Annual Report 3/30/06
for 2005
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS
This annual report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "AOB believes," "management believes" and similar language. The forward-looking statements are based on the current expectations of AOB and are subject to certain risks, uncertainties and assumptions, including those set forth in the discussion under "Description of Business" and "Management's Discussion and Analysis or Plan of Operation," including the discussion under "Risk Factors" thereunder. The actual results may differ materially from results anticipated in these forward-looking statements. We base the forward-looking statements on information currently available to us, and we assume no obligation to update them.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have identified one policy area as critical to the understanding of our consolidated financial statements. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting periods. With respect to net realizable value of the Company's accounts receivable and inventories, significant estimation judgments are made and actual results could differ materially from these estimates.
In 2005, the management of the Company provided an allowance against its accounts receivable to reflect management's expectation on the collectibility of aged accounts receivable. Management's estimation of the reserve on accounts receivable at December 31, 2005 was based on the current facts that there are aged accounts receivable. In making their judgment, management has assessed customers' ability to continue to pay their outstanding invoices timely, and whether their financial position will deteriorate significantly in the future, which would result in their inability to pay their debts to the Company. At December 31, 2005, the Company provided a $266,248 reserve against accounts receivable pertaining to the HSPL subsidiary operations.
At December 31, 2005, the Company provided an allowance against its inventories amounting to $842,112, of which $107,364 was provided against the inventories of Harbin Bioengineering and $734,748 was provided against the inventories of HSPL. Management's estimation that a provision is needed is based on the current facts that there are potential impairments on the current carrying value of the inventories due to potential obsolescence as a result of aged inventories. The Company might not be able to realize the existing carrying value of the inventories. In making their judgment, management made their estimations of the potential impairments based on the demand for their products in the future and the trends of turnover of the inventories.
While the Company's management currently believes that there is little likelihood that the actual results of their current estimates will differ materially from such current estimates, if customer demand for its products decreases significantly in the near future, or if the financial position of its customers deteriorates in the near future, the Company could realize significant write downs for slow moving inventories or uncollectible accounts receivable.
We believe the following is among the most critical accounting policies that impact our consolidated financial statements. We suggest that our significant accounting policies, as described in our consolidated financial statements in the Summary of Significant Accounting Policies, be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations.
We recognize revenue in accordance with Staff Accounting Bulletin ("SAB") No. 104. All of the following criteria must exist in order for us to recognize revenue:
1. Persuasive evidence of an arrangement exists;
2. Delivery has occurred or services have been rendered;
3. The seller's price to the buyer is fixed or determinable; and
4. Collectibility is reasonably assured.
The majority of the Company's revenue results from sales contracts with distributors and revenues are generated upon the shipment of goods. The Company's pricing structure is fixed and there are no rebate or discount programs. Management conducts credit background checks for new customers as a means to reduce the subjectivity of assuring collectibility. Based on these factors, the Company believes that it can apply the provisions of SAB 104 with minimal subjectivity.
We established a subsidiary in Hong Kong with a specialty store to sell our products. Our subsidiary in Hong Kong also sells certain products to certain customers on consignment. We record revenue for consignment transactions when the consignee sells the product to the end user.
RESULTS OF OPERATIONS
The following table sets forth selected statement of income data as a percentage of revenues for the years indicated.
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2005 2004
------------ ------------
Revenues 100.00% 100.00%
Cost of Goods Sold 35.82% 35.25%
Gross Profit 64.18% 64.75%
Selling and Distribution Expenses 5.88% 7.47%
Advertising 9.57% 9.16%
General and Administrative Expenses 12.93% 14.23%
Depreciation and Amortization 2.29% 2.37%
Interest Expense, Net 0.92% 0.32%
Income Taxes 8.04% 6.93%
Net Income 24.53% 24.31%
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
Revenues, Cost of Goods Sold and Gross Profit
---------------------------------------------
Revenues for the year ended December 31, 2005 were $54,732,557, an
increase of $22,765,630 from $31,966,927 for the year ended December 31, 2004.
