|
69,962
|
56,298
|
|||||||||||||||
Total
|
$
|
1,192,995
|
$
|
969,591
|
$
|
97,144
|
$
|
69,962
|
$
|
56,298
|
Off-Balance
Sheet Arrangements
We do not
have any outstanding financial guarantees or commitments to guarantee the
payment obligations of any third parties. We have not entered into any
derivative contracts that are indexed to our shares and classified as
stockholders’ equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
Exchange Rates
Xian Tianxing maintains its books and
records in Renminbi (“RMB”), the lawful currency of China. In
general, for consolidation purposes, we translate Xian Tianxing’s assets and liabilities into US$ using
the applicable exchange
rates prevailing at the balance sheet date, and the statement of income is
translated at average exchange rates during the reporting period. Adjustments
resulting from the translation of Xian Tianxing’s financial statements are recorded as
accumulated other comprehensive
income.
The exchange rates used to translate
amounts in RMB into US$ for the purposes of preparing the consolidated financial
statements or otherwise stated in this MD&A were as
follows:
December
31,
2009
|
December
31,
2008
|
|||||
Assets
and liabilities
|
USD0.1467:
RMB1
|
USD0.1467:
RMB1
|
||||
Statements
of operations and cash flows for the year ended
|
USD
0.14661: RMB1
|
USD0.14415:
RMB1
|
No representation is made that RMB
amounts have been, or would be, converted into US$ at the above
rates.
Inflation
We believe that inflation has not had a
material effect on our operations to date.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
The
consolidated financial statements and financial statement schedule are included
in Part III, Item 15 (a) (1) and (2) of this Annual report on Form
10-K.
39
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
As reported in a Form 8-K Current Report
filed with the SEC on January 7, 2010, we were notified that,
effective January 1, 2010, certain partners of Moore Stephens Wurth Frazer and
Torbet, LLP (“MSWFT”) and Frost, PLLC (“Frost”) formed Frazer Frost, LLP
(“Frazer Frost”), a new partnership. Pursuant to the terms of a combination
agreement by and among MSWFT, Frazer Frost and Frost (the “Combination
Agreement”), each of MSWFT and Frost contributed substantially all of their
assets and certain of their liabilities to Frazer Frost, resulting in Frazer
Frost assuming MSWFT’s engagement letter with the Company and becoming the
Company’s new independent accounting firm.
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
As of
December 31, 2009, the end of the fiscal year covered by this report, our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, has performed an evaluation of
the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).
Based on
the evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were ineffective at the reasonable assurance
level.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in rules 13a-15(f) and 15d-15(f).
The Company's 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 in the United States of America. The
Company's internal control over financial reporting includes those policies and
procedures that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles in the United States of
America, and that receipts and expenditures of the Company are being made only
in accordance with authorizations of management and directors of the Company;
and (iii) 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.
Any
system of internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be circumvented or
overridden and misstatements due to error or fraud may occur and not be detected
in a timely manner. Also, because of changes in conditions, internal control
effectiveness may vary over time. Accordingly, even an effective system of
internal control will provide only reasonable assurance with respect to
financial statement preparation.
Our
management assessed the effectiveness of the Company's internal control over
financial reporting based on criteria in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
40
Based on
that evaluation, our management concluded that as of December 31, 2009, and as
of the date that the evaluation of the effectiveness of our internal control
over financial reporting was completed, our internal control over financial
reporting was not effective due to the following material
weaknesses:
1.
|
Accounting
and Finance Personnel Weaknesses - The
current accounting staff is relatively inexperienced, and requires
substantial training so as to meet with the higher demands necessary to
fulfill the requirements of U.S. GAAP-based reporting and SEC rules and
regulations.
|
As
indicated in Item 9A(T) of our annual report on Form 10-K for the year ended
December 31, 2008 (the “2008 Form 10-K”), we concluded that the Company had
accounting and finance personnel weaknesses as of December 31, 2008.
Management’s assessment of the control deficiency over accounting and finance
personnel as of December 31, 2009 and 2008 considered the same factors, which
included:
a.
|
the
number of adjustments proposed by our independent auditors during our
quarterly review and annual audit
processes;
|
b.
|
the
significance of the audit adjustments impact on the overall financial
statements;
|
c.
|
how
appropriately we complied with U.S. GAAP on transactions;
and
|
d.
|
how
accurately we prepared supporting information to provide to our
independent auditors on a quarterly and annual
basis.
|
Based on
the above factors, management concluded that the control deficiency over
accounting and finance personnel should be a material weakness as of December
31, 2009 and 2008 respectively because the situation in regard to our
insufficient number of qualified resources in our U.S. reporting team remained
the same in these two years.
2.
|
Lack
of effective Internal Audit Function - We did not maintain
effective controls over internal audit function due to the lack of
qualified internal auditors who are familiar with internal audit and U.S.
GAAP, and we did not implement adequate and proper supervisory review to
ensure that significant internal control deficiencies can be detected or
prevented.
|
As
indicated in Item 9A(T) of the 2008 Form 10-K, we concluded that the Company
lacked of effective internal audit function as of December 31, 2008 because we
lacked an internal audit department, which rendered the Company ineffective in
preventing and detecting control lapses and errors in the accounting of certain
key areas. We attempted to remediate this material weakness in year 2009 through
setting up an internal audit department and appointing one person to carry out
internal audit function. However, the material weakness had not been removed due
to our insufficient number of qualified resources and lacking of substantial
internal audit work.
Remediation of Material Weaknesses in Internal Control over Financial Reporting
During
year 2009, we carried out certain measures described below to address and
remediate our previously identified material weaknesses:
1.
|
Streamlined
main process cycles, including financial reporting, revenue, procurement,
treasury and so on, to guide the routine work and improve the ability of
accounting and financial
reporting;
|
2.
|
Involved
both internal accounting and operations personnel and outside contractors
with technical accounting expertise, as needed, early in the evaluation of
a complex, non-routine transaction to obtain additional guidance as to the
applying of U.S. GAAP to such a proposed transaction;
and
|
3.
|
Set
up an internal audit department and assigned more resources to enhance the
internal audit function, especially in the supervision of complex,
non-routine transactions.
|
Although
we implemented the remediation measures described above, we were unable to
remediate our two material weaknesses due to the reasons stated in the previous
paragraphs.
41
In 2010,
besides the remediation measures described above, we will take the following
measures:
1.
|
Recruit
sufficient qualified accounting and internal audit personnel and continue
to engage outside contractor with technical accounting expertise, as
needed.
|
2.
|
Reorganize
the accounting and finance department to ensure that accounting personnel
with adequate experience, skills and knowledge are directly involved in
the review and accounting evaluation of our complex, non-routine
transactions.
|
3.
|
Continue
to evaluate our existing staffs and make adjustments as necessary, in
addition to providing additional training on accounting principles and
internal control procedures for our existing
staffs.
|
4.
|
Improve
the interaction among our management, audit committee, independent
auditors and other external
advisors.
|
While the
Company has taken steps to remediate its material weaknesses, the Company
believes that, such steps were not yet implemented to the extent required to
fully remediate those material weaknesses and additional measures will be
required. The effectiveness of these remediation efforts will not be known until
the Company performs a test of these controls in connection with management’s
tests of internal controls over financial reporting that the Company will
undertake as of December 31, 2010.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding management’s assessment
of the Company’s internal control over financial reporting. Management’s report
was not subject to attestation by the Company’s independent registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
annual report.
Changes
in Internal Controls over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) during the year ended December 31, 2009 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM
9B. OTHER INFORMATION
None.
PART
III
Name
|
Age
|
Position
|
Date
of Appointment
|
|||
Weibing
Lu
|
47
|
Chief
Executive Officer and Chairman of the Board of Directors
|
November
2005
|
|||
|
||||||
Bennet
P. Tchaikovsky
|
41
|
Chief
Financial Officer
|
May
2008
|
|||
|
||||||
Wei
Wen
|
44
|
Secretary
and Director
|
November
2005
|
|||
|
||||||
R.
Scott Cramer
|
46
|
Director
|
October
2001
|
|||
|
||||||
Qiang
Fan
|
55
|
Director
|
July
2008
|
|||
|
||||||
Chengtun Qu
|
45
|
Director
|
July
2008
|
|||
|
||||||
Shouguo
Zhao
|
47
|
Director
|
July
2008
|
|||
Mark
D. Chen
|
42
|
Director
|
May
26, 2009
|
42
Business
Experience Descriptions
Weibing Lu, Chief Executive Officer and
Chairman of the Board of Directors
Mr. Weibing Lu received his
Bachelor’s degree in science from Wuhan
University of Mapping Science and Technology (now known as Wuhan University) in
1985. In 1986, he was a teacher of College of Xian Geology. Mr. Lu attended Xian
Jiao Tong University in 1999 where he received a Master’s degree in Business Administration in
2002. Mr. Lu has vast experience in the biotechnology field and in enterprise
management. In 1992, he founded the Xian Xingji Electronic Engineering Company
and served as its Chairman and President until 1997. In 2002, he was
awarded as the title of “Outstanding Enterpriser of Xian Feed
Industry” and appointed as
a director of Xian Institute of Feed Industry. In July 1997, he founded Xian
Tianxing Science and Technology Development Co., Ltd. In December 2003, Xian Tianxing
Science and Technology Development Co., Ltd., was reorganized and became Xian
Tianxing Bio-Pharmaceutical Co., Ltd. Since December 2003, Mr. Lu has served as
Chairman of the Board and General Manager of Xian Tianxing Bio-Pharmaceutical Co.,
Ltd.
Bennet P. Tchaikovsky, Chief Financial
Officer
Mr. Bennet P. Tchaikovsky is presently the Chief Financial Officer
for China Jo-Jo Drugstores which he performs on a part-time basis. Mr. Tchaikovsky has served as
our chief financial officer of Skystar Bio-Pharmaceutical Company since May 2008
which he performs on a part-time basis. From March 2008 through November 2009,
Mr. Tchaikovsky served as a director of Ever-Glory International Group. From
December 2008 through November 2009, Mr. Tchaikovsky served as a director of
Sino Clean Energy, Inc. From July 2004 through October 2007, Mr. Tchaikovsky
served as the chief financial officer of Innovative Card Technologies,
Inc. Mr. Tchaikovsky acted as a consultant to Innovative Card
Technologies from November 2007 until July 2008. Mr. Tchaikovsky is a licensed
Certified Public Accountant and an inactive member of the California State Bar.
He received a B.A. in Business Economics from the University of California at
Santa Barbara, and a J.D. from Southwestern University School of
Law.
Wei Wen, Secretary and
Director
Mr. Wei Wen graduated from Xian
University of Science and Industry (also known as Xian University of Technology)
in 1989. From 1990 to 1994, Mr. Wen was the manager of Sales Department of Xian Zhongtian Science and
Technology Development Co., Ltd. Then, from 1994 to 1997, Mr. Wen served as Vice
General Manager and Manager of Sales Department of Xian Xingji Electronic
Engineering Company. In 1997, Mr. Wen was appointed as the Vice General Manager of Xian Tianxing Science
and Technology Development Co., Ltd. which he served until December 2003. After
the reorganization of the company in December 2003, Mr. Wen was appointed and
continues to serve as Vice General Manager and a Director of Xian Tianxing Bio-Pharmaceutical
Co., Ltd. (including as secretary of the Board of
Directors).
R. Scott Cramer,
Director
Mr. R. Scott Cramer was previously the
Chairman from November 2001 to November 2005, Chief Executive Officer from March
2002 to November 2005, and
Chief Financial Officer from April 2003 to November 2005, of The Cyber Group
Network Corporation. He is currently a member of our Board of Directors. Mr.
Cramer is the founder and President of Cramer & Rauchegger, Inc., a firm
specializing in retirement management, estate
planning and wealth management. He has been a Registered Investment Advisor
since August 2001, a Securities Selling Representative since May 1999, and a
General Securities Representative (Registered Representative) since July 2002. Mr. Cramer is a graduate of
Seminole State College. He received certification as a Chartered Retirement
Planning Counselor from the College of Financial Planning in 2001, as a
Certified Estate Planning Professional from the Abts Institute for Estate Preservation in 2001, and as a
Certified Senior Advisor from the Society of Senior Advisors in
2002.
43
Qiang Fan, Director
Mr. Qiang Fan also serves as chairman of
the compensation committee and member of the audit committee. Mr. Fan is the
President and Founder of
MIC Consulting Group, U.S.A., which he established in 1992 to provide
operational and financial related problem solving services to privately owned
companies. Since 2007, Mr. Fan is the exclusive representative of North America
operation for China Venture Capital Research
Institute, and the head analyst at Power Partner Institute focusing on IT trends
since 2001. From 2006 to 2007, Mr. Fan was a Vice-president of Operation at
Kantan Inc., a privately-held boutique technology company focused on wireless solutions for device
manufacturers. From 2005 to 2006, he was a Vice-president at Third Wave
Ventures, which provides corporate venturing-related advisory, consulting and
management services. From 1998 to 2000, Mr. Fan was the exclusive
representative in China for PowerQuest, a Utah
based international software company that focused on computer data storage
management, as well as for ChipCoolers, a U.S. CPU cooler manufacturer. Mr. Fan
received his B.A. degree from the Business School of California State University at San
Francisco.
Chengtun Qu,
Director
Dr. Chengtun Qu is the Vice Dean of the
College of Chemistry and Chemical Engineering at Xi’an Shi You University, where he also
teaches and heads the environmental engineering department. Dr. Qu is a board member of both the Shaanxi
Province Environmental Protection Association and the Shaanxi Province Chemical
Engineering Association. As a principal researcher, Dr. Qu has participated in
various projects at both national and provincial levels, including ones sponsored by the Chinese
Ministry of Science and Technology, and is the recipient of numerous accolades
from the Shaanxi provincial government in recognition of his contributions. Dr.
Qu has three patents issued by the Chinese State Intellectual Property Office. He has also been
extensively published in various scientific journals both in China and abroad.
Dr. Qu has a B.S. degree in chemistry from Northwest University in
Xi’an, a master’s degree from Southwest Petroleum
University and a doctorate degree from Xi’an Jiaotong
University.
Shouguo Zhao,
Director
Dr. Shouguo Zhao also serves as member
of both the audit and the compensation committees. Dr. Zhao is an independent
director of Shaanxi International Trust & Investment Corp., Ltd., a
listed company on the
Shenzhen Stock Exchange (SZSE: SZ000563), chairing its Remuneration and
Assessment Committee and serving on its Strategy Committee. Dr. Zhao is also an
independent non-executive director of Sungreen International Holdings Limited, a
listed company on the Hong Kong Exchange
(HKEX: HK8306), serving as a member of its audit committee. He is additionally
an independent director of Tian Di Yuan Co., Ltd., a listed company on the
Shenzhen Stock Exchange (SZSE: SH600665), chairing its Nominating Committee and serving on its Strategy
Committee. From June 2005 to June 2008, Dr. Zhao was an independent director of
IRICO Group Corporation, a listed company on the Shenzhen Stock Exchange (SZSE:
SH600707), chairing its Remuneration and Assessment Committee and serving on its Strategy
Committee. Dr. Zhao is the Vice Dean of the School of Economics and Management
at Northwest University, where he also serves as a guide professor to doctorate
candidates in finance and national economics. He has led and participated in 18 research programs
sponsored by governments and the private sectors in areas of financial
investment, modern enterprise systems and development strategies, and regional
economic development strategies, and has more than 30 publications in
various academic journals. Dr. Zhao is a
member of Shaanxi Provincial Decision-making Consultative Committee, a member of
the Executive Committee of the Tenth Session of Shaanxi Provincial Industrial
and Commercial Association, the chairman of the Negotiable Securities Research Society of Shaanxi
Province, and a consultant with the Listed Companies Association of Shaanxi
Province. Dr. Zhao received his doctorate degree in economics from Northwest
University.
Mark D. Chen,
Director
Mr. Mark D. Chen also serves as chairman
of the audit committee and member of the compensation committee. Mr. Chen is the
chairman and chief executive officer of Pantheon China Acquisition Corp., a U.
S. publicly traded acquisition company he founded in 2006 focusing on pre-IPO Chinese
companies. Since 1998, Mr. Chen has been a founding general partner and has
served in various positions, including managing director and currently a venture
partner, with Easton Capital Investment Group and its various affiliated funds, a New York based private
equity investment firm. Mr. Chen has also worked extensively in China and was a
founder and senior executive of SureData Inc., a marketing and distribution
company in China in 1997. Mr. Chen received a B.S. from the Shanghai Jiao Tong University in Shanghai,
China, an M.S. from Pennsylvania State University and an M.B.A. from the
Columbia Business School at Columbia University.
44
Family
Relationships
There are
no family relationships between or among any of our current directors, executive
officers or persons nominated or charged by the Company to become directors or
executive officers. There are no family relationships among our officers and
directors and the officers and directors of our direct and indirect
subsidiaries.
Involvement
in Certain Legal Proceedings
There are no orders, judgments, or
decrees of any governmental agency or administrator, or of any court of
competent jurisdiction, revoking or suspending for cause any license, permit or
other authority to engage
in the securities business or in the sale of a particular security or
temporarily or permanently restraining any of our officers or directors from
engaging in or continuing any conduct, practice or employment in connection with
the purchase or sale of securities, or convicting such person
of any felony or misdemeanor involving a security, or any aspect of the
securities business or of theft or of any felony. Nor are any of the officers or
directors of any corporation or entity affiliated with us so enjoined.
Compliance
with Section 16(a) of the Exchange Act
Based
solely on review of the copies of such forms furnished to the Company, or
written representations that no reports were required, the Company believes that
for the fiscal year ended December 31, 2009, our directors and executive
officers complied with Section 16(a) filing requirements applicable to
them.
Code
of Ethics
We have adopted a code of ethics that
applies to our officers, directors and employees, including our chief executive
officer, senior executive
officers, principal accounting officer, and other senior financial officers. Our
code of ethics is available on our website at www.skystarbio-pharmaceutical.com. A copy of our code of ethics will also
be provided to any person without charge, upon written request sent to
us at our offices located at Rm. 10601, Jiezuo Plaza, No.4, Fenghui Road South,
Gaoxin District, Xi’an, Shaanxi Province, P.R.
