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dfh

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Friday, 09/28/2012 4:08:38 PM

Friday, September 28, 2012 4:08:38 PM

Post# of 136
Form 10-K for BOHAI PHARMACEUTICALS GROUP, INC.

28-Sep-2012

Annual Report


Item 7. Management's Discussion and Analysis or Plan of Operation.

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in our audited consolidated financial statements for the twelve months ended June 30, 2012 and 2011, and should be read in conjunction with such financial statements and related notes included in this Annual Report. Those statements in the following discussion that are not historical in nature should be considered to be forward looking statements that are inherently uncertain. Actual results and the timing of the events may differ materially from those contained in these forward looking statements due to a number of factors, including those discussed in the "Cautionary Note on Forward Looking Statements" set forth elsewhere in this Annual Report.

Overview

We are engaged in the production, manufacturing and distribution in China of herbal pharmaceuticals based on traditional Chinese medicine, which we refer to herein as Traditional Chinese Medicine, or TCM. We are based in the city of Yantai, Shandong Province, China and our operations are exclusively in China.

Our medicines address rheumatoid arthritis, viral infections, gynecological diseases, cardio vascular issues and respiratory diseases. Our initial operating subsidiary Bohai obtained Drug Approval Numbers (or DANs) for 29 varieties of traditional Chinese herbal medicines in 2004, an additional 14 varieties in December 2010. Through our acquisition of Yantai Tianzheng in August 2011, we obtained DANs for another 5 varieties in August 2011. We currently produce 19 varieties of approved traditional Chinese herbal medicines in seven delivery systems: tablets, granules, capsules, formulations, concentrated powder, tincture and medicinal wine. Of these 19 products, 12 are prescription drugs and 7 are over the counter (or OTC) products.

Three of Bohai's lead products, Tongbi Capsules and Tablets and Lung Nourishing Syrup, are eligible for reimbursement under China's National Medical Insurance Program (or NRDL), which we believe significantly increases the marketability of these products. In addition to these lead products, three of our current products and five of our formulas we acquired in 2010 are eligible for NRDL reimbursement. In addition, one of our current products and four of our newly acquired formulas are currently included on the Chinese government's Essential Drug List (or EDL). Inclusion on either the EDL or NRDL allows for up to 100% insurance coverage by the Chinese government. Yantai Tianzheng owns five prescription products approved by the State Food and Drug Administration of China (which we refer to herein as the SFDA) and currently manufactures four of such products. Among Yantai Tianzheng's products, Fangfengtongsheng Granule has an exclusive status and is on the EDL and NDRL, and Zhengxintai Capsule has renewed its protective status to August 2017 and is currently under the NDRL.

Prior to January 5, 2010, we were a public "shell" company operating under the name "Link Resources, Inc." On January 5, 2010, we consummated a share exchange transaction (the "Share Exchange") pursuant to which we acquired Chance High, the indirect parent company of Bohai, our principal operating subsidiary, which is a Chinese variable interest entity that we (through a Chinese wholly-owned foreign enterprise subsidiary) control through certain contractual arrangements. On August 8, 2011, WFOE II, a PRC company and a newly formed subsidiary of Chance High, entered into a Share Purchase Agreement pursuant to which we acquired, from the three individual holders thereof, one hundred percent (100%) of the outstanding shares of Yantai Tianzheng, which became our second operating subsidiary effective as of July 1, 2011.

Use of Non-GAAP Financial Measures

We make reference to Non-GAAP financial measures in portions of this "Management's Discussion of Financial Condition and Results of Operations". Management believes that investors may find it useful to review our financial results that exclude certain non-cash income and expense, namely the aggregate change in the fair value of our warrants, amortization of the beneficial conversion features in our convertible notes and the effective interest charges on our convertible notes, stock-based compensation, and deferred income tax expenses as shown in the chart below in the aggregate net amount of $9,465,207 and $(2,234,879) income/(expenses) for the twelve months ended June 30, 2012 and 2011, respectively.

Management believes that these Non-GAAP financial measures are useful to investors in that they provide supplemental information to intend to enhance our investors' understanding of the underlying business trends and operating performance of our Company. We use these Non-GAAP financial measures to evaluate operating performance. However, Non-GAAP financial measures should not be considered as either a substitute or alternative measurement of net income or any other performance measures derived in accordance with GAAP.

The following is a summary of reconciliations of such Non-GAAP financial measures to the most directly comparable GAAP financial measures for the fiscal years ended June 30, 2012 and 2011:

Twelve Months Ended
June 30,
Increase
2012 2011 (Decrease)
Net income available to Common shareholders
-GAAP $ 9,648,025 $ 14,004,875 $ (4,356,850 )
Add Back (Subtract):
Change in fair value of warrants 273,369 (a) (4,544,061 )(a) 4,817,430
Amortization of beneficial conversion
features on convertible notes converted 9,317,897 (a) 1,029,487 (a) 8,288,410
Change in Option and Equity Based
Compensation 44,000 (b) 209,527 (b) (165,527 )
Deferred income tax expenses - indefinite
intangible assets (170,059 )(c) 1,070,168 (c) (1,240,227 )
Adjusted net income available to Common
shareholders -non-GAAP $ 19,113,232 $ 11,769,996 $ 7,343,236
Net income margins -non-GAAP 13.91 % 14.47 % (0.56 )%
Basic earning per share - GAAP $ 0.54 $ 0.81 $ (0.27 )
Add back (Subtract):
Change in fair value of warrants 0.02 (a) (0.26 )(a) 0.28
Amortization of beneficial conversion
features on convertible notes converted 0.52 (a) 0.06 (a) 0.46
Change in Option and Equity Based
Compensation 0.00 (b) 0.01 (b) (0.01 )
Deferred tax expenses - indefinite
intangible assets (0.01 )(c) 0.06 (c) (0.07 )
Adjusted basic earning per share non-GAAP $ 1.07 $ 0.68 $ 0.39

Diluted earning per share-GAAP $ 0.54 $ 0.75 $ (0.21 )
Add back (Subtract):
Change in fair value of warrants 0.02 (a) (0.20 )(a) 0.22
Amortization of beneficial conversion
features on convertible notes converted 0.52 (a) 0.05 (a) 0.47
Change in Option and Equity Based
Compensation 0.00 (b) 0.01 (b) (0.01 )
Deferred tax expenses - indefinite
intangible assets (0.01 )(c) 0.05 (c) (0.06 )
Adjusted diluted earning per share non-GAAP $ 1.07 $ 0.66 $ 0.41

Weighted average number of shares
Basic 17,861,085 17,198,917
Diluted 17,861,085 22,423,917

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