China.
Material
Changes to the Procedures by which Security Holders May Recommend Nominees to
the Board of Directors
There
have been no material changes to the procedures by which security holders may
recommend nominees to the Board of Directors.
Our audit committee consists of three
independent directors: Mr. Fan, Dr. Zhao and Mr. Chen. Our board of directors
has determined, based on information furnished by Mr. Chen and other available
information, that he meets the requirements of an “audit committee financial expert” as such term is defined in the rules
promulgated under the Securities Act of 1933 and the Exchange Act of 1934, as
amended. On May 26, 2009, Mr. Chen was appointed to serve as chairman of the
audit committee, and to serve as our audit committee financial
expert.
The responsibilities of our audit
committee will include:
•
|
meeting
with our management periodically to consider the adequacy of our internal
control over financial reporting and the objectivity of our financial
reporting;
|
45
•
|
appointing
the independent registered public accounting firm, determining the
compensation of the independent registered public accounting firm and
pre-approving the engagement of the independent registered public
accounting firm for audit and non-audit
services;
|
•
|
overseeing
the independent registered public accounting firm, including reviewing
independence and quality control procedures and experience and
qualifications of audit personnel that are providing us audit
services;
|
•
|
meeting
with the independent registered public accounting firm and reviewing the
scope and significant findings of the audits performed by them, and
meeting with management and internal financial personnel regarding these
matters; and
|
•
|
reviewing
our financing plans, the adequacy and sufficiency of our financial and
accounting controls, practices and procedures, the activities and
recommendations of the auditors and our reporting policies and practices,
and reporting recommendations to our full board of directors for
approval.
|
Compensation
Committee
Our compensation committee consists of
three independent directors: Mr. Fan, Dr. Zhao and Mr. Chen. On July 14, 2008,
Mr. Fan was appointed to serve as chairman of the compensation committee. Our compensation
committee will oversee and, as appropriate, make recommendations to the board
regarding the annual salaries and other compensation of the Company’s executive officers, the
Company’s general employee compensation, and
other policies, and provide assistance and
recommendations with respect to the compensation policies and practices of the
Company.
ITEM
11. EXECUTIVE COMPENSATION
Summary
of Compensation
The
following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal years ended December 31, 2009 and
2008 by (i) our Chief Executive Officer (principal executive officer), (ii) our
Chief Financial Officer (principal financial officer), (iii) the three most
highly compensated executive officers other than our CEO and CFO who were
serving as executive officers at the end of our last completed fiscal year,
whose total compensation exceeded $100,000 during such fiscal year ends, and
(iv) up to two additional individuals for whom disclosure would have been
provided but for the fact that the individual was not serving as an executive
officer at the end of our last completed fiscal year, whose total compensation
exceeded $100,000 during such fiscal year ends.
Summary
Compensation
SUMMARY
COMPENSATION TABLE
|
||||||||||||||||||||||||
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
(
$)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
(
$)
|
Total
($)
|
|||||||||||||||
Weibing
Lu,
|
2009
|
100,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
100,000
|
|||||||||||||||
current
CEO (1)
|
2008
|
66,028
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
66,028
|
|||||||||||||||
Bennet
P. Tchaikovsky
|
2009
|
75,000
|
-0-
|
63,280
|
-0-
|
-0-
|
-0-
|
-0-
|
138,280
|
|||||||||||||||
Current
CFO (2)
|
2008
|
49,395
|
-0-
|
39,517
|
-0-
|
-0-
|
-0-
|
-0-
|
88,.912
|
______________________
(1)
|
On
May 5, 2008, we entered into an employment agreement with Mr. Lu pursuant
to which he is entitled to an initial annual compensation of $100,000 as
our Chief Executive Officer. Mr. Lu received no other form of compensation
in the years shown, other than the salary set forth in this
table.
|
(2)
|
On
May 4, 2008, we entered into a loanout agreement pursuant to which we
retained the services of Mr. Tchaikovsky as our CFO for one year. Pursuant
to this agreement, Mr. Tchaikovsky is entitled to $75,000 of annual cash
compensation and 10,435 shares (taking into account the 1-for-10 reverse
stock split effectuated on May 12, 2009 and the 2-for-1 forward split on
November 5, 2009) valued at approximately $60,000. On May 26, 2009, we
entered into an amendment to the loanout agreement for an additional year
of Mr. Tchaikovsky’s services as CFO. Pursuant to this agreement, Mr.
Tchaikovsky is entitled to $75,000 of annual cash compensation and 14,440
shares (taking into account the 2-for-1 forward split on November 5, 2009)
valued at approximately $65,000. Mr. Tchaikovsky received no other form of
compensation in the years shown, other than the salary and stock
compensation set forth in this
table.
|
46
Outstanding Equity Awards at Fiscal
Year-End
With the exception of Mr. Bennet P.
Tchaikovsky, our current Chief Financial Officer, there were no
unexercised options, unvested stock awards or equity incentive plan awards for
any of our named
executive officers
outstanding as of December 31, 2009. Pursuant to the terms of his
employment under the Amendment to Loanout Agreement (which terms are described
below under the heading “Loanout Agreement for the Services of
Bennet P. Tchaikovsky”), Mr. Tchaikovsky was
granted 14,440 shares of our restricted common stock
(taking into account the
2-for-1 forward stock split effected on November 5, 2009) for his service period from May 5,
2009 through May 4, 2010, which shares were
not issued pursuant to any equity incentive plans in effect. As of December 31,
2009, Mr. Tchaikovsky was
due 7,220 shares, and the
balance of 7,220 shares will vest during the remainder of his vesting
period from January 1, 2009 through May 4, 2010.
Employment
Agreements, Termination of Employment and Change-in-Control Arrangements with
our Executive Officers
Except as described below, we currently
have no employment agreements with any of our executive officers, nor any
compensatory plans or arrangements resulting from the resignation, retirement or
any other termination of any of our executive officers, from a change-in-control, or from a change in
any executive officer’s responsibilities following a
change-in-control.
Employment Agreement with Weibing
Lu
On May 5, 2008, we entered into an
Employment Agreement with Mr. Weibing Lu. Under the terms of the
Employment Agreement, we
agreed to the continued employment of Mr. Lu as our chief executive officer for
a term of 5 years. Mr. Lu is to receive an initial annual salary of $100,000,
with an annual 5% increase of the prior year’s salary thereafter during the
term. Additionally, at the discretion of
our board of directors’ compensation committee, Mr. Lu may be
eligible for an annual bonus which amount, if any, and payment will be
determined by the compensation committee. Mr. Lu is entitled to medical,
disability and life insurance, as well as 4 weeks
of vacation annually and reimbursement of all reasonable or authorized business
expenses.
During its term, the Employment
Agreement terminates upon Mr. Lu’s death, in which event we are obligated
to pay Mr. Lu’s estate his base salary amount through the
first anniversary of his death (or the expiration of the Employment Agreement if
earlier than the anniversary date), as well as pro rata allocation of any bonus
based on the days of service during the year of death, and all amounts owing to Mr. Lu at the
time of termination, including for previously accrued but unpaid bonuses,
expense reimbursements and accrued but unused vacation pay.
If Mr. Lu is unable to perform his
obligations under the Employment Agreement for over 180 consecutive days during any
consecutive 12 months period, we may terminate the Employment Agreement by
written notice to Mr. Lu delivered prior to the date that he resumes his duties.
Upon receipt of such written notice, Mr. Lu may request a medical examination under which if he is
certified to be incapable of performing his obligations for over 2 additional
months, the Employment Agreement is terminated. We are obligated to pay Mr. Lu
his base salary through the second anniversary of our notice to him of his termination, less any amount
Mr. Lu may receive for such period from any Company-sponsored or Company-paid
for source of insurance, disability compensation or governmental program. We
will also pay Mr. Lu pro rata allocation of any bonus based on the days of service during the year
our notice is issued, and all amounts owing to Mr. Lu at the time of
termination, including for previously accrued but unpaid bonuses, expense
reimbursements and accrued but unused vacation pay.
47
We may also terminate the Employment Agreement for cause, upon
notice if at any time Mr. Lu: (a) refuses in bad faith to carry out specific
written directions of our board of directors; (b) intentionally takes fraudulent
or dishonest action in his relations with us; (c) is convicted of a crime involving an act of
significant moral turpitude; or (d) knowingly commits an act or omits to act in
violation of our written policies, the Employment Agreement or any agreements
that we may have with third parties and that is materially damaging to our business or reputation.
However, termination for the cause described in (a), (b) or (d) is predicated
first on Mr. Lu receiving a 5-day written notice and a reasonable opportunity to
present his positions, then a subsequent written notice of the termination, with the termination to
take effect 20 business days thereafter if Mr. Lu does not dispute the cause for
the termination or fails to take corrective actions in good faith. Thereafter,
if Mr. Lu takes corrective actions, he may be terminated for the same misconduct upon a 5-day
written notice.
On the other hand, Mr. Lu may terminate
the Employment Agreement upon written notice if: (w) there is a material adverse
change in the nature of his title, duties or obligations; (x) we materially
breach the Employment
Agreement; (y) we fail to make any payment to Mr. Lu (excepting any payment
which is not material and which we are contesting in good faith); or (z) there
is a change of control of the Company. However, termination for cause described
in (w), (x) or (y) is predicated on our
receiving a written notice from Mr. Lu specifying the cause, with the
termination to take effect if we fail to take corrective action within 20
business days thereafter. If Mr. Lu terminates the Employment Agreement
for any one of these reasons, or if we
terminate the Employment Agreement without cause, we are obligated to pay to Mr.
Lu (or in the case of his/her death, his estate), his base salary and any bonus,
without any offset, as well as all amounts owing to Mr. Lu at the time of termination, including
for previously accrued but unpaid bonuses, expense reimbursements and accrued
but unused vacation pay.
The Employment Agreement also contains
restrictive covenants: (i) preventing the use and/or disclosure of
confidential information
during or at any time after termination; (ii) preventing competition with
Skystar during his employment and for a period of 3 years after termination
(including contact with or solicitation of Skystar’s customers, employees or
suppliers), provided that Mr. Lu may make
investments of up to 2% in the publicly-traded equity securities of any
competitor of Skystar; (iii) requiring Mr. Lu to refer any business
opportunities to Skystar during his employment and for a period of 1 year after
termination. However, Mr. Lu shall have no
further obligations with respect to competition and business opportunities if
his employment is terminated without cause or if he terminates his employment
for cause.
Lastly, we are obligated under the
Employment Agreement to
indemnify Mr. Lu for any claims made against him in his capacity as our chief
executive officer and, in connection to that obligation, we are required to
include him under any director and officer insurance policy that is in effect
during his employment as our officer, director or
consultant.
Amendment to Loanout Agreement for the Services of
Bennet P. Tchaikovsky
On May 5, 2008, we entered into a
Loanout Agreement with Worldwide Officers, Inc. (“WOI”) pursuant to which we engaged the
services of Mr. Tchaikovsky as our Chief Financial Officer for a period of one
year. When the Loanout
Agreement expired on May 4, 2009, he continued to act as our Chief
Financial Officer at our request. On May 26, 2009, we entered into an Amendment
to Loanout Agreement (the “Amendment”) with WOI pursuant to which we have
continued our engagement of Mr. Tchaikovsky as our Chief Financial Officer under the Loanout Agreement,
subject to certain modification of terms. The Amendment amends the Loanout
Agreement by renewing Mr. Tchaikovsky’s term for an additional 1-year period,
beginning on May 5, 2009. Additionally, we will pay an annual fee of $75,000 for Mr.
Tchaikovsky’s services, in twelve monthly
installments of $6,250 payable at the beginning of each month. Mr. Tchaikovsky
will be entitled to receive 14,440 restricted shares of our common stock which will vest in four
equal installments of 3,610
shares every three calendar months, with the first installment to vest on August
5, 2009.
48
Compensation
of Directors
The
following director compensation disclosure reflects all compensation awarded to,
earned by or paid to the directors below for the year ended December 31,
2009.
Name
|
Year
|
Fees
Earned
or
Paid
in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
||||||||||||
Weibing
Lu (1)
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||
Wei
Wen (1)
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||
R.
Scott Cramer (2)
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
282,374
|
282.374
|
||||||||||||
Qiang
Fan (3)
|
2009
|
30,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
30,000
|
||||||||||||
Chengtun
Qu (4)
|
2009
|
2,932
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
2,932
|
||||||||||||
Winston
Yen (5)
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||
Shouguo
Zhao (6)
|
2009
|
7,331
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
7,331
|
||||||||||||
Mark
D. Chen (7)
|
2009
|
9,589
|
-0-
|
-0-
|
-0-
|
-0-
|
25,002
|
34,591
|
_______________
(1)
|
In
connection with the share exchange transaction (described in the
Description of Business above under the heading "Corporate Organization
and History"), these persons became our directors on November 7, 2005.
After the change in control that occurred as a result of the share
exchange transaction, we do not have any compensation arrangements with
our directors.
|
(2)
|
Mr.
Cramer was an officer of the Company prior to the share exchange
transaction and has stayed on as a director thereafter. Mr. Cramer’s
compensation for 2009 was for services provided during the year unrelated
to his duties as a director, and includes 26,000 shares of the Company’s
restricted common stock, none of which to be issued pursuant to any equity
incentive plan in effect. As of December 31, 2009, Mr. Cramer is
owed 47,334 shares for services through such
date.
|
(3)
|
Mr.
Qiang Fan was appointed to our board of directors effective July 14, 2008,
and is entitled to receive annual compensation of $30,000 for his services
rendered as a director, as well as chairman of the compensation and member
of the audit committee.
|
(4)
|
Dr.
Chengtun Qu was appointed to our board of directors effective July 14,
2008, and is entitled to receive annual compensation of RMB 20,000 for his
services rendered as a director.
|
(5)
|
Mr.
Winston Yen resigned from our board of directors effective May 26,
2009
|
(6)
|
Dr.
Shouguo Zhao was appointed to our board of directors effective July 14,
2008, and is entitled to an annual compensation of RMB 50,000 for his
services rendered as a director, as well as a member of both the audit
committee and the compensation
committee.
|
(7)
|
Mr.
Mark D, Chen was appointed to our board of directors effective May 26,
2009, and is entitled to an annual compensation of $14,000 for his
services rendered as a director, as well as a member of both the audit
committee and the compensation
committee.
|
(8)
|
For
reporting purposes in this table, compensations in RMB have been converted
to U.S. Dollars at the conversion rate of 6.82RMB to one U.S.
Dollar.
|
There
were no option awards issued to any directors and outstanding as of December 31,
2008.
49
Agreements with
Directors
Under our agreement with Mr. Fan, he
will be entitled to receive annual compensation of $30,000 for his services
rendered as a member of the
board, as well as the chairman of the compensation committee and member of the
audit committee. Mr. Fan’s annual compensation will be paid in
cash, although at the discretion of the board of directors, up to $8,000 of his annual
compensation may be paid in
the form of a number of shares of the Company’s common stock under the
Company’s Stock Incentive Plan #2 (the
“Plan”). During his term as a director, we
agree to include Mr. Fan as an insured under an officers and directors insurance
policy which we will obtain within a reasonable time
(the “D&O
Insurance”). In addition,
the Company has agreed to reimburse Mr. Fan for reasonable expenses incurred in
connection with the performance of duties as a director of the Company,
including travel expenses.
Under our agreement with Dr. Qu, he will
be entitled to receive annual compensation of RMB 20,000 for his services
rendered as a member of the board. In addition, the Company has agreed to
reimburse Mr. Qu for reasonable expenses incurred in connection with the performance of duties as a director
of the Company, including travel expenses.
Under our agreement with Dr. Zhao, he
will be entitled to receive annual compensation of RMB 50,000 for his services rendered as a member of
the board, as well as a member of both the audit committee and the compensation
committee. In addition, the Company has agreed to reimburse Mr. Zhao for
reasonable expenses incurred in connection with the performance of duties as a director of the Company,
including travel expenses.
Under our agreement with Mr. Chen, he
will be entitled to receive annual compensation of $14,000 for his services
rendered as a member of the board, as well as the chairman of the audit
committee and member of the
compensation committee. Additionally, Mr. Chen will have the right to receive
5,556 shares of our restricted common stock
at the beginning of each term of his directorship. We also agree to include Mr.
Chen as an insured under the D&O Insurance, and will reimburse him for
reasonable expenses incurred in connection with the performance of duties as a director of the Company,
including travel expenses.
On March 30, 2010, we entered into an
agreement with Mr. Scott Cramer to memorialize the terms under which he has been
acting as our United States representative (the “Representative”) since November 2006. Under the terms of this
agreement, we agreed to compensate Mr. Cramer for his services as the
Representative through December 31, 2009 in a stock grant of 47,334 shares of
our restricted common stock, as well as a one-time cash payment of
$100,000 payable by March 31, 2010.
Additionally, we agreed to compensate Mr. Cramer for his services as the
Representative from January 1, 2010 through March 31, 2010 in the amount of
$7,500 and a stock grant of 2,500 shares of our restricted common
stock.
Indemnification
of Officers and Directors
Pursuant to Article 7 of our Articles of
Incorporation and Nevada’s Revised Business Statutes, we adopted
Bylaws with the following indemnification provisions for our directors and
officers:
“Section 8.1. Indemnification. No officer or director shall
be personally liable for any obligations arising out of any acts or conduct of
said officer or director performed for or on behalf of the Corporation. The
Corporation shall and does hereby indemnify and hold harmless each person and his heirs and
administrators who shall serve at any time hereafter as a director or officer of
the Corporation from and against any and all claims, judgments and liabilities
to which such persons shall become subject by reason of any action alleged to have been heretofore or
hereafter taken or omitted to have been taken by him as such director or
officer, and shall reimburse each such person for all legal and other expenses
reasonably incurred by him in connection with any such claim of liability; including power to defend such
person from all suits as provided for under the provisions of the Nevada
Corporation Laws; provided, however that no such person shall be indemnified
against, or be reimbursed for, any expense incurred in connection with any claim or liability arising out
of his own gross negligence or willful misconduct. The rights accruing to any
person under the foregoing provisions of this section shall not exclude any
other right to which he may lawfully be entitled, nor shall anything herein contained restrict the
right of the Corporation to indemnify or reimburse such person in any proper
case, even though not specifically herein provided for. The Corporation, its
directors, officers, employees and agents shall be fully protected in taking any action or making any
payment or in refusing so to do in reliance upon the advice of
counsel.
Section 8.2. Other Indemnification. The
indemnification herein provided shall not be deemed exclusive of any other
rights to which those seeking indemnification may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors, or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has ceased to be a director,
officer or employee and shall inure to the benefit of the heirs, executors and
administrators of such a person.
50
Section 8.3. Insurance. The Corporation
may purchase and maintain insurance on behalf of any person who is or was a director, officer or
employee of the Corporation, or is or was serving at the request of the
Corporation in such capacity for another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against
him and incurred by him in any capacity, or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify him against liability under the provisions of this Article
VIII or the laws of the State of Nevada.
Section 8.4. Settlement by Corporation. The right of
any person to be indemnified shall be subject always to the right of the
Corporation by its Board of Directors, in lieu of such indemnity, to settle any
such claim, action, suit or proceeding at the expense of the Corporation by the payment of the amount of
such settlement and the costs and expenses incurred in connection
therewith.”
These indemnification provisions may be
sufficiently broad to permit indemnification of the registrant's executive
officers and directors for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act.
Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to our directors,
officers and controlling persons pursuant to the foregoing provisions, or otherwise,
we have been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. No pending material litigation or proceeding involving our directors, executive officers,
employees or other agents as to which indemnification is being sought exists,
and we are not aware of any pending or threatened material litigation that may
result in claims for indemnification by any of our directors or executive
officers.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Plan
Category
|
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
|
|||||||||
Equity
compensation plans
approved
by security holders
|
0
|
0
|
700,000
|
(1)
|
||||||||
Equity
compensation plans
not
approved by security holders
|
0
|
0
|
538,620
|
(2)
(3)
|
||||||||
TOTAL
|
0
|
0
|
1,238,620
|
_____________________
As of
December 31, 2009, the Company had the following three equity compensation plans
in effect:
(1)
|
On
December 8, 2009, our Board approved a stock incentive plan for officers,
directors, employees and consultants entitled the “Skystar
Bio-Pharmaceutical Company 2010 Stock Incentive Plan” (hereinafter the
“2010 Plan”). The maximum number of shares that may be issued under the
2010 Plan is 700,000 shares of our common stock. The 2010 Plan was
approved by our stockholders on December 31, 2009, and awards may be
granted under this Plan until December 7, 2019. Under this Plan, the
Company may issue common stock and/or options to purchase common stock to
certain officers, directors and employees and consultants of the Company
and its subsidiaries. The 2010 Plan is administered either by the Board or
a committee appointed by the Board, which is comprised of two or more
independent directors. The Board (or the committee) has full and complete
authority, in its discretion, but subject to the express provisions of the
2010 Plan to approve the eligible persons nominated by the management of
the Company to be granted awards of common stock “Awards”) or stock
options, to determine the number of Awards or stock options to be granted
to an eligible person; to determine the time or times at which or stock
options shall be granted; to establish the terms and conditions upon which
Awards or Stock Options may be exercised; to remove or adjust any
restrictions and conditions upon Awards or Stock Options; to specify, at
the time of grant, provisions relating to exercisability of Stock Options
and to accelerate or otherwise modify the exercisability of any Stock
Options; and to adopt such rules and regulations and to make all other
determinations deemed necessary or desirable for the administration of the
Plan. As of December 31, 2009, there are 700,000 shares of our common
stock remaining available for future issuance under the 2010
Plan.
|
51
(2)
|
On
February 22, 2006, the Company adopted a stock incentive plan for
consultants entitled the “2006 Consultant Stock Plan” (hereinafter the
“2006 Plan”). The maximum number of shares that may be issued under the
2006 Plan is 1,199,648 shares of our common stock. The 2006 Plan has not
previously been approved by security holders and awards may be granted
under this Plan until February 21, 2016. Under the 2006 Plan, the Company
may issue common stock to certain consultants of the Company who are
crucial to the future growth and success of the Company and its
subsidiaries and affiliates. The 2006 Plan is administered by either a
committee appointed by the Board, which is comprised of one or more
members of the Board who is not serving on another plan committee, or the
Board. The committee has full and complete authority, in its discretion,
but subject to the express provisions of the Plan, to designate the
persons or classes of persons eligible to receive awards of common stock
“Awards”; to determine the form and amount of Awards to be granted to an
eligible person or class of persons; to establish the terms and conditions
upon which Awards may be exercised; to remove or adjust any restrictions
and conditions upon Awards; and to adopt such rules and regulations and to
make all other determinations deemed necessary or desirable for the
administration of the Plan. As of December 31, 2009, there are 119,930
shares of our common stock remaining available for future issuance under
the 2006 Plan.
|
(3)
|
On
October 16, 2002, the Company adopted a stock incentive plan for officers,
directors, employees, and consultants entitled the “Cyber Group Network
Corporation Stock Incentive Plan # 2” (hereinafter the “2002 Plan”). The
maximum number of shares that may be issued under the 2002 Plan is
40,000,000 shares of our common stock. The 2002 Plan has not previously
been approved by security holders and awards may be granted under this
Plan until October 15, 2012. Under this Plan, the Company may issue common
stock and/or options to purchase common stock to certain officers,
directors and employees and consultants of the Company and its
subsidiaries. The 2002 Plan is administered either by the compensation
committee or a committee appointed by the Board, which is comprised of a
combination of two or more officers and/or members of the Board. The
committee has full and complete authority, in its discretion, but subject
to the express provisions of the Plan to approve the eligible persons
nominated by the management of the Company to be granted awards of common
stock “Awards”) or stock options, to determine the number of Awards or
stock options to be granted to an eligible person; to determine the time
or times at which or stock options shall be granted; to establish the
terms and conditions upon which Awards or Stock Options may be exercised;
to remove or adjust any restrictions and conditions upon Awards or Stock
Options; to specify, at the time of grant, provisions relating to
exercisability of Stock Options and to accelerate or otherwise modify the
exercisability of any Stock Options; and to adopt such rules and
regulations and to make all other determinations deemed necessary or
desirable for the administration of the Plan. As of December 31, 2009,
there are 418,690 shares of our common stock remaining available for
future issuance under the 2002
Plan.
|
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth certain information regarding our common stock
beneficially owned on March 24, 2010, for (i) each stockholder known to be the
beneficial owner of 5% or more of our outstanding common stock, (ii) each
executive officer and director, and (iii) all executive officers and directors
as a group. In general, a person is deemed to be a "beneficial owner" of a
security if that person has or shares the power to vote or direct the voting of
such security, or the power to dispose or to direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities of
which the person has the right to acquire beneficial ownership within 60
days. Shares of common stock subject to options, warrants or
convertible securities exercisable or convertible within 60 days of March 24,
2010 are deemed outstanding for computing the percentage of the person or entity
holding such options, warrants or convertible securities but are not deemed
outstanding for computing the percentage of any other person. To the best of our
knowledge, subject to community and martial property laws, all persons named
have sole voting and investment power with respect to such shares, except as
otherwise noted.
52
Title
of Class
|
Name
and Address
of Beneficial
Owners (1)
|
Amount
of
Beneficial Ownership
|
Percent
of Class (2)
|
|||||||
Common
Stock
|
Upform
Group Limited (3)
|
939,126
|
13.2
|
%
|
||||||
Common
Stock
|
Weibing
Lu, Director and Chief Executive Officer (3)
|
939,126
|
13.2
|
%
|
||||||
Common
Stock
|
Wei
Wen, Director (4)
|
41,544
|
*
|
%
|
||||||
Common
Stock
|
Bennet
P. Tchaikovsky, Chief Financial Officer (5)
|
21,268
|
*
|
%
|
||||||
Common
Stock
|
R.
Scott Cramer, Director (6)
|
206,286
|
2.9
|
%
|
||||||
Common
Stock
|
Qiang
Fan, Director (7)
|
-0-
|
0
|
%
|
||||||
Common
Stock
|
Chengtun
Qu, Director (8)
|
-0-
|
0
|
%
|
||||||
Common
Stock
|
Mark
D. Chen, Director (9)
|
5,556
|
*
|
%
|
||||||
Common
Stock
|
Shouguo
Zhao, Director (10)
|
-0-
|
0
|
%
|
||||||
Common
Stock
|
All
officers and directors as a group (8 total)
|
1,213,780
|
17.1
|
%
|
__________
* Less
than 1%.
(1)
|
Unless
otherwise noted, the address for each of the named beneficial owners is:
Rm. 10601, Jiezuo Plaza, No.4, Fenghui Road South, Gaoxin District, Xi’an,
Shaanxi Province, People’s Republic of
China.
|
(2)
|
Unless
otherwise noted, the number and percentage of outstanding shares of our
common stock is based upon 7,097,708 shares outstanding as of March 24,
2010.
|
(3)
|
Upform
Group Limited’s (“Upform Group”) address is Sea Meadow House, Blackburne
Highway, P.O. Box 116, Road Town, Tortola, British Virgin Islands. Weibing
Lu and Xinya Zhang are directors of the Upform Group. Mr. Lu is the
majority stockholder and the Chairman of the Board of Directors of Upform
Group, and thus Mr. Lu indirectly owns the shares held by Upform Group,
through his majority ownership of Upform Group. Thus, the number of shares
reported herein as beneficially owned by Mr. Lu therefore includes the
shares held by Upform Group. Similarly, because Xinya Zhang is a director
of Upform Group, he might be deemed to have or share investment control
over Upform Group’s portfolio. Thus, the number of shares reported herein
as beneficially owned by Mr. Zhang also include the shares held by Upform
Group.
|
(4)
|
The number of shares reported
herein as
beneficially owned by Wei Wen are held by Clever Mind International
Limited, which address is: Sea Meadow House, Blackburne Highway, P.O. Box
116, Road Town, Tortola, British Virgin Islands. Mr. Wen is Chairman of
the Board of Directors of Clever Mind and owns approximately 2.3% of the
issued and outstanding shares of Clever Mind. Because Mr. Wen is a
director of Clever Mind, he might be deemed to have or share investment
control over Clever Mind’s
portfolio.
|
(5)
|
Bennet
P. Tchaikovsky’s address is: 6571 Morningside Drive, Huntington Beach, CA
92648. Includes 3,610 shares that Mr. Tchaikovsky has the right to acquire
beneficial ownership of within 60 days of March 24,
2010.
|
(6)
|
R.
Scott Cramer’s address is: 1012 Lewis Dr., Winter Park, FL 32789. Includes
154,284 shares held by the Cramer Family Trust of which Mr. Cramer is the
sole trustee and sole primary beneficiary, and 49,834 shares that Mr.
Cramer has right to acquire beneficial ownership of within 60 days of
March 24,2010.
|
(7)
|
Qiang
Fan’s address is: 9176 West Laguna Way, Elk Grove, CA
95758.
|
(8)
|
Chengtun
Qu’s address is: No. 18 Dian Zi 2nd Road, School of Chemistry &
Chemical Engineering, Xi'an Shiyou University, Xi'an, Shaanxi Province,
People’s Republic of China.
|
(9)
|
Mark D. Chen’s address is: 10-64 #9
Jianguomenwai Avenue, Beijing, China 100600.
|
(10)
|
Shouguo
Zhao’s address is: No. 229 North Tai Bai Road, School of Economics and
Management, Northwest University, Xi'an, Shaanxi Province, People’s
Republic of China.
|
53
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Related Party Receivables and
Payables
Set forth below are the related party
receivables and payables between us and our officers and/or directors, and
between Xian Tianxing and
its stockholders, officers and/or directors, as of the date set forth on the
table.
December
31,
2009
|
December
31,
2008
|
|||||||
|
|
|
||||||
Short
term loans from shareholders:
|
|
|
||||||
Mr.
Weibing Lu(1)(2)
|
$
|
36,675
|
$
|
220,050
|
||||
Mr.
Wei Wen(2)
|
36,675
|
44,010
|
||||||
Ms.
Aixia Wang(2)
|
36,675
|
44,010
|
||||||
Total
|
$
|
110,025
|
$
|
308,070
|
||||
Shares
to be issued to a related party:
|
|
|
||||||
Mr.
Mark Chen (3)
|
$
|
25,002
|
—
|
|||||
Mr.
Scott Cramer(3)
|
$
|
302,372
|
$
|
95,204
|
||||
Total
|
327,374
|
95,204
|
||||||
Amount
due to related parties:
|
|
|
||||||
Mr.
Bennet P. Tchaikovsky(5)
|
$
|
—
|
$
|
13,168
|
||||
Mr.
Scott Cramer(3)
|
143,556
|
224,684
|
||||||
Shaanxi
Xingji Electronics Co.(4)
|
—
|
4,373
|
||||||
Officer
and shareholder (4)
|
41,468
|
—
|
||||||
Total
|
$
|
185,024
|
242,225
|
(1)
|
In
2008, Weibing Lu obtained an unsecured personal loan in the amount of
$176,040 (RMB 1,500,000) from Huaxia Bank with annual interest rate
of 7.47% and advanced to Xian Tianxing to facilitate operations. Xian
Tianxing guaranteed the loan. The loan principal and related interest was
due on December 30, 2008. On January 4, 2009, Xian Tianxing paid the
full principal amount to the bank, with related interest of
$15,741.
|
(2)
|
On
May 29, 2008, Weibing Lu, Wei Wen and Aixia Wang obtained personal loans
from Yanta Credit Union and advanced cash to Xian Tianxing in the
total amount of $132,030 to facilitate operations. These loans, which were
due on May 29, 2009 with 8.436% interest per annum and guaranteed by Xian
Tianxing, were paid in full on May 29, 2009. On June 2, 2009, Mr. Lu,
Mr. Wen and Ms. Wang again obtained loans from the same bank and advanced
cash to Xian Tianxing in the total amount of $110,025. These loans are due
on June 1, 2010, with 10.11% interest per annum and are also guaranteed by
Xian Tianxing. For the year ended December 31, 2009, Xian Tianxing paid
interest of $ 0 and $3,695, respectively, for these
loans.
|
(3)
|
As
of December 31, 2009 and December 31, 2008, the Company had
$302,372 (representing 47,334 common shares) and $95,204
balances (representing 22,000 common shares),
respectively, under agreement to issue shares to Scott Cramer,
respectively, as compensation for being a representative of the Company in
the United States for the periods from May 2008 to June 30, 2009, and
December 31, 2008, respectively. In addition, as of December 31,
2009, the Company had $25,002 balance (representing 5,556 common shares)
under agreement to issue shares to Mr. Mark D Chen as compensation at the
beginning of each term of his
directorship.
|
(4)
|
Shaanxi
Xinji Electronics Co., Ltd. is owned by the wife of Weibing Lu. The
amounts due to Shaanxi Xinji Electronics as of December 31, 2009 and
December 31, 2008 were short-term cash transfers for business operations,
non-interest bearing, unsecured, and payable upon demand. As of December
31, 2009, the Company also had $41,468 payable to officers and
shareholders for advance for short-term financing purposes. As of
December 31, 2009 and December 31, 2008, the Company also had amounts due
to Scott Cramer for bonus and the expenses paid by them on behalf of
the Company.
|
54
Our Officers and Directors’ Relationship with Us, Our Subsidiaries
and VIE
Mr. Weibing Lu, our Chairman and Chief
Executive Officer, is a Director of Upform Group Limited, a British Virgin
Islands company which owns approximately 13.2% of Skystar’s issued and outstanding common stock. Mr.
Bennet P. Tchaikovsky, our Chief Financial Officer, owns approximately 0.30% of
Skystar’s issued and outstanding common stock.
Mr. Wei Wen, who is one of our directors, is Director of Clever Mind
International Limited, a British Virgin Islands company which
owns approximately 0.58% of Skystar’s issued and outstanding common stock.
Mr. Scott Cramer, who is also one of our directors, owns and/or controls
approximately 2.2% of Skystar’s issued and outstanding common
stock. Mr. Lu and Mr. Wen are both Directors of
Skystar Cayman, our wholly owned subsidiary.
Mr. Cramer is Director of Fortunate
Time, wholly owned subsidiary of Skystar Cayman.
The management of Sida, the wholly owned
subsidiary of Fortunate Time, includes Mr. Wen as General
Manager.
The management of Xian Tianxing, which
we control through contractual arrangements between Sida and Xian Tianxing,
includes Mr. Lu as Chairman and Chief Executive Officer and Mr. Wen as
Vice-General Manager and Director. As of the date of this prospectus, Mr. Lu also
owns approximately 41%, and Mr. Wen approximately 5%, of the issued and
outstanding stock of Xian Tianxing.
Mr. Wen is the General Manager of
Shanghai Siqiang, wholly owned subsidiary of Xian Tianxing.
Other Related Party Transactions
On January 1, 2007, we entered into a
5-year lease agreement with Mr. Weibing Lu, our chief executive officer, to
lease the premises at Rm. 10601, Jiezuo Plaza, No.4, Fenghui Road South, Gaoxin
District, Xi’an, Shaanxi Province, China, which belongs to Mr. Lu and which has
been serving as our headquarters. The annual rent under the lease agreement is
RMB 165,600 (approximately $24,000). Mr. Lu previously provided the premises
rent-free, in 2005 and 2006, for the use of our administrative division.
On June 17, 2007, Shanghai Siqiang,
wholly owned subsidiary of Xian Tianxing, entered into a 10-year lease agreement
with Mr. Lu to lease the premises at 1715 Zhongchu Road, Building F, Unit 1001,
Shanghai, China, which belongs to Mr. Lu. The annual rent under the lease agreement is
RMB 144,000 (approximately $21,000).
Conflicts of interests between the
duties of our officers and directors who are also management members of Xian
Tianxing to our company and Xian Tianxing may arise. As our directors and/or
executive officer (in the case of Mr. Lu), they have a duty of loyalty and care to us under U.S. and Cayman
Islands law when there are any potential conflicts of interests between our
company and Xian Tianxing. We cannot assure you, however, that when conflicts of
interest arise, these individuals will act completely in our interests or that conflicts of
interests will be resolved in our favor. In addition, they could violate their
legal duties by diverting business opportunities from us to others. If we cannot
resolve any conflicts of interest between us and them, we would have to rely on legal proceedings,
which could result in the disruption of our business.
55
Other than the above transactions,
neither we nor our subsidiaries have entered into any material transactions with
any director, executive officer, and nominee for director, beneficial owner of five
percent or more of our common stock, or family members of such persons. We are
not a subsidiary of any company.
Director
Independence
Based upon information submitted to the
Board of Directors by Mr. Fan, Dr. Qu, Dr. Zhao and Mr. Chen, the Board has
determined that each of them is “independent” under the listing standards of the
NASDAQ Capital Market.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit
Fees
The
aggregate fees billed by our independent auditors, Frazer Frost LLP (successor
entity of Moore Stephens Wurth Frazer and Torbet, LLP), for the year
ended December 31, 2009 and 2008, for professional services rendered for the
audit of the Company’s annual financial statements and review of the Company’s
quarterly financial statements were $195,000 and $185,000,
respectively.
Audited-Related
Fees
For the
years ended December 31, 2009 and 2008, there were no fees billed by our
independent auditors for services reasonably related to the performance of the
audit or review of the financial statements outside of those fees disclosed
above under “Audit Fees,”
Tax
Fees
The
aggregate fees billed by Frazer Frost for the year ended December 31, 2009, and
Moore Stephens, for the year ended December 31, 2008, for services rendered for
tax compliance, tax advice and tax planning work to the Company were $8,000 and
$7,000, respectively.
All
Other Fees
For the
years ended December 31, 2009 and December 31, 2008, there were no other fees
billed by our independent auditors for products and services outside of those
fees disclosed above under “Audit Fees”, “Audit-Related Fees” and “Tax
Fees”.
ITEM
15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
(1) Financial
Statements
The
following consolidated financial statements of Skystar are included in Part II,
Item 8 of this Report:
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets at December 31, 2009 and 2008
Consolidated
Statements of Operations and Comprehensive Income for the Years Ended December
31, 2009 and 2008
Consolidated
Statements of Shareholders’ Equity for the Years Ended December 31, 2009 and
2008
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009 and
2008
Notes to
Consolidated Financial Statements
56
(2)
Financial Statement Schedules
Schedules
are omitted because the required information is not present or is not present in
amounts sufficient to require submission of the schedule or because the
information required is given in the consolidated financial statements or the
notes thereto.
(3)
Exhibits
Exhibit
Number |
Description
|
|
2.1
|
Share
Purchase Agreement by and between The Cyber Group Network, Inc. and Howard
L. Allen and Donald G. Jackson (shareholders of Hollywood Entertainment
Network, Inc.) dated May 12, 2000 (1)
|
|
2.2
|
Plan
of Merger Agreement between The Cyber Group Network Corp. and CGN
Acquisitions Corporation dated December 7, 2000 (2)
|
|
2.3
|
Share
Exchange Agreement between The Cyber Group Network Corporation, R. Scott
Cramer, Steve Lowe, David Wassung and Skystar Bio-Pharmaceutical, and the
Skystar Shareholders dated September 20, 2005 (3)
|
|
3.1
|
Charter
of The Cyber Group Network Corporation as filed with the State of Nevada
(4)
|
|
3.2
|
Certificate
of Amendment and Certificate of Change (5)
|
|
3.3
|
Certificate
of Amendment to Increase Number of Authorized Shares of Common Stock
(13)
|
|
3.4
|
Amended
and Restated Bylaws of Skystar Bio-Pharmaceutical Company
(14)
|
|
3.5
|
Certificate
of Change Purusant to NRS 78.209 as filed with the Secretary of State of
Nevada, effective May 12, 2009 (16)
|
|
3.6
|
Certificate
of Change Pursuant to NRS 78.209 as filed with the Secretary of State of
Nevada, effective November 16, 2009 (20)
|
|
4.1
|
Certificate
of Designation of Series B Convertible Preferred Stock
(4)
|
|
4.2
|
Form
of Class A Convertible Debenture (6)
|
|
4.3
|
Form
of Class B Convertible Debenture (6)
|
|
4.4
|
Form
of Class A Warrant (6)
|
|
4.5
|
Form
of Class B Warrant (6)
|
|
4.6
|
Form
of Common Stock Certificate (19)
|
|
4.7
|
Form
of Common Stock Purchase Option to be granted to the representative of the
underwriters (19)
|
|
10.1
|
Form
of Securities Purchase Agreement, dated as of February 26, 2007 by and
among the Company and eight accredited investors (6)
|
|
10.2
|
Form
of Registration Rights Agreement, dated as of February 26, 2007 by and
among the Company and eight accredited investors (6)
|
|
10.3
|
Form
of Company Principal Lockup Agreement in connection with the Securities
Purchase Agreement dated as of February 26, 2007 (6)
|
|
10.4
|
Form
of the Amendment, Exchange and Waiver Agreement between the Company and
certain accredited investors dated November 9, 2007
(7)
|
57
10.5
|
Form
of the Amendment and Waiver Agreement between Skystar Bio-Pharmaceutical
Company and two institutional and accredited investors dated March 31,
2008 (10)
|
|
10.6
|
Amendment
to Consulting Services Agreement among Skystar Cayman, Xian Tianxing and
Sida Biotechnology (Xian) Co., Ltd. (“Sida”) dated March 10, 2008
(8)
|
|
10.7
|
Agreement
to Transfer of Operating Agreement among Skystar Cayman, Xian Tianxing,
Xian Tianxing’s Majority Stockholders, Weibing Lu and Sida dated March 10,
2008 (8)
|
|
10.8
|
Amendment
to Equity Pledge Agreement among Skystar Cayman, Xian Tianxing, Xian
Tianxing’s Majority Stockholders, and Sida dated March 10, 2008
(8)
|
|
10.9
|
Designation
Agreement among Skystar Cayman, Xian Tianxing, Xian Tianxing’s Majority
Stockholders, Weibing Lu and Sida dated March 10, 2008
(8)
|
|
10.10
|
Agreement
to Transfer of Option Agreement among Skystar Cayman, Xian Tianxing, Xian
Tianxing Majority Stockholders, Weibing Lu and Sida dated March 10, 2008
(8)
|
|
10.11
|
Employment
Agreement with Weibing Lu dated May 5, 2008 (11)
|
|
10.12
|
Loanout
Agreement with Worldwide Officers, Inc. with respect to the services of
Bennet Tchaikovsky, our Chief Financial Officer, dated May 5, 2008
(11)
|
|
10.13
|
Form
of Director Offer Letter with Mr. Qiang Fan and Mr. Winston Yen
(14)
|
|
10.14
|
Form
of Director Offer Letter with Chengtun Qu and Shouguo Zhao
(14)
|
|
10.15
|
Form
of Amendment to Loanout Agreement (17)
|
|
10.16
|
Form
of Director Offer Letter with Mr. Bennet P. Tchaikovsky
(17)
|
|
10.17
|
Agreement
with R. Scott Cramer dated March 30, 2010 *
|
|
14.1
|
Code
of Ethics (15)
|
|
16.1
|
Letter
from MSWFT dated January 7, 2010 (21)
|
|
21.1
|
List
of subsidiaries (15)
|
|
23.1
|
Consent
of Moore Stephens Worth Frazer and Torbert LLP (18)
|
|
31.1
|
Section
302 Certification by the Corporation’s Chief Executive Officer
*
|
|
31.2
|
Section
302 Certification by the Corporation’s Chief Financial Officer
*
|
|
32.1
|
Section
906 Certification by the Corporation's Chief Executive Officer
*
|
|
32.2
|
Section
906 Certification by the Corporation's Chief Financial Officer
*
|
|
99.1
|
Legal
Opinion from Allbright Law Offices regarding the transfer of the
contractual arrangements from Skystar Cayman to Sida, dated April 29, 2008
(12)
|
|
99.2
|
Lease
Agreement between Xian Tianxing and Weibing Lu dated June 1, 2007
(9)
|
|
99.3
|
Lease
Agreement between Shanghai Siqiang Biotechnological Co., Ltd. and Weibing
Lu dated June 17, 2007 (12)
|
|
99.4
|
Summary
of Research Arrangement between Shanghai Poultry Verminosis Institute and
Xian Tianxing (12)
|
58
99.5
|
Cooperation
Agreement between Shaanxi Microbial Institute and Xian Tianxing
(12)
|
|
99.6
|
Technology
Cooperation Agreement with Fourth Military Medical University
*
|
_________
* Filed
herewith.
(1)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K/A filed on
June 1, 2000.
|
(2)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K/A filed on
January 12, 2001.
|
(3)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed on
September 26, 2005.
|
(4)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed on
November 14, 2005.
|
(5)
|
Incorporated
by reference from the Registrant’s Annual Report on Form 10-KSB filed on
April 17, 2006.
|
(6)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed on
March 5, 2007.
|
(7)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed on
December 11, 2007.
|
(8)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K on March 11,
2008.
|
(9)
|
Incorporated
by reference from the Registrant’s Annual Report on Form 10-K on April 2,
2008.
|
(10)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K on April 23,
2008.
|
(11)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K on May 5,
2008.
|
(12)
|
Incorporated
by reference from the Registrant’s Registration Statement on Form S-1/A
filed on June 26, 2008.
|
(13)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K on July 14,
2008.
|
(14)
|
Incorporated
by reference from the Registrant’s Current Report on Form 8-K on July 15,
2008.
|
(15)
|
Incorporated
by reference from the Registration’s Annual Report on Form 10-K on April
15, 2009.
|
(16)
|
Incorporated
by reference from the Registration’s Current Report on Form 8-K on May 18,
2009.
|
(17)
|
Incorporated
by reference from the Registration’s Current Report on Form 8-K on May 27,
2009.
|
(18)
|
Incorporated
by reference from the Registration’s Amendment to Registration Statement
on Form S-1/A on June 2, 2009.
|
(19)
|
Incorporated
by reference from the Registration’s Amendment to Registration Statement
on Form S-1/A on June 26, 2009.
|
(20)
|
Incorporated
by reference from the Registration’s Current Report on Form 8-K on
November 17, 2009.
|
(21)
|
Incorporated
by reference from the Registration’s Current Report on Form 8-K on January
7, 2010.
|
59
SIGNATURES
Pursuant
to the requirements of section 13 or 15 (d) 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.
SKYSTAR
BIO-PHARMACEUTICAL COMPANY
(Registrant)
|
||||
Date:
March 31, 2010
|
By:
|
/s/
Weibing Lu
|
||
Weibing
Lu
Chief
Executive Officer
|
Date:
March 31, 2010
|
By:
|
/s/
Bennet P. Tchaikovsky
|
||
Bennet
P. Tchaikovsky
Chief
Financial Officer
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Name
|
Title
|
Date
|
||
/s/
Weibing Lu
|
Chief
Executive Officer / Director
|
March
31, 2010
|
||
Weibing
Lu
|
||||
/s/
Bennet P. Tchaikovsky
|
Chief
Financial Officer
|
March
31, 2010
|
||
Bennet
P. Tchaikovsky
|
||||
/s/
Wei Wen
|
Secretary
/ Director
|
March
31, 2010
|
||
Wei
Wen
|
||||
/s/
R. Scott Cramer
|
Director
|
March
31, 2010
|
||
R.
Scott Cramer
|
||||
/s/
Qiang Fan
|
Director
|
March
31, 2010
|
||
Qiang
Fan
|
||||
/s/
Chengtun Qu
|
Director
|
March
31, 2010
|
||
Chengtun
Qu
|
||||
/s/
Mark D. Chen
|
Director
|
March
31, 2010
|
||
Mark
D. Chen
|
||||
/s/
Shouguo Zhao
|
Director
|
March
31, 2010
|
||
Shouguo
Zhao
|
60
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholder of
Skystar
Bio-Pharmaceutical Company and Subsidiaries
We have
audited the accompanying consolidated balance sheets of Skystar
Bio-Pharmaceutical Company and Subsidiaries (the “Company”) as of December 31,
2009 and 2008, and the related consolidated statements of income and other
comprehensive income, changes in equity, and cash flows for each of the years in
the two-year period ended December 31, 2009. Our audits also included the
financial statement schedules for the years ended December 31, 2009 and
2008. The Company’s management is responsible for these consolidated
financial statements. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Skystar Bio-Pharmaceutical
Company and Subsidiaries as of December 31, 2009 and 2008, and the results of
its operations and its cash flows for each of the years in the two-year period
ended December 31, 2009 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Frazer
Frost, LLP (Successor Entity of Moore Stephens Wurth Frazer and Torbet, LLP, see
Form 8-K filed on January 7, 2010)
Brea,
California
March 31,
2010
F-1
SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
ASSETS
|
||||||||
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$ |
11,699,398
|
$ |
576,409
|
||||
Restricted
cash
|
- | 80,885 | ||||||
Short-term
investments
|
- | 352,080 | ||||||
Accounts
receivable, net of allowance for doubtful accounts of
$327,857
|
||||||||
and
$327,857 as of December 31, 2009 and 2008, respectively
|
4,383,187 | 2,424,102 | ||||||
Inventories
|
4,074,645 | 3,086,060 | ||||||
Deposits
and prepaid expenses
|
11,900,314 | 4,878,851 | ||||||
Loans
receivable
|
- | 295,087 | ||||||
Other
receivables
|
490,712 | 85,099 | ||||||
Total
current assets
|
32,548,256 | 11,778,573 | ||||||
PLANT
AND EQUIPMENT, NET
|
8,829,058 | 7,413,689 | ||||||
CONSTRUCTION-IN-PROGRESS
|
9,389,120 | 6,516,630 | ||||||
OTHER
ASSETS:
|
||||||||
Long-term
prepayments
|
7,980,307 | 5,207,117 | ||||||
Intangible
assets, net
|
1,860,172 | 899,529 | ||||||
Total
other assets
|
9,840,479 | 6,106,646 | ||||||
Total
assets
|
$ | 60,606,913 | $ | 31,815,538 | ||||
LIABILITIES
AND CHANGES IN EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 297,567 | $ | 547,430 | ||||
Other
payable and accrued expenses
|
917,284 | 1,556,973 | ||||||
Short-term
loans
|
220,050 | 748,170 | ||||||
Short-term
loans from shareholders
|
110,025 | 308,070 | ||||||
Deposits
from customers
|
1,275,958 | 424,266 | ||||||
Taxes
payable
|
722,106 | 212,661 | ||||||
Shares
to be issued to related parties
|
327,374 | 95,204 | ||||||
Due
to related parties
|
185,024 | 242,225 | ||||||
Total
current liabilities
|
4,055,388 | 4,134,999 | ||||||
OTHER
LIABILITIES:
|
||||||||
Deferred
government grant
|
1,100,250 | 1,100,250 | ||||||
Warrant
liability
|
1,538,686 | - | ||||||
Total
other liabilities
|
2,638,936 | 1,100,250 | ||||||
Total
liabilities
|
6,694,324 | 5,235,249 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
CHANGES
IN EQUITY:
|
||||||||
Preferred
stock, $0.001 par value, 50,000,000 Series "A" shares authorized
and
|
||||||||
2,000,000
shares issued and outstanding as of December 31, 2008
|
||||||||
48,000,000
Series "B" shares authorized, Nil Series "B" shares
|
||||||||
issued
and outstanding as of December 31, 2008
|
- | 2,000 | ||||||
Common
stock, $0.001 par value, 40,000,000 shares authorized, 6,989,640 and
3,733,038 shares
|
||||||||
issued
and outstanding as of December 31, 2009 and December 31, 2008,
respectively
|
6,989 | 3,733 | ||||||
Paid-in
capital
|
34,580,096 | 16,345,775 | ||||||
Statutory
reserves
|
3,879,077 | 2,952,710 | ||||||
Retained
earnings
|
12,574,906 | 4,418,464 | ||||||
Accumulated
other comprehensive income
|
2,871,521 | 2,857,607 | ||||||
Total
shareholders' equity
|
53,912,589 | 26,580,289 | ||||||
Total
liabilities and shareholders' equity
|
$ | 60,606,913 | $ | 31,815,538 |
The
accompanying notes are an integral part of these consolidated financial
statements.
See
report of indepedent registered public accounting firm.
F-2
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
Years
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
REVENUE,
NET
|
$ | 33,778,305 | $ | 25,584,446 | ||||
COST
OF REVENUE
|
16,520,989 | 12,808,896 | ||||||
GROSS
PROFIT
|
17,257,316 | 12,775,550 | ||||||
OPERATING
EXPENSES:
|
||||||||
Research
and development
|
1,167,937 | 549,236 | ||||||
Selling
expenses
|
1,928,441 | 1,381,807 | ||||||
General
and administrative
|
2,466,470 | 2,663,520 | ||||||
Total
operating expenses
|
5,562,848 | 4,594,563 | ||||||
INCOME
FROM OPERATIONS
|
11,694,468 | 8,180,987 | ||||||
OTHER
INCOME (EXPENSE):
|
||||||||
Other
income (expense), net
|
117,873 | 30,906 | ||||||
Interest
income (expense), net
|
(62,590 | ) | (329,167 | ) | ||||
Inducement
cost for debentures converted
|
- | (756,855 | ) | |||||
Change
in fair value of warrants
|
(868,445 | ) | - | |||||
Total
other expense, net
|
(813,162 | ) | (1,055,116 | ) | ||||
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
10,881,306 | 7,125,871 | ||||||
PROVISION
FOR INCOME TAXES
|
2,029,374 | 1,529,688 | ||||||
NET
INCOME
|
8,851,932 | 5,596,183 | ||||||
OTHER
COMPREHENSIVE (LOSS) INCOME :
|
||||||||
Foreign
currency translation adjustment
|
13,914 | 1,415,005 | ||||||
COMPREHENSIVE
INCOME
|
$ | 8,865,846 | $ | 7,011,188 | ||||
EARNINGS
PER SHARE:
|
||||||||
Basic
|
$ | 1.65 | $ | 1.53 | ||||
Diluted
|
$ | 1.62 | $ | 1.53 | ||||
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES:
|
||||||||
Basic
|
5,374,452 | 3,645,746 | ||||||
Diluted
|
5,459,528 | 3,649,396 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
See
report of indepedent registered public accounting firm.
F-3
SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
Accumulated
|
||||||||||||||||||||||||||||||||||||
Retained
earnings
|
other
|
|||||||||||||||||||||||||||||||||||
Preferred
stock
|
Common
stock
|
Paid-in
|
Statutory
|
comprehensive
|
||||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
capital
|
reserves
|
Unrestricted
|
income
|
Total
|
||||||||||||||||||||||||||||
BALANCE,
January 31, 2008
|
2,000,000 | $ | 2,000 | 3,422,240 | $ | 3,422 | $ | 14,692,209 | $ | 1,652,720 | $ | 122,271 | $ | 1,442,602 | $ | 17,915,224 | ||||||||||||||||||||
Stock-based
compensation
|
62,758 | 62,758 | ||||||||||||||||||||||||||||||||||
Shares
issued for services
|
23,218 | 23 | 130,398 | 130,421 | ||||||||||||||||||||||||||||||||
Shares
issued for debt settlement
|
42,080 | 42 | 220,878 | 220,920 | ||||||||||||||||||||||||||||||||
Debentures
converted to common stock
|
245,500 | 246 | 1,239,532 | 1,239,778 | ||||||||||||||||||||||||||||||||
Foreign
currency translation
|
1,415,005 | 1,415,005 | ||||||||||||||||||||||||||||||||||
Net
income
|
5,596,183 | 5,596,183 | ||||||||||||||||||||||||||||||||||
Appropriation
to statutory reserve
|
1,299,990 | (1,299,990 | ) | - | ||||||||||||||||||||||||||||||||
BALANCE,
December 31, 2008, as previously reported
|
2,000,000 | 2,000 | 3,733,038 | 3,733 | 16,345,775 | 2,952,710 | 4,418,464 | 2,857,607 | 26,580,289 | |||||||||||||||||||||||||||
Cumulative
effect of reclassification of warrants
|
(1,108,508 | ) | 230,877 | (877,631 | ) | |||||||||||||||||||||||||||||||
BALANCE,
January 1, 2009, as adjusted, (Unaudited)
|
2,000,000 | 2,000 | 3,733,038 | 3,733 | 15,237,267 | 2,952,710 | 4,649,341 | 2,857,607 | 25,702,658 | |||||||||||||||||||||||||||
Shares
issued for services
|
12,438 | 12 | 63,002 | 63,014 | ||||||||||||||||||||||||||||||||
Cancellation
of preferred stock
|
(2,000,000 | ) | (2,000 | ) | 2,000 | - | ||||||||||||||||||||||||||||||
Fractional
shares due to the ten-for-one reverse split
|
1,772 | 2 | (2 | ) | - | |||||||||||||||||||||||||||||||
Shares
issued for cash
|
3,220,000 | 3,220 | 19,070,461 | 19,073,681 | ||||||||||||||||||||||||||||||||
Cashless
exercise of warrants
|
22,392 | 22 | 207,368 | 207,390 | ||||||||||||||||||||||||||||||||
Foreign
currency translation
|
13,914 | 13,914 | ||||||||||||||||||||||||||||||||||
Net
income
|
8,851,932 | 8,851,932 | ||||||||||||||||||||||||||||||||||
Appropriation
to statutory reserves
|
926,367 | (926,367 | ) | - | ||||||||||||||||||||||||||||||||
BALANCE,
December 31, 2009
|
- | $ | - | 6,989,640 | $ | 6,989 | $ | 34,580,096 | $ | 3,879,077 | $ | 12,574,906 | $ | 2,871,521 | $ | 53,912,589 |
The
accompanying notes are an integral part of these consolidated financial
statements.
See
report of indepedent registered public accounting firm.
F-4
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 8,851,932 | $ | 5,596,183 | ||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Depreciation
|
566,230 | 443,062 | ||||||
Amortization
|
212,826 | 179,343 | ||||||
Amortization
of deferred financing costs
|
- | 101,815 | ||||||
Amortization
of discount on debentures
|
- | 680,446 | ||||||
Amortization
of deferred compensation
|
- | 62,758 | ||||||
Inducement
cost for debentures converted
|
- | 257,775 | ||||||
Common
stock issued for services
|
63,014 | 130,421 | ||||||
Common
stock to be issued to related parties for compensation
|
232,170 | 95,204 | ||||||
Bad
debt expense
|
- | 112,253 | ||||||
Inducement
cost for debt settlement
|
- | 42,081 | ||||||
Change
in fair value of warrant liability
|
868,445 | - | ||||||
Change
in operating assets and liabilities
|
||||||||
Accounts
receivable
|
(1,957,883 | ) | (1,068,391 | ) | ||||
Inventories
|
(987,977 | ) | (674,486 | ) | ||||
Deposits
and prepaid expenses
|
(7,310,495 | ) | (3,647,834 | ) | ||||
Other
receivables
|
(705,365 | ) | 93,613 | |||||
Accounts
payable
|
(249,709 | ) | 404,642 | |||||
Accrued
expenses
|
55,140 | 946,801 | ||||||
Deposits
from customers
|
851,170 | 352,012 | ||||||
Taxes
payable
|
509,132 | (389,081 | ) | |||||
Other
payables
|
267,097 | (18,189 | ) | |||||
Net
cash provided by operating activities
|
1,265,727 | 3,700,428 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Proceeds
from short-term investment
|
351,864 | 57,660 | ||||||
Refund
(payments)
of long-term prepayments
|
2,713,950 | (3,833,669 | ) | |||||
Prepayment
for potential acquisition
|
(6,802,704 | ) | - | |||||
Loans
to third parties
|
(2,580,336 | ) | 315,472 | |||||
Proceeds
from loans receivable
|
2,875,242 | - | ||||||
Purchases
of intangible assets
|
(1,172,880 | ) | - | |||||
Purchases
of plant and equipment
|
(529,470 | ) | (9,529 | ) | ||||
Payments
on construction-in-progress
|
(2,709,105 | ) | (1,606,280 | ) | ||||
Net
cash used in investing activities
|
(7,853,439 | ) | (5,076,346 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Decrease
(increase) in restricted cash
|
80,684 | (654 | ) | |||||
Proceeds
from short-term loans
|
219,915 | 735,165 | ||||||
Repayment
for short-term loans
|
(747,711 | ) | - | |||||
Proceeds
from equity offering
|
18,411,496 | - | ||||||
Repayment
to shareholders and directors
|
(307,881 | ) | - | |||||
Proceeds
from shareholders and directors
|
109,958 | 401,616 | ||||||
Due
(from) to related parties
|
(57,223 | ) | - | |||||
Net
cash provided by financing activities
|
17,709,238 | 1,136,127 | ||||||
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
1,463 | 44,708 | ||||||
INCREASE
(DECREASE) IN CASH
|
11,122,989 | (195,083 | ) | |||||
CASH,
beginning of year
|
576,409 | 771,492 | ||||||
CASH,
end of year
|
$ | 11,699,398 | $ | 576,409 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid for interest
|
$ | 73,085 | $ | 35,177 | ||||
Cash
paid for income taxes
|
$ | 2,095,704 | $ | 740,899 | ||||
Non-cash
investing and financing activities
|
||||||||
Long-term
prepayment transferred to construction-in-progress
|
$ | 190,458 | $ | - | ||||
Construction-in-progress
transferred to property, plant and equipment
|
1,818,403 | 1,133,580 | ||||||
Issuance
of common stock for debt settlement
|
$ | - | $ | 178,839 | ||||
Debentures
converted to common stock
|
$ | - | $ | 482,923 | ||||
Cashless
exercise of warrants
|
$ | 207,390 | - | |||||
Expense
paid thorugh contribution receivable
|
$ | 662,185 | - | |||||
Interest
expense capitalized as construction-in-progress
|
$ | - | $ | 114,990 |
The
accompanying notes are an integral part of these consolidated financial
statements.
See
report of indepedent registered public accounting firm.
F-5
SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Note
1 - ORGANIZATION
Organization and description
of business
Skystar
Bio-Pharmaceutical Company (“Skystar” or the “Company”), was incorporated in
Nevada on September 24, 1998. Since its acquisition on November 7, 2005 of
Skystar Bio-Pharmaceutical (Cayman) Holdings Co., Ltd. (“Skystar Cayman”),
a Cayman Islands company, the Company has been engaged in research, development,
production, marketing and sales of veterinary healthcare and medical care
products. All current operations of the Company are in the People’s
Republic of China (“China” or the “PRC”).
All of
the Company’s operations are carried out by Xian Tianxing Bio-Pharmaceutical
Co., Limited (“Xian Tianxing”), a PRC joint stock company that the Company
controls through contractual arrangements originally between Skystar Cayman and
Xian Tianxing. On March 10, 2008, the Company entered into a series of
agreements transferring all of the rights and obligations of Skystar Cayman
under the contractual arrangements to Sida Biotechnology (Xian) Co., Ltd.
(“Sida”), a PRC company. Sida is the wholly owned subsidiary of Fortunate
Time International Limited (“Fortunate Time”), a Hong Kong company and wholly
owned subsidiary of Skystar Cayman. Xian Tianxing also has a wholly owned
subsidiary, Shanghai Siqiang Biotechnological Co., Ltd. (“Shanghai
Siqiang”), a PRC company.
As a
result of these contractual arrangements, which obligates Sida to absorb all of
the risk of loss from Xian Tianxing’s activities and enable Sida to receive all
of its expected residual returns, the Company accounts for Xian Tianxing as a
variable interest entity (“VIE”) under Financial Accounting Standards Board’s
(“FASB”) interpretation on consolidation of variable interest
entities. Accordingly, the Company consolidates Xian Tianxing’s
results, assets and liabilities.
Sida was
established by Fortunate Time on July 10, 2007, with registered capital of
$5,000,000. Fortunate Time invested $2,000,000 into Sida on July 20, 2007, which
amount is payable to Skystar Cayman. On July 9, 2009, Fortunate Time
invested the remaining $3,000,000 into Sida. Xi’an High Technology District
approved Sida’s application to increase its registered capital to
$15,000,000 on July 13, 2009. On July 15, 2009, Sida received the
$10,000,000 additional registered capital from Fortunate Time.
Funds from Fortunate Time for $13,000,000 was from the cash proceeds of the
equity offering which is further discussed in Note 14.
On
September 18, 2009, Skystar Bio-Pharmaceutical Inc. (“Skystar California”) was
incorporated in California and became a wholly-owned subsidiary of
Skystar.
Hereinafter,
Skystar, Skystar California, Skystar Cayman, Fortunate Time, Sida, Xian Tianxing
and Shanghai Siqiang are sometimes collectively referred to as the
“Company.”
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of
consolidation
The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. The
consolidated financial statements include the financial statements of the
Company, its wholly-owned subsidiaries, and its VIEs. All significant
inter-company transactions and balances between the Company, its subsidiaries
and VIEs are eliminated upon consolidation.
See
report of independent registered public accounting firm.
F-6
Use of
estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. For example, the Company estimates its
allowance for doubtful accounts and useful lives of plant and equipment. Because
of the use of estimates inherent in the financial reporting process, actual
results could materially differ from those estimates upon which the carrying
values were based.
Foreign currency
translation
The
Company uses the United States dollar (“U.S. dollar”) for financial reporting
purposes and the Chinese Renminbi (“RMB”) as its functional currency. The
Company’s subsidiaries and VIEs maintain their books and records in their
functional currency, being the primary currency of the economic environment in
which their operations are conducted.
The
Company translates the subsidiaries’ and VIEs’ assets and liabilities into U.S.
dollars using the applicable exchange rates prevailing at the balance sheet
dates, and the statements of operations and cash flows are translated at average
exchange rates during the reporting period. As a result, amounts related to
assets and liabilities reported on the consolidated statements of cash flows
will not necessarily agree with changes in the corresponding balances on the
consolidated balance sheets. Equity accounts are translated at historical rates.
Adjustments resulting from the translation of the subsidiaries’ and VIEs’
financial statements are recorded as accumulated other comprehensive
income.
The
quotation of the exchange rates does not imply free convertibility of RMB to
other foreign currencies. All foreign exchange transactions continue to take
place either through the People's Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate quoted by the People's Bank of
China. The rates of exchange quoted by the People’s Bank of China on
December 31, 2009 and 2008 were US $1.00 to RMB 6.82 and
RMB 6.82, respectively. The average translation rates of US $1.00 to
RMB 6.82 and RMB 6.94 was applied to the income statement accounts for the
years ended December 31, 2009 and 2008, respectively.
Approval
of foreign currency payments by the People’s Bank of China or other institutions
requires submitting a payment application form together with invoices, shipping
documents and signed contracts. 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.
Fair values of financial
instruments
On
January 1, 2008, the Company adopted the accounting standards regarding fair
value of financial instruments and related fair value measurements defines
financial instruments and requires fair value disclosures of those financial
instruments. This accounting standard defines fair value, establishes
a three-level valuation hierarchy for disclosures of fair value measurement and
enhances disclosures requirements for fair value measures. Current
assets and current liabilities qualified as financial instruments and management
believes their carrying amounts are a reasonable estimate of fair value because
of the short period of time between the origination of such instruments and
their expected realization and if applicable, their current interest rate is
equivalent to interest rates currently available. The three levels of
valuation hierarchy are defined as follows:
•
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
See
report of independent registered public accounting firm.
F-7
•
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the assets or liability, either directly or indirectly, for
substantially the full term of the financial
instruments.
|
•
|
Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
|
Effective
January 1, 2009, the Company adopted the provisions of an accounting
standard regarding whether an instrument (or embedded feature) is indexed to an
entity’s own stock. This accounting standard specifies that a contract that
would otherwise meet the definition of a derivative but is both (a) indexed to
the Company’s own stock and (b) classified in stockholders’ equity in the
statement of financial position would not be considered a derivative financial
instrument. It provides a new two-step model to be applied in
determining whether a financial instrument or an embedded feature is indexed to
an issuer’s own stock and thus able to qualify for the scope exception within
the standards.
As a
result of the foregoing adoption, 309,100 common stock purchase warrants
previously treated as equity pursuant to the derivative treatment exemption are
no longer afforded equity treatment because the strike price of the warrants is
denominated in U.S. dollars, a currency other than the Company’s functional
currency, the RMB. As a result, the warrants are not considered indexed to
the Company’s own stock, and as such, all future changes in the fair value of
these warrants will be recognized currently in earnings until such time as the
warrants are exercised or expired.
As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in February 2007. On
January 1, 2009, the Company reclassified from additional paid-in capital,
as a cumulative effect adjustment, $230,877 to beginning retained earnings and
$877,631 to warrant liability to recognize the fair value of such warrants.
The Company recognized a loss of $868,445 from the change in fair value of the
warrant liability for the year ended December 31, 2009.
These
warrants do not trade in an active securities market, and as such, the
Company estimates the fair value of these warrants using the Black-Scholes
Option Pricing Model (“Black-Scholes Model”) using the following
assumptions:
|
|
Warrants (1)
|
|
|
Warrants (2)
|
|
||||||||||
|
|
December
31, 2009
|
|
|
January
1, 2009
|
|
|
December
31, 2009
|
|
|
January
1, 2009
|
|
||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
Stock
price
|
$
|
10.10
|
$
|
4.750
|
$
|
10.10
|
$
|
4.75
|
||||||||
Exercise
price
|
$
|
6.00
|
$
|
6.00
|
$
|
5.00
|
$
|
5.00
|
||||||||
Annual
dividend yield
|
—
|
—
|
—
|
—
|
||||||||||||
Expected
term (years)
|
.17
|
1.20
|
2.17
|
3.20
|
||||||||||||
Risk-free
interest rate
|
0.04
|
%
|
0.875
|
%
|
1.14
|
%
|
1.125
|
%
|
||||||||
Expected
volatility
|
34
|
%
|
140
|
%
|
178
|
%
|
130
|
%
|
(1)
|
As
of January 1, 2009, 195,000 warrants with an exercise price of $6.00 were
outstanding. As of December 31, 2009, 145,000 warrants with an exercise
price of $6.00 were outstanding.
|
(2)
|
As
of January 1, 2009, 114,100 warrants with an exercise price of $5.00 were
outstanding. As of December, 31, 2009, 107,254 warrants with an exercise
price of $5.00 were outstanding.
|
See
report of independent registered public accounting firm.
F-8
Expected
volatility is based on historical volatility. Historical volatility was
computed using daily pricing observations for recent periods that correspond to
the term of the warrants. The Company believes this method produces an estimate
that is representative of future volatility over the expected term of these
warrants. The Company has no reason to believe future volatility over the
expected remaining life of these warrants is likely to differ materially from
historical volatility. The expected life is based on the remaining term of the
warrants. The risk-free interest rate is based on U.S. Treasury securities
according to the remaining term of the warrants.
As
required by the FASB’s accounting standards, financial assets and liabilities
are classified in their entirety based on the lowest level of input that is
significant to the fair value measurement. Depending on the product and the
terms of the transaction, the fair values warrant liability were modeled using a
series of techniques, including closed-form analytic formula, such as the
Black-Scholes Model, which does not entail material subjectivity because the
methodology employed does not necessitate significant judgment, and the pricing
inputs are observed from actively quoted markets.
The fair
value of the 252,254 warrants as of December 31, 2009 was determined using the
Black-Scholes Model, defined in the FASB’s accounting standard of fair value
measurement as level 2 inputs, and recorded the change in earnings. As a result,
the warrant liability is carried on the consolidated balance sheets at fair
value.
The
following table sets forth by level within the fair value hierarchy our
financial assets and liabilities that were accounted for at fair value on a
recurring basis as of December 31, 2009:
Carrying
Value at
December
31, 2009
|
Fair Value Measurement at
December
31, 2009
|
|||||||||||||||
Level
1
|
Level
2
|
Level
3
|
||||||||||||||
Warrant
liability
|
$ | 1,538,686 | $ | - | $ | 1,538,686 | $ | - |
In
addition to assets and liabilities that are recorded at fair value on a
recurring basis, the Company is required to record assets and liabilities at
fair value on a non-recurring basis. Generally, assets are recorded
at fair value on a non-recurring basis as a result of impairment
charges. For the year ended December 31, 2009, there were no
impairment charges.
Revenue
recognition
Revenue
of the Company is primarily from the sales of veterinary healthcare and medical
care products in China. Sales are recognized when the following four revenue
criteria are met: persuasive evidence of an arrangement exists, delivery has
occurred, the selling price is fixed or determinable, and collectability is
reasonably assured. Sales are presented net of value added tax (“VAT”). No
allowance for sales returns is made on these consolidated financial statements
as sales returns are de minimis based on historical
experience.
There are
two types of sales upon which revenue is recognized:
a.
|
Credit
sales: Revenue is recognized when the products have been delivered to the
customers.
|
b.
|
Full
payment before delivering: Revenue is recognized when the products have
been delivered to customers.
|
Shipping
and handling costs related to costs of goods sold are included in selling
expenses, which totaled $850,387 and $335,605 for the years ended December
31, 2009 and 2008, respectively.
See
report of independent registered public accounting firm.
F-9
The
Company’s revenues and cost of revenues by product line were as
follows:
|
Years
Ended December 31,
|
|||||||
2009
|
2008
|
|||||||
Revenues
|
||||||||
Micro-organism
|
$
|
8,021,139
|
$
|
5,868,623
|
||||
Veterinary
Medications
|
22,920,479
|
17,535,757
|
||||||
Feed
Additives
|
1,411,222
|
1,189,108
|
||||||
Vaccines
|
1,425,465
|
990,958
|
||||||
Total
Revenues
|
$
|
33,778,305
|
$
|
25,584,446
|
||||
Cost
of Revenues
|
||||||||
Micro-organism
|
$
|
2,129,945
|
$
|
1,781,598
|
||||
Veterinary
Medications
|
13,672,332
|
10,389,726
|
||||||
Feed
Additives
|
568,007
|
525,653
|
||||||
Vaccines
|
150,705
|
111,919
|
||||||
Total
Cost of Revenues
|
16,520,989
|
12,808,896
|
||||||
Gross
Profit
|
$
|
17,257,316
|
$
|
12,775,550
|
Cash
Cash
includes cash on hand, demand deposits with banks and liquid investments with an
original maturity of three months or less.
Restricted
cash
Restricted
cash is comprised of amounts received from the PRC government as subsidies and
set aside for specific uses (see Note 13). Restricted cash is
maintained as bank deposits and reflected as current assets based on the
expected period when such funds will be put into their specific
uses.
Short-term
investments
Short-term
investments are comprised of securities classified as available-for-sale,
held by a private investment trust company for investing activities with a fixed
rate of return on investment. Available-for-sale securities are carried at
fair value, with unrealized gains or losses reported in other comprehensive
income, net of tax. Realized gains or losses are included in the results of
operations. There was no unrealized gain or loss relating to short-term
investments for the years ended December 31, 2009 and 2008, and as such, no such
amounts were included in other comprehensive income for such
periods.
The
Company entered into an investment agreement with an unrelated party in 2007 to
invest certain funds in the Chinese stock market. The nature of the investment
is available-for-sale with certain guaranteed returns such as 7.2% interest
through August 1, 2008 and 5.0% interest after August 1, 2008 for one
year. There are no restrictions or penalties for early withdrawals prior to
maturity. The investment matured on July 31, 2009 and the investment
principal of $352,080 and accrued interest of $22,666 were received by the
Company on August 3, 2009.
Accounts receivable and
other receivables
Accounts
receivable are recorded at net realizable value consisting of the carrying
amount less an allowance for uncollectible accounts, as needed. The Company uses
the aging method to estimate the allowance for anticipated uncollectible
receivable balances. Under the aging method, bad debt percentages determined by
management based on historical experience, as well as current economic
climate, are applied to customers’ balances categorized by the number of months
the underlying invoices have remained outstanding. At each reporting period, the
allowance balance is adjusted to reflect the amount computed as a result of the
aging method. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, a corresponding adjustment is made to
the allowance account as a change in estimate. The ultimate collection of
the Company’s accounts receivable may take one year. Delinquent account balances
are reserved after management determines that the likelihood of collection is
not probable, and known bad debts are written-off against allowance for doubtful
accounts when identified.
See
report of independent registered public accounting firm.
F-10
Inventories
Inventories
are stated at the lower of cost or market, as determined on a moving
weighted-average basis. Inventories include purchases and related costs incurred
in bringing the inventories to their present location and
condition. Management reviews inventories for obsolescence and cost in
excess of net realizable value at least annually and records a reserve against
the inventory and additional cost of goods sold when the carrying value exceeds
net realizable value.
Plant and
equipment
Plant and
equipment are stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets. Expenditures for maintenance and repairs which do not improve or extend
the useful lives of the assets are charged to operations as incurred, while
renewals and betterments are capitalized. Gains and losses on disposals are
included in the results of operations. Estimated useful lives of the assets are
as follows:
|
Estimated Useful
Life
|
||
Buildings
|
20-40
years
|
||
Machinery
and equipment
|
10
years
|
||
Computer,
office equipment and furniture
|
5
years
|
||
Vehicles
|
5-10
years
|
Management
assesses the carrying value of plant and equipment annually, more often when
factors indicating impairment are present, and reduces the carrying value of
such assets by the amount of the impairment. The Company determines the
existence of such impairment by measuring the expected future cash flows
(undiscounted and without interest charges) and comparing such amount to the net
asset carrying value. An impairment loss, if it exists, is measured as the
amount by which the carrying amount of the asset exceeds the fair value of the
asset. Based on its review, management believes that, as of December 31,
2009 and 2008, there was no impairment for its plant and equipment.
Construction-in-progress
Construction-in-progress
includes direct costs of construction of a factory building. Interest incurred
during the period of construction, if significant, is capitalized. All
other interest is expensed as incurred. Construction-in-progress is not
depreciated until such time the assets are completed and put into
service.
Intangible
assets
Land Use
Rights — Land use rights represent the amounts paid to acquire a long-term
interest to utilize the land underlying the Company’s facilities. This type of
arrangement is common for the use of land in the PRC. Land use rights are
amortized on a straight-line basis over its 50-year term.
See
report of independent registered public accounting firm.
F-11
Technological Know-How — Purchased
technological know-how includes confidential formulas, manufacturing processes,
technical and procedural manuals, and is amortized using the straight-line
method over the weighted average useful life of nine years, which reflects the
period over which such confidential formulas, manufacturing processes, and
technical and procedural manuals are kept confidential by the Company as agreed
between the Company and the selling parties.
Impairment
of Intangible Assets — The Company evaluates
the carrying value of intangible assets annually, or more often when factors
indicating impairment are present. The Company determines the existence of such
impairment by measuring the estimated future cash flows (undiscounted) and
comparing such amount to the net asset carrying value. If the undiscounted cash
flow estimated to be generated by any such intangible asset is less than its
carrying amount, a loss is recognized based on the amount by which the carrying
amount exceeds the intangible asset’s fair market value. Loss on intangible
assets to be disposed of is determined in a similar manner, except that fair
market values are reduced by the cost of disposal. Based on its review, the
Company believes that, as of December 31, 2009, there was no impairment of its
intangible assets.
Comprehensive
income
The
FASB’s accounting standard of reporting comprehensive income requires disclosure
of all components of comprehensive income and loss on an annual and interim
basis. Comprehensive income and loss is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The accompanying consolidated financial
statements include the provisions of GAAP. Accumulated other comprehensive
income is comprised of the changes in foreign currency exchange
rates.
Research and development
costs
Research
and development costs are charged to operations as incurred and include
salaries, professional fees and technical support fees related to such
efforts.
Advertising
costs
Advertising
costs are charged to operations currently. Advertising costs for the years ended
December 31, 2009 and 2008 were $253,006 and $93,573 respectively.
Income
taxes
The
Company accounts for income taxes in accordance with the FASB’s accounting
standard for income taxes. Under the asset and liability method as
required by this accounting standard, deferred income taxes are
recognized for the tax consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred income taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is recognized if it is more likely than not that some portion, or all
of, a deferred tax asset will not be realized.
Further,
in accordance with this accounting standard, a tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The standard also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosures, and transition. The adoption
had no effect on the Company’s consolidated financial statements.
See
report of independent registered public accounting firm.
F-12
The
Company’s operations are subject to income and transaction taxes in the United
States and in the PRC jurisdictions. Significant estimates and judgments are
required in determining the Company’s worldwide provision for income taxes. Some
of these estimates are based on interpretations of existing tax laws or
regulations. The ultimate amount of tax liability may be uncertain as a
result.
The
Company does not anticipate any events which could cause a change to these
uncertainties.
Stock-based
compensation
The
Company records and reports stock-based compensation by measuring the cost of
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. That cost is recognized over the period
during which services are received. Stock compensation for stock granted to
non-employees is determined as the fair value of the consideration received or
the fair value of equity instruments issued, whichever is more reliably
measured.
The
Company uses the Black-Scholes Model which was developed for use in estimating
the fair value of options. This models requires the input of highly complex and
subjective variables including the expected life of options granted and the
Company’s expected stock price volatility over a period equal to or greater than
the expected life of the options. Because changes in the subjective assumptions
can materially affect the estimated value of the Company’s employee stock
options, it is management’s opinion that the Black-Scholes Model may not provide
an accurate measure of the fair value of the Company’s employee stock options.
Although the fair value of employee stock options is determined in accordance
with the standards using an option-pricing model, that value may not be
indicative of the fair value observed in a willing buyer/willing seller market
transaction.
Earnings per
share
The
Company reports earnings per share and present both basic and diluted earnings
per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share is based
upon the weighted-average number of common shares outstanding. Diluted earnings
per share is based on the assumption that all dilutive convertible shares,
including convertible preferred shares, and stock options were converted or
exercised. Further, the method requires that stock dividends or stock splits be
accounted for retroactively if the stock dividends or stock splits occur during
the period, or retroactively if the stock dividends or stock splits occur after
the end of the period but before the release of the financial statements, by
considering it outstanding of the entirety of each period
presented. Dilution is computed by applying the treasury stock method.
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.
All share
and per share amounts used in the Company's consolidated financial statements
and notes thereto have been retroactively restated to reflect the 1-for-10
reverse stock split effectuated on May 12, 2009, and the 2-for-1 forward stock
split effectuated on November 16, 2009.
Related
parties
Parties
are considered to be related to the Company if the parties, directly or
indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company. Related parties also include
principal owners of the Company, its management, members of the immediate
families of such principal owners and management, and other parties with which
the Company may deal if one party controls or can significantly influence the
management or operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own separate
interests.
See
report of independent registered public accounting firm.
F-13
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications had no impact on previously reported net
income or cash flows.
Recently issued accounting
pronouncements
In
January 2009, the FASB issued an accounting standard amending the Impairment
Guidance of recognition of interest income and impairment on purchased and
retained beneficial interests in securitized financial assets. The newly issued
accounting standard changes the impairment model included to be more consistent
with the impairment model of another accounting standard for accounting for
securities. The new accounting standard remove its exclusive reliance
on “market participant” estimates of future cash flows used in determining fair
value. Changing the cash flows used to analyze other-than-temporary impairment
from the “market participant” view to a holder’s estimate of whether there has
been a “probable” adverse change in estimated cash flows allows companies to
apply reasonable judgment in assessing whether an other-than-temporary
impairment has occurred. The adoption of this FASB Staff Positions did not have
a material impact the Company’s consolidated financial statements.
In April
2009, the FASB issued three related FASB Staff Positions: (i) Recognition of
Presentation of Other-Than-Temporary Impairments, (ii) Interim Disclosures about
Fair Value of Financial Instruments, and (iii) Determining the Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, which are effective
for interim and annual reporting periods ending after June 15, 2009. The first
Staff Position modifies the requirement for recognizing other-than-temporary
impairments, changes the existing impairment model, and modifies the
presentation and frequency of related disclosures. The second Staff Position
requires disclosures about fair value of financial instruments for interim
reporting periods as well as in annual financial statements. The
third Staff Position requires new disclosures regarding the categories of fair
value instruments, as well as the inputs and valuation techniques utilized to
determine fair value and any changes to the inputs and valuation techniques
during the period. The adoption of these FASB Staff Positions did not
have a material impact the Company’s consolidated financial
statements.
In May
2009, the FASB an accounting standard which provides guidance to establish
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The standard also requires entities to disclose the date
through which subsequent events were evaluated as well as the
rationale for why that date was selected. The standard is effective for
interim and annual periods ending after June 15, 2009, and accordingly, the
Company adopted this Standard as of December 31, 2009. The standard requires
that public entities evaluate subsequent events through the date that the
financial statements are issued.
In June
2009, the FASB issued an accounting standard which establishes the FASB
Accounting Standards Codification™ (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in
one place. The Codification is effective for interim and annual periods ending
after September 15, 2009, and as of the effective date, all existing
accounting standard documents will be superseded. The Codification is effective
for the Company in the third quarter of 2009, and accordingly, the
Company’s Annually Report on Form 10-K for the year ended December 31, 2009 and
all current and subsequent public filings will reference the Codification
as the sole source of authoritative literature.
In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU. The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements.
See
report of independent registered public accounting firm.
F-14
In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation. This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The Company is currently evaluating the impact of this ASU on its
consolidated financial statements.
In
January 2010, the FASB issued ASU No. 2010-02 regarding accounting and reporting
for decreases in ownership of a subsidiary. Under this guidance, an
entity is required to deconsolidate a subsidiary when the entity ceases to have
a controlling financial interest in the subsidiary. Upon
deconsolidation of a subsidiary, an entity recognizes a gain or loss on the
transaction and measures any retained investment in the subsidiary at fair
value. In contrast, an entity is required to account for a decrease
in its ownership interest of a subsidiary that does not result in a change of
control of the subsidiary as an equity transaction. This ASU
clarifies the scope of the decrease in ownership provisions, and expands the
disclosures about the deconsolidation of a subsidiary or de-recognition of a
group of assets. This ASU is effective beginning in the first interim
or annual reporting period ending on or after December 31, 2009. The
adoption of this ASU did not have a material impact the Company’s consolidated
financial statements.
In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure to include transfers in and out of Levels 1 and 2 and
activity in Level 3 fair value measurements. Further, this update
clarifies existing disclosures on level of disaggregation and Disclosures about
inputs and valuation techniques. A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities and
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company is currently evaluating the impact of this ASU;
however, the Company does not expect the adoption of this ASU to have a material
impact on its consolidated financial statements.
Note
3 - CONCENTRATIONS AND CREDIT RISK
The
Company’s operations are all carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC’s economy. The Company’s operations in the PRC are subject to
specific 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 environments and foreign
currency exchange. The Company’s results may be adversely affected by changes in
governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
Financial
instruments, which subject the Company to concentration of credit
risk, consist of cash. The Company maintains balances at financial
institutions which, from time to time, may exceed federally insured limits for
the banks located in the United States. Balances at financial institutions or
state-owned banks within the PRC are not covered by insurance. As of
December 31, 2009 and 2008, the Company had deposits in excess of federally
insured limits (including restricted cash) of $11,504,970 and $448,082
respectively. The Company has not experienced any losses in such
accounts.
See
report of independent registered public accounting firm.
F-15
For the
year ended December 31, 2009 and 2008, all of the Company’s sales
occurred in the PRC. No major customers accounted for more than 10% of the
Company’s total revenues. In addition, all accounts receivable at December
31, 2009 and 2008 also arose in the PRC.
The
Company’s five largest vendors accounted for approximately 59% of the
Company’s total purchases for the year ended December 31, 2009, while the
Company’s four largest vendors accounted for 59% of the Company’s total
purchases for the year ended December 31, 2008. As of December 31, 2009
and 2008, there were no amounts due to those five and four largest vendors,
respectively.
The
Company had one product that accounted for 20% and 12% of the Company’s total
revenues for the years ended December 31, 2009 and 2008,
respectively.
Note 4
- ACCOUNTS RECEIVABLE, NET
Accounts
receivable consisted of the following:
December
31,
2009
|
December
31,
2008
|
||||||||
Account
receivable
|
$ | 4,711,044 | $ | 2,751,959 | |||||
Allowance
for bad debts
|
(327,857 | ) | (327,857 | ) | |||||
Account receivable,
net
|
$ | 4,383,187 | $ | 2,424,102 |
The
following table presents the movement of allowance for doubtful
accounts:
Allowance for bad debt, January
1, 2008
|
$
|
199,639
|
||
Addition
|
114,239
|
|||
Recovery
|
—
|
|||
Translation
adjustment
|
13,979
|
|||
Allowance
for bad debt, December 31, 2008
|
327,857
|
|||
Addition
|
—
|
|||
Recovery
|
—
|
|||
Translation
adjustment
|
—
|
|||
Allowance
for bad debt, December 31, 2009
|
$
|
327,857
|
Note 5 –
INVENTORIES
Inventories
consist of the following:
|
December
31,
2009
|
December 31,
2008
|
||||||
Raw
materials
|
$
|
2,798,021
|
$
|
2,087,428
|
||||
Packing
materials
|
159,620
|
165,077
|
||||||
Work-in-process
|
886
|
2,446
|
||||||
Finished
goods
|
1,096,547
|
811,538
|
||||||
Other
|
19,571
|
19,571
|
||||||
Total
|
$
|
4,074,645
|
$
|
3,086,060
|
See
report of independent registered public accounting firm.
F-16
The
Company periodically reviews its reserves for slow moving and obsolete
inventories. As of December 31, 2009 and 2008, the Company believes that no such
reserves were necessary.
Note
6 - DEPOSITS AND PREPAID EXPENSES
Deposits
and prepaid expenses are comprised of the following:
December
31,
2009
|
December 31,
2008
|
|||||||
Prepayment
for raw materials purchasing
|
$ | 10,990,913 | $ | 4,210,618 | ||||
Prepayment
for packaging materials purchasing
|
489,392 | 499,755 | ||||||
Prepayment
for advertisement fee
|
- | 89,436 | ||||||
Prepayment
for due diligence fee
|
- | 73,350 | ||||||
Other
|
420,009 | 5,692 | ||||||
Total
|
$ | 11,900,314 | $ | 4,878,851 |
Note
7 – LOANS RECEIVABLE
Loans
receivable consist of the following:
|
December
31,
2009
|
December 31,
2008
|
||||||
Shaanxi
Xinbangdike Technology Developing Company (1)
|
$
|
-
|
$
|
295,087
|
(1) Loan
to Shaanxi Xinbangdike Technology Development Company is non-interest bearing,
unsecured and due on demand.
Note
8 - PLANT AND EQUIPMENT, NET
Plant and
equipment consist of the following:
|
December
31,
2009
|
December 31,
2008
|
||||||
Building
and improvements
|
$
|
6,798,616
|
$
|
4,977,654
|
||||
Machinery
and equipment
|
3,035,814
|
3,035,376
|
||||||
Office
equipment and furniture
|
191,424
|
186,702
|
||||||
Vehicles
|
485,156
|
329,331
|
||||||
Total
|
10,511,010
|
8,529,063
|
||||||
Less:
accumulated depreciation
|
(1,681,952)
|
(1,115,374
|
)
|
|||||
Plant
and equipment, net
|
$
|
8,829,058
|
$
|
7,413,689
|
Depreciation
expense was $566,230 and $443,062 for the years ended December 31, 2009 and
2008, respectively.
See
report of independent registered public accounting firm.
F-17
Note
9 - CONSTRUCTION-IN-PROGRESS
Construction-in-progress
(“CIP”) is related to a plant being built in accordance with the PRC’s Good
Manufacturing Practices (“GMP”) Standard. Construction on this
plant commenced in 2005. The veterinary medicine facility and the building
that houses quality control, research and development and administration were
completed during 2007, and the remaining plant facilities are expected to be
completed by June 30, 2010, at an estimated cost of $11,846,479. During the year
ended December 31, 2009, vaccine and micro-organism facilities were completed
resulting in a transfer from CIP to property, plant and equipment of $2,951,288.
No depreciation is provided for construction-in-progress until such time the
assets are completed and placed into service.
The
construction projects the company is in the progress of completing
are:
Total in CIP
as of
12/31/09
|
Estimate cost to
Complete
|
Estimated
Total Cost
|
Estimated
Completion Date
(1)
|
||||||||||
Project
|
|||||||||||||
Vaccine
facility
|
$ | 7,846,479 | $ | 2,500,000 | $ | 10,346,479 |
June
2010
|
||||||
Micro-organism
facility
|
1,339,371 | 160,629 | 1,500,000 |
April
2010
|
|||||||||
Other
|
203,270 | ||||||||||||
TOTAL
CIP Balance
|
$ | 9,389,120 | $ | 2,660,629 | $ | 11,846,479 |
(1)
|
Note
that this date does not include the time to certify the facility, if
necessary.
|
As of
December 31, 2009 and 2008, the Company had construction in progress amounting
to $9,389,120 and $6,516,330, respectively. $0 and $150,789 in interest expense
had been capitalized for construction in progress for the years ended December
31, 2009 and 2008, respectively.
Note
10 - LONG-TERM PREPAYMENTS
Long-term
prepayments consist of the following:
|
|
December
31,
2009 |
December 31,
2008
|
|
||||
Construction
deposit
|
$
|
733,500
|
$
|
2,493,167
|
||||
Deposit
for building purchase
|
439,927
|
-
|
||||||
Deposit
for potential acquisitions
|
6,806,880
|
2,713,950
|
||||||
Total
|
$
|
7,980,307
|
$
|
5,207,117
|
As of
December 31, 2009 and 2008, the Company has determined that these prepayments
are noncurrent because: (1) these amounts relate to noncurrent assets, and (2)
the Company’s ability to complete any potential acquisitions is contingent upon
the Company identifying and negotiating with target companies.
As of
December 31, 2008, deposits for potential acquisitions represent
deposits made to four separate potential acquisition targets: one that
produces veterinary medicines, one that produces micro-organisms and feed
additives, one that produces veterinary medicines for domestic pets, and one
with buildings for the Company’s own future expansion. In April 2009, all
deposits made by the Company for potential acquisitions as of December 31, 2008
in the amount of $2,713,950 (RMB 18,500,000) were returned to the
Company.
As of
December 31, 2009, deposits for office building purchase of $439,927 (RMB
2,998,820) represent deposits made for new office building. The Company is in
the process of applying for property certificate, and made the remaining payment
of $1,069,018 (RMB 7,287,105) in January, 2010.
See
report of independent registered public accounting firm.
F-18
As of
December 31, 2009, deposits for potential acquisitions of $6,806,880 (RMB
46,400,000) represent deposits made to two separate potential acquisition
targets. The Company obtained appraisal report in January 2010 for
the target in Hubei, stating the total fair value of net assets at $2,711,603
(RMB 18,484,000). The Company is expected to finish the acquisition
in June 2010.
Note
11 – INTANGIBLE ASSETS
Intangible
assets consisted of the following:
|
December
31,
2009
|
December 31,
2008
|
||||||
Land
use rights
|
$
|
378,853
|
$
|
378,853
|
||||
Technological
know-how
|
2,053,800
|
880,200
|
||||||
Total
|
2,432,653
|
1,259,053
|
||||||
Less:
accumulated amortization
|
(572,481
|
)
|
(359,524
|
)
|
||||
Intangible
assets, net
|
$
|
1,860,172
|
$
|
899,529
|
During
2007, the Company paid $658,350 for the exclusive rights to the use of a strain
of micro-bio organisms for a five-year term from November 1, 2007 through
October 31, 2012. The Company began using the strain in its veterinary medicines
in 2008.
In 2009,
the Company paid $1,172,880 (RMB 8,000,000) for fish disease technology transfer
for an eleven-year term from September 2009 through September 2020.
For the
year ended December 31, 2009 and 2008, the amortization expense for intangibles
amounted to $212,826 and $179,343, respectively.
Amortization
expense for the future five years and thereafter is as follows:
Years ending December 31,
|
|
Amount
|
|
|
2010
|
$
|
388,757
|
||
2011
|
388,757
|
|||
2012
|
364,322
|
|||
2013
|
242,148
|
|||
2014
|
183,504
|
|||
2015
and thereafter
|
292,684
|
|||
Total
|
$
|
1,860,172
|
Note
12 – SHORT-TERM LOANS
On
September 3, 2008, the Company signed a one year short-term agreement with
the Bank of East Asia to borrow up to $1.9 million (RMB 13 million) for
operating purposes secured by the Company’s land use rights and buildings. On
September 17, 2008, the Company received proceeds of $733,500 (RMB 5
million) from the bank. The balance of $1.1 million (RMB 8 million)
can be borrowed once the Company has a deposit balance in the amount of $4
million with the bank and uses the bank as the Company’s primary transaction
bank. The applicable interest rate of the loan is the Bank of China’s
standard short-term rate, 6.93% at inception of the loan, which is subject to
change with the government policy, plus an additional 20% interest rate float.
Pursuant to these terms, the interest rates were approximately
6.37% and 8.32% as of December 31, 2009 and December 31, 2008,
respectively. Interest payments to the Bank of East Asia are due every six
months. The Company repaid amount of $733,050 (RMB 5 million) on
September 16, 2009.
See
report of independent registered public accounting firm.
F-19
Pursuant
to the short-term loan agreement, the Company is required to comply with certain
covenants, such as maintaining sufficient environmental controls with respect to
the Company’s manufacturing processes, and providing written notification to the
bank for any changes in the organizational structure or executive officers,
among others. As of December 31, 2009, the Company determined that it was in
compliance with these covenants.
On
January 14, 2009, the Company signed a one year short-term loan contract with
Shaanxi Agricultural Yanta Credit Union for $220,050 (RMB 1.5 million) at an
annual interest rate of 8.66% for operating purposes secured by the personal
property of Weibing Lu, the Company’s Chief Executive Officer. This loan
was paid off on January 15, 2010.
Interest
expense incurred and associated with the short-term loans amounted to $71,467
for the year ended December 31, 2009, none of which has been capitalized as part
of construction-in-progress in 2009. Interest expense incurred and associated
with the short term loan amounted to $15,741 for the year ended December 31,
2008, which has been capitalized as part of
construction-in-progress.
Note
13 - DEFERRED GOVERNMENT GRANT
Deferred
government grant represents subsidies for GMP projects granted by the PRC
government. A subsidy in the amount of $641,000 was approved by the PRC
government for the Company to construct a new factory in which operations will
meet the GMP Standard. In 2003, $516,500 was received by the Company and the
remaining $124,500 was received in the first quarter of 2006. In 2006, the
Company expended $186,644 for the construction of its new factory (Note
9).
Also in
2003, the Company received a second subsidy in the amount of $256,400 to finance
the Company’s research and development activities. In 2005, the Company received
a third subsidy of $64,100 for the Company’s research and development
activities, which was expended during that year.
According
to PRC government regulations, the funds granted may be treated as capital
contributed by a company appointed by the PRC government or as a loan from such
company, which the Company will be required to repay. As of December 31, 2009,
the Company has not reached a final agreement with the PRC government regarding
the treatment of these three subsidies as either a loan or capital contribution,
and the Company does not expect that the final agreement will be completed
within the next year. Therefore, these amounts are reflected as non-current
liabilities in the accompanying consolidated financial statements.
Note
14 - CAPITAL TRANSACTIONS
On May
12, 2009, the Company effectuated a 1-for-10 reverse stock split of its issued
and outstanding shares of common stock and a proportional reduction of its
authorized shares of common stock. Number of common stock, warrants, options
disclosed in the footnotes has been retroactively restated to reflect the
1-for-10 reverse stock split. On November 16, 2009, the Company effectuated a
2-for-1 forward split of its issued and outstanding common stock and a
proportional increase of its authorized shares of common stock. Number of common
stock, warrants, options disclosed in the footnotes has been retroactively
restated to reflect the 2-for-1 forward stock split.
Preferred
stock
On June
25, 2009, the Company’s board of directors concluded that 2,000,000 shares of
series “A” preferred stock issued in 2001 were not valid because no certificate
of designation was filed prior to their issuance as required under Nevada
corporate law. On December 21, 2009, the Company instructed its transfer agent
to remove these preferred shares officially from its shareholder records. As of
December 31, 2009, no share of preferred stock is outstanding.
See
report of independent registered public accounting firm.
F-20
Stock-based
compensation
On
February 12, 2008, the Company issued 18,000 shares of common stock as salary to
a non-executive director. The trading value of the Company's common stock on
February 12, 2008, was $5.55 per share and a corresponding amount of $99,900 was
charged to general and administrative expenses. The Company also had a
$302,372 and $95,204 balance under shares to be issued as of December 31, 2009
and 2008, which represented 47,334 and 22,000 common shares to be issued to the
non-executive director for his service provided for the period from May
2008 to December 2009, and for the period from May 2008 to December 2008,
respectively. The amounts were included in general and administrative
expenses based on the weighted-average trading price of the Company’s
common stock for the said periods.
On
February 29, 2008, the Company issued 42,080 shares of common stock to its legal
counsel as partial payment for services rendered. The trading value of the
Company's common stock on February 29, 2008, was $5.25 per share and additional
inducement cost of $42,081 between the fair value of the shares at $220,920 and
the partial payment of $178,839 was charged to general and administrative
expenses.
On April
21, 2008, two of the Company’s convertible debenture holders converted
$982,003 of debentures into 245,500 shares of common stock.
On May 5,
2008, the Company agreed to issue 10,434 shares of common stock to its chief
financial officer (“CFO”) during the term of a one-year agreement,
which would vest in four equal installments of 2,608 shares each
quarter. The trading value of the common stock on May 5, 2008 was
$5.85 per share for a total value of $61,042. These shares were fully
vested. On May 26, 2009, the Company renewed the one-year
service agreement with the CFO and agreed to issue 14,440 shares of common
stock, which would vest in four equal installments of 3,610 shares every quarter
starting August 5, 2009. Compensation expense is recognized on a
straight-line basis over the vesting period. Total compensation expense of
$32,490 was charged to general and administrative expenses for
the year ended December 31, 2009.
On May
26, 2009, the Company agreed to issue 5,556 shares of common stock to a director
at the beginning of each term of his directorship. The trading value of the
common stock on May 26, 2009 was $4.50 per share for the total value of $25,002,
and the amount was charged to general and administrative expenses for the year
ended December 31, 2009. As of December 31, 2009, the balance was under shares
to be issued.
Warrants
On
February 28, 2007, the Company issued 195,000 warrants to four investors with an
exercisable price of $6.00 per share for a term of three years. On
the same date, the Company also issued warrants to the private placement agent,
exercisable for 114,100 shares of the Company’s common stock at a price of $5.00
per share for a five-year term. As of December 31, 2009, 56,846 warrants
have been exercised. The Company valued the conversion on exercise date and
recorded $207,390 losses from changes in fair value of warrants. Following is a
summary of the status of warrants outstanding at December 31, 2009:
Number
of
|
Average
Remaining
|
Average
|
|||||
Warrants
|
Contractual
Life
|
Exercise
Price
|
|||||
145,000
|
0.16
years
|
$
|
6.00
|
||||
107,254
|
2.17
years
|
$
|
5.00
|
||||
252,254
|
$
|
5.57
|
See
report of independent registered public accounting firm.
F-21
Following
is an activity summary of the Company’s outstanding warrants:
Outstanding
as of December 31, 2007
|
309,100
|
|||
Granted
|
—
|
|||
Forfeited
|
—
|
|||
Exercised
|
—
|
|||
Outstanding
as of December 31, 2008
|
309,100
|
|||
Granted
|
—
|
|||
Forfeited
|
—
|
|||
Exercised
|
56,846
|
|||
Outstanding
as of December 31, 2009
|
252,254
|
Equity
offering
On June
30, 2009, the Company and Rodman & Renshaw, LLC, as representative
of underwriters (the "Underwriters") entered into an Underwriting Agreement.
Pursuant to the Underwriting Agreement, Skystar agreed to issue and sell an
aggregate of 3,220,000 shares (including 420,000 over-allotment shares) of the
Company’s common stock, at a price of $6.49 per share in a public offering. The
closing date of this offering was on the third business day following
the effective date of the registration statement registering the shares offered,
or July 3, 2009.
In
connection with this offering, the Company agreed to grant 140,000 common
stock purchase options to five individuals from the Underwriters. The
options are exercisable from June 30, 2010 to June 30, 2014, and each option is
exercisable for one share of the Company’s common stock, with exercise price at
$8.11 per share. The Company used the Black-Scholes Model to value the
options granted, which amounted to $1,065,842. The value of options granted to
these individuals was included as part of the offering costs, and had no net
effect on the Company’s equity.
The
following are the assumptions used by the Company in the Black-Scholes
Model:
Number of
options
|
Stock price
|
Exercise
price
|
Expected
term
|
Dividend
yield
|
Volatility
|
Risk-free
interest rate
|
||||||||||||||||
140,000
|
$
|
8.97
|
$
|
8.11
|
3.0
years
|
—
|
161
|
%
|
1.67
|
%
|
The
following is a summary of the status of options outstanding at September 30,
2009:
Outstanding Options
|
Exercisable Options
|
||||||||||||||||||||
Number
|
Average
Remaining
|
Average
|
Number
|
Average
Remaining
|
Average
|
||||||||||||||||
of Options
|
Contractual
Life
|
Exercise Price
|
of Options
|
Contractual
Life
|
Exercise Price
|
||||||||||||||||
140,000
|
4.75
|
$
|
8.11
|
—
|
—
|
$
|
—
|
Following
is an activity summary of the Company’s outstanding options:
|
Number of
Options
Outstanding
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
|||||||||
Outstanding
as of December 31, 2008
|
—
|
—
|
—
|
|||||||||
Granted
|
140,000
|
$
|
8.11
|
—
|
||||||||
Forfeited
|
—
|
—
|
—
|
|||||||||
Exercised
|
—
|
—
|
—
|
|||||||||
Outstanding
as of December 31, 2009
|
140,000
|
$
|
8.11
|
$
|
—
|
See
report of independent registered public accounting firm.
F-22
Incremental
costs incurred of this offering, including underwriting commission, legal fees,
and printing costs were $1,730,477, and were directly deducted from the
proceeds. The gross proceeds of this offering were $20,897,800. The
Company received cash proceeds of $18,411,496 on July 6, 2009.
Equity Compensation
Plan
On
December 8, 2009, the Company’s board of directors approved a stock incentive
plan for officers, directors, employees and consultants entitled the “Skystar
Bio-Pharmaceutical Company 2010 Stock Incentive Plan” (hereinafter the “2010
Plan”). The maximum number of shares that may be issued under the 2010 Plan is
700,000 shares of the Company’s common stock. The 2010 Plan was approved by the
Company’s stockholders on December 31, 2009, and awards may be granted under
this Plan until December 7, 2019. As of December 31, 2009, there are 700,000
shares of the Company’s common stock remaining available for future issuance
under the 2010 Plan.
Note
15 - CONVERTIBLE DEBENTURES
In
February 2007, the Company sold an aggregate of $4.075 million of its 8%
convertible debentures (the “Debentures”) and issued warrants to purchase
815,000 shares of common stock to several institutional and accredited
investors. On April 21, 2008, the Company entered into an Amendment and Waiver
Agreement (the “Amendment”) with two institutional and accredited investors who
acquired two remaining unconverted Debentures in a private transaction from the
original holders of these Debentures. A summary of the Amendment is as
follows:
•
|
The
Amendment amends the terms of these Debentures by: (a) changing the
conversion price from $5.00 per share to $4.00 per share; (b) deleting the
trading conditions for mandatory conversion; (c) granting the Company the
right to mandatory conversion at any time, and (d) allowing the Company to
designate the date for the mandatory conversion.
|
•
|
The
Amendment is deemed to be the Company’s notice to require conversion of
the entire outstanding principal of these Debentures and all accrued but
unpaid interest thereon.
|
The
difference between the value of the conversion option at the previous prices and
their value at the modified prices are deemed costs for the Company and are
charged to operations. The inducement cost for the two Debentures converted was
$257,775 for year ended December 31, 2008. The inducement cost for the converted
Debentures was based on the market value of the additional 49,100 shares
obtained by these two investors at $5.25 per share on April 21,
2008.
245,500
shares of common stock were issued upon conversion of the two Debentures with a
carrying value of $982,003 (including $490,713 of default premium) at a reduced
conversion price of $4.00.
In
accordance with the accounting standard of application of certain convertible
instruments, all unamortized discount amounting to $291,548 at the time of the
conversion was recognized as interest expense year ended December 31, 2008. The
unamortized deferred financing costs of $79,998 on conversion of the Debentures
were also recorded as interest expense for the year ended December 31,
2008.
Note
16 - STATUTORY RESERVES
Statutory
reserves represent restricted retained earnings. Based on the legal formation of
the entities, all PRC entities are required to set aside 10% of its net income
as reported in its statutory accounts on an annual basis to the statutory
surplus reserve fund. Once the total statutory surplus reserve reaches 50% of
the registered capital of the respective subsidiaries, further appropriations
are discretionary. The statutory surplus reserve can be used to increase the
registered capital and eliminate future losses of the respective companies under
PRC GAAP. The Company’s statutory surplus reserve is not distributable to
shareholders except in the event of liquidation. As of December 31, 2009,
Xian Tianxing has met the statutory surplus reserve requirement, and
approximately $7,534,275 still needs to be transferred to the statutory surplus
reserve from Shanghai Siqiang and Sida.
See
report of independent registered public accounting firm.
F-23
The
reserve fund can be used to increase the registered capital upon approval by
relevant government authorities and eliminate future losses of the respective
companies upon a resolution by the board of directors.
Appropriations
to the above statutory reserves are accounted for as a transfer from
unrestricted earnings to statutory reserves. There are no legal
requirements in the PRC to fund these statutory reserves by the transfer of cash
to any restricted accounts, and as such, the Company has not transferred any
cash to these accounts. These reserves are not distributable as cash
dividends.
Note
17 – TAXES
Skystar
and Skystar California are subject to the United States federal income tax
provision. Whereas its subsidiary, Skystar Cayman, is a tax-exempt company
incorporated in the Cayman Islands and conducts all of its business through its
subsidiaries, Fortunate Time, Sida, and Sida’s PRC VIEs, Xian Tianxing and
Shanghai Siqiang.
Sida,
Xian Tianxing, and Shanghai Siqiang are subject to PRC’s Enterprise Income Tax.
Pursuant to the PRC Income Tax Laws, Enterprise Income Tax is generally imposed
at a statutory rate of 25% beginning on January 1, 2008. Xian Tianxing has been
approved as a new technology enterprise, and under PRC Income Tax Laws is
entitled to a preferential tax rate of 15%.
For the
years ended December 31, 2009 and 2008, the provisions for income tax were as
follows:
2009
|
2008
|
|
Current
PRC income tax expense Enterprise income tax
|
$2,029,374
|
$1,529,688
|
The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate as of December 31:
2009
|
2008
|
|||||||
U.S.
Statutory rate
|
34.0
|
%
|
34.0
|
%
|
||||
Foreign
income not recognized in the U.S.
|
(34.0
|
)
|
(34.0
|
)
|
||||
China
income tax rate
|
25.0
|
25.0
|
||||||
China
income tax exemption
|
(10.0
|
)
|
(10.0
|
)
|
||||
Other
item (1)
|
3.7
|
6.5
|
||||||
Total
provision for income taxes
|
18.7
|
%
|
21.5
|
%
|
(1)
|
The
other item is operating expenses incurred by Skystar that are not
deductible in the PRC which resulted in an increase in effective tax rate
of 3.7% and 6.5% for the years ended December 31, 2009 and 2008,
respectively.
|
Taxes
payable consisted of the following:
December
31, 2009
|
December
31, 2008
|
|||||||
Income
taxes payable
|
$
|
104,261
|
$
|
200,937
|
||||
Value
added tax (1)
|
561,646
|
-
|
||||||
Other
taxes
|
56,199
|
11,724
|
||||||
Total
|
$
|
722,106
|
$
|
212,661
|
(1)
|
In
2009, the increase in value added tax (“VAT”) is mainly due to increase in
sales. In 2008, the Company made more payments than its VAT on
sales resulting in prepaid expenses that can be used to offset future VAT
on sales.
|
See
report of independent registered public accounting firm.
F-24
The
estimated tax savings due to the reduced tax rate for the years ended December
31, 2009 and 2008 amounted to $202,934 and $1,019,600,
respectively. If the statutory income tax had been applied, the Company
would have decreased basic earnings per share and diluted per shares from $1.65
to $1.61 and from $1.62 to $1.58 for the years ended December 31,
2009. For the
year ended December 31, 2008, the basic and diluted earnings per share would
have decreased from $1.53 to $1.47 if the statutory income tax had been
applied.
Skystar
is incorporated in the U.S. and has incurred a net operating loss for income tax
purposes for 2009. As of December 31, 2009, the estimated net operating loss
carryforwards for U.S. income tax purposes amounted to $4,569,638 which may be
available to reduce future years’ taxable income. These carryforwards will
expire, if not utilized, beginning in 2026 and continue through 2029. Management
believes that the realization of the benefits arising from this loss appears to
be uncertain due to the Company’s limited operating history and continuing
losses for U.S. income tax purposes. Accordingly, the Company has provided a
100% valuation allowance at December 31, 2009 and 2008. The valuation allowance
at December 31, 2009 and 2008 was $1,553,677 and $967,424,
respectively. The Company’s management reviews this valuation allowance
periodically and makes adjustments as necessary.
The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $25,508,239 as of December 31, 2009, which are included in
consolidated retained earnings and will continue to be indefinitely reinvested
in international operations. Accordingly, no provision has been made for
U.S. deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
Note
18 - EARNINGS PER SHARE
The
following is the calculation of earnings per share:
For
the years ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Net
income
|
$
|
8,851,932
|
$
|
5,596,183
|
||||
Weighted
average shares used in basic computation
|
5,374,452
|
3,645,746
|
||||||
Diluted
effect of stock warrants
|
85,076
|
3,650
|
||||||
Weighted
average shares used in diluted computation
|
5,459,528
|
3,649,396
|
||||||
Earnings
per share:
|
||||||||
Basic
|
$
|
1.65
|
$
|
1.53
|
||||
Diluted
|
$
|
1.62
|
$
|
1.53
|
See
report of independent registered public accounting firm.
F-25
At
December 31, 2009 and 2008, the Company had 252,254 and 309,100 warrants
outstanding, respectively. For the year ended December 31, 2009, the average
stock price was greater than the exercise prices of warrants which resulted in
additional weighted-average common stock equivalents of 85,076. For the year
ended December 31, 2008, the average stock price was greater than the exercise
price of 114,100 warrants outstanding at such time which resulted in additional
weighted average common stock equivalents of 3,650 shares. As such, 195,000
outstanding warrants were excluded from the diluted earnings per share
calculation as they were anti-dilutive.
For the
year ended December 31, 2009, 140,000 outstanding options were excluded from the
diluted earnings per share calculation as they are anti-dilutive.
Note
19 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
Amounts
receivable from and payable to related parties are summarized as
follows:
December
31,
2009
|
December
31,
2008
|
|||||||
Short-term loans from
shareholders
|
||||||||
Mr.
Weibing Lu – officer and shareholder (1)
(2)
|
$
|
36,675
|
$
|
220,050
|
||||
Mr.
Wei Wen – officer and shareholder (2)
|
36,675
|
44,010
|
||||||
Ms.
Aixia Wang – shareholder (2)
|
36,675
|
44,010
|
||||||
Total
|
$
|
110,025
|
$
|
308,070
|
||||
Shares to be issued to
related party
|
||||||||
Scott
Cramer – non-executive director (3)
|
$
|
302,372
|
$
|
95,204
|
||||
Mark
D. Chen – non-executive director(3)
|
25,002
|
—
|
||||||
Total
|
$
|
327,374
|
$
|
95,204
|
||||
Amounts due (from) to
related parties
|
||||||||
Bennet
P. Tchaikovsky – CFO (4)
|
$
|
-
|
$
|
13,168
|
||||
Scott
Cramer – non-executive director and shareholder (4)
|
143,556
|
224,684
|
||||||
Shaanxi
Xingji Electronics Co. - owned by a director's wife (4)
|
-
|
4,373
|
||||||
Officer
and shareholder (4)
|
41,468
|
-
|
||||||
Total
|
$
|
185,024
|
$
|
242,225
|
(1) In
2008, Weibing Lu obtained an unsecured personal loan in the amount of $176,040
(RMB 1,500,000) from Huaxia Bank with annual interest rate of 7.47% and
advanced to Xian Tianxing to facilitate operations. Xian Tianxing
guaranteed the loan. The loan principal and related interest was due on December
30, 2008. On January 4, 2009, Xian Tianxing paid the full principal amount
to the bank, with related interest of $15,741.
(2) On May
29, 2008, Weibing Lu, Wei Wen and Aixia Wang obtained personal loans from Yanta
Credit Union and advanced cash to Xian Tianxing in the total amount of
$132,030 to facilitate operations. These loans, which were due on May 29, 2009
with 8.436% interest per annum and guaranteed by Xian Tianxing, were paid in
full on May 29, 2009. On June 2, 2009, Mr. Lu, Mr. Wen and Ms. Wang again
obtained loans from the same bank and advanced cash to Xian Tianxing in the
total amount of $110,025. These loans are due on June 1, 2010, with 10.11%
interest per annum and are also guaranteed by Xian Tianxing. For the year ended
December 31, 2009 and 2008, Xian Tianxing paid interest of $ 0 and $3,695,
respectively, for these loans.
(3) As
of December 31, 2009 and December 31, 2008, the Company had
$302,372 (representing 47,334 common shares) and $95,204
balances (representing 22,000 common shares), respectively, under
agreement to issue shares to Scott Cramer as compensation for being a
representative of the Company in the United States for the periods from May
2008 to December 31, 2009, and December 31, 2008, respectively. In
addition, as of December 31, 2009, the Company had $25,002 balance (representing
5,556 common shares) under agreement to issue shares to Mark D. Chen as
compensation at the beginning of each term of his directorship.
See
report of independent registered public accounting firm.
F-26
(4)
Shaanxi Xinji Electronics Co., Ltd. is owned by the wife of Weibing Lu. The
amounts due to Shaanxi Xinji Electronics as of December 31, 2009 and December
31, 2008 were short-term cash transfers for business operations, non-interest
bearing, unsecured, and payable upon demand. As of December 31, 2009, the
Company also had $41,468 payable to officers and shareholders for
advance for short-term financing purposes. As of December 31, 2009 and
December 31, 2008, the Company also had amounts due to Scott Cramer for
bonus and Scott Cramer and Bennet P. Tchaikovsky the expenses paid by them on
behalf of the Company.
Note
20 - COMMITMENTS AND CONTINGENCIES
(a) Lease
commitments
The
Company recognizes lease expense on a straight-line basis over the term of the
lease in accordance to the FASB’s accounting standard of accounting for leases.
The Company entered into a tenancy agreement for the lease of factory premises
for a period of ten years from October 1, 2004 to December 31, 2014, with annual
rent of $13,563 (or RMB 94,600), which is subject to a 10% increase every four
subsequent years.
The
Company leases office space from Weibing Lu, the Company’s chief executive
officer, for a period of five years from January 1, 2007 to December 31, 2011,
with annual rent of approximately $24,000 (or RMB 165,600). The Company also
entered into a tenancy agreement with Weibing Lu for the lease of Shanghai
Siqiang’s office for a period of ten years from August 1, 2007 to August 1,
2017, with annual rent of approximately $21,000 (or RMB 144,000).
The
Company entered into a tenancy agreement for the lease of an office space in
California for a period of three years from July 1, 2009 to July 1, 2012 with
monthly rent of $1,100.
The
minimum future lease payments for the next five years and thereafter are as
follows:
Period
|
Amount
|
|||
Year
ending December 31, 2010
|
$
|
61,195
|
||
Year
ending December 31, 2011
|
61,195
|
|||
Year
ending December 31, 2012
|
35,949
|
|||
Year
ending December 31, 2013
|
34,981
|
|||
Year
ending December 31, 2014
|
34,981
|
|||
Year
ending December 31, 2015 and thereafter
|
56,298
|
|||
Total
|
$
|
284,599
|
Rental
expense for the years ended December 31, 2009 and 2008 amounted to $63,660 and
$63,303, respectively.
(b) Legal
proceedings
From time
to time, the Company is involved in legal
matters arising in the ordinary course of business. Management
currently is not
aware of any legal matters or pending litigation, which would have a significant
effect on the Company’s consolidated financial statements as of December 31,
2009.
In May
2007, Andrew Chien filed suit against the Company, Scott Cramer, Steve Lowe,
David Wassung and Weibing Lu in United States District Court for the District of
Connecticut, alleging causes of action for violation of Sections 10(b) and 20(a)
of the Exchange Act. On July 17, 2008, in a decision that is now published, the
Court granted defendants' motion to dismiss and subsequently dismissed the
lawsuit, entering judgment on behalf of the defendants. Mr. Chien filed a notice
of appeal of the Court's dismissal of his lawsuit, opposed by the defendants,
which remains pending. Additionally, on February 5, 2009, the Court issued a
ruling on defendants' motion for sanctions, finding the action filed by Mr.
Chien to have been entirely frivolous, and to have constituted a "substantial"
violation of Federal Rule of Civil Procedure Rule 11, and imposed significant
monetary sanctions on both Mr. Chien and his former attorney. As part of the
basis for imposing sanctions on Mr. Chien personally, the Court specifically
found that Mr. Chien had knowledge of facts directly contradicting the
allegations of his complaint, as evident in internet postings he made on online
message boards. Mr. Chien subsequently filed motions seeking to "re-open" this
case, and to recuse the judge, but both motions were denied. A Notice of Appeal
concerning the ruling awarding sanctions against him was also filed by Mr.
Chien. All appeals, including the one referenced below concerning Mr.
Chien's second lawsuit, were subsequently consolidated and remain pending,
although briefing has been completed.
See
report of independent registered public accounting firm.
F-27
Subsequently,
Mr. Chien, proceeding pro se, filed another lawsuit against the Company, Scott
Cramer, Steve Lowe, David Wassung and Weibing Lu in Connecticut Superior Court,
alleging causes of action similar to those alleged in his federal complaint
described above as well as state law causes of action. The case was removed to
the U.S. District Court, District of Connecticut, and assigned to the same Judge
who dismissed Mr. Chien’s related federal action. On June 8, 2009, the Court
granted defendants’ motion to dismiss this action in its entirety, and denied
Mr. Chien’s motion to further amend his complaint. Mr. Chien filed a Notice of
Appeal concerning the ruling dismissing this lawsuit, which has been
consolidated with Mr. Chien’s appeal of his other lawsuit.
Other
than the above described legal proceedings, the Company is not aware of any
other legal matters in which purchasers, any director, officer, or any owner of
record or beneficial owner of more than five percent of any class of voting
securities of the Company, or any affiliate of purchaser, or of any such
director, officer, affiliate of the Company, or security holder, is a party
adverse to the Company or has a material adverse interest to the Company. No
provision has been made in the consolidated financial statements for the above
contingencies.
(c) Ownership of leasehold
property
In 2005,
a shareholder contributed a leasehold office building as additional capital of
Xian Tianxing. However, the title of the leasehold property has not passed to
the Company. The Company does not believe there are any legal barriers for the
shareholder to transfer the ownership to the Company. However, in the event that
the Company fails to obtain the ownership certificate for the leasehold
property, there is a risk that the building will need to be vacated due to
unofficial ownership. Management believes that this possibility is remote, and
as such, no provision has been made in the consolidated financial statements for
this potential occurrence.
(d) R&D Project
During
the first quarter of 2008, Xian Tianxing contracted with Northwestern
Agricultural Technology University to jointly work on an R&D project
concerning the application of nano-technology in the prevention of major milk
cow disease. The total projected budget for this project is approximately
$574,000 (RMB 4 million) which is to be paid according to the completed
stages of the project. The Company expects this project to be completed in 2010.
As of December 31, 2009, the Company incurred approximately $102,627 (RMB
700,000) of expenses relating to this project. The project reached trial stage
in June 2009 and the Company expects to obtain veterinary permit for the new
product from government on 2010.
During
2008, Xian Tianxing contracted with Shanxi Shenzhou Bio-pharmaceuticals
Technology Company to jointly work on a R&D project with a contracted amount
of approximately $308,000. As of December 31, 2009, the Company
incurred approximately $102,627 (RMB 700,000) expenses relating to this project.
This project was completed by December 31, 2009.
During
the year ended December 31, 2009, Xian Tianxing contracted with the Fourth
Military Medical University to jointly work on a R&D project with a
contracted amount of approximated $880,200(RMB 6,000,000). As of December 31,
2009, the Company incurred approximately $704,314 (RMB 4,804,000) expenses
relating to this project.
Note
21 - SUBSEQUENT EVENTS
On
January 19, 2010, a holder of 45,000 warrants issued in February 2007 and priced
at $6.00 per share which were set to expire in February 2010, exercised their
cashless option which resulted in the issuance of 21,148 shares.
On
January 19, 2010, a holder of 57,050 warrants issued in February 2007 and priced
at $5.00 per share which were to expire in February 2012, exercised their
cashless option which resulted in the issuance of 31,851 shares.
On
January 20, 2010, a holder of 100,000 warrants issued in February 2007 and
priced at $6.00 per share which were set to expire in February 2010, exercised
their cashless option which resulted in the issuance of 47,670
shares.
See
report of independent registered public accounting firm.
F-28