The increases in sales of our two main categories of products were as follows:
Increase /
Product 2005 2004 (Decrease)
------------------ -------------- -------------- --------------
PBP products $ 34,184,853 $ 15,941,246 $ 18,243,607
PBN products 20,547,704 16,025,681 4,522,023
-------------- -------------- --------------
TOTAL $ 54,732,557 $ 31,966,927 $ 22,765,630
============== ============== ==============
In 2005, the sales of our PBP products increased by $18,243,607, or 114% as compared to 2004. This was mainly due to an increase in our sales of Cease Enuresis Soft Gel by 52% from $6,628,210 in 2004 to $10,073,289 in 2005. Our continued marketing efforts on Cease Enuresis Soft Gel together with the growing demand of such product in the Chinese market resulted in increased sales of our Cease Enuresis Soft Gel. The sales of our Shuanghuanglian Injection Powder produced by HSPL also increased from $4,985,768 in 2004 to $16,288,193 in 2005 by 227%. Such increase was due to the fact that in 2004, there were only 3 months of sales of Shuanghuanglian Injection Powder consolidated into the sales performance of our Company, while in 2005 we consolidated 12 months of sales total of Shuanghuanglian Injection Powder into our sales revenue. UrinStopper Patch, our new product in 2005, also recorded sales revenue of $1,845,130 that did not happen in 2004. Compared to 2004, the sales revenues from other PBP products also increased by $1,650,973 in 2005.
The sales revenue from our PBN products increased to $20,547,704 in 2005 from $16,025,681 in 2004, representing a growth of 28%. During 2005, our sales of Protein Peptide products series increased by 32% from $11,423,092 in 2004 to $15,061,386 in 2005. Such increase was mainly attributable to increased sales of peptide coffee and peptide tablets of $1,235,011 and $2,321,443, respectively, in 2005 as compared to 2004. Our sales of Compound bio-functional beverage series also increased from $2,616,866 in 2004 to $3,464,314 in 2005, representing an increase of 32%. Such increase resulted from our marketing efforts on such products. Other PBN products recorded an increase in sales from $1,986,158 in 2004 to $2,022,004 in 2005, or an increase of $35,846.
Cost of goods sold for the year ended December 31, 2005 were $19,607,240, an increase of $8,339,593 from $11,267,647 for the year ended December 31, 2004. The increases by product categories were as follows:
Increase /
Product 2005 2004 (Decrease)
------------------ -------------- ------------- --------------
PBP products $ 12,483,535 $ 5,887,657 $ 6,595,878
PBN products 7,123,705 5,379,990 1,743,715
-------------- ------------- --------------
TOTAL $ 19,607,240 $ 11,267,647 $ 8,339,593
============== ============= ==============
The cost of goods sold of PBP products increased by $6,595,878, or 112% in 2005 compared to 2004. This increase resulted from our 114% increase in sales revenue from our PBP products in 2005 compared to 2004.
The cost of goods sold of PBN products increased by $1,743,715, or 32% in 2005 compared to 2004. This increase resulted from our 28% increase in sales revenue from our PBN products in 2005 compared to 2004. The increase in cost of sales was higher in proportion than the increase in sales revenue because the profit margin of PBN products decreased from 65.3% in 2004 to 65.4% in 2005. The decrease in profit margin was mainly because of the increase in the cost of raw materials for the peptide protein products.
Our overall gross profit margin reduced from 64.8% in 2004 to 64.2% in 2005. This was mainly due to the fact that the gross profit margin of PBN products decreased from 66.4% in 2004 to 65.4% in 2005.
Selling and Distribution Expenses
---------------------------------
Selling and marketing expenses increased from $2,387,805 in 2004 to
$3,216,545 in 2005, representing a 35% increase. The detail of our sales and
distribution expenses were as follows:
Increase/
2005 2004 (Decrease)
----------- ----------- ----------
Payroll $ 883,919 $ 492,290 80%
Transportation 925,982 615,808 50%
Promotional materials and fees 504,672 431,161 17%
Offices and sundries 483,502 745,405 (35%)
AOB Hong Kong marketing 55,269 9,240 498%
AOB US marketing 9,448 1,635 478%
Other 353,753 92,266 283%
----------- -----------
TOTAL $3,216,545 $2,387,805 35%
=========== ===========
Our increase in selling and distribution expenses in 2005 against 2004 was as a result of increased selling and distribution expenses in our AOB US, AOB Hong Kong, Harbin Bioengineering and HSPL operations.
AOB US and AOB Hong Kong Operations
In 2005, our sales and distribution expenses for AOB Hong Kong and AOB US increased by 498% and 478%, respectively. This was because AOB Hong Kong marketing activities and AOB US marketing activities reached full operational levels in August, 2004 and October, 2004, respectively. As a result, the financial results of 2004 did not reflect full year operations in Hong Kong and US while the financial results of 2005 reflected the full year operations in these 2 regions.
Harbin Bioengineering and HSPL Operations
-----------------------------------------
For the year ended 2005, the detailed breakdowns of our sales and
distribution expenses incurred by Harbin Bioengineering and HSPL were as
follows:
PAYROLL Increase/
2005 2004 (Decrease)
----------- ----------- ----------
Harbin Bioengineering $ 649,083 $ 470,100 38%
HSPL 234,836 22,190 958%
----------- -----------
TOTAL $ 883,919 $ 492,290 80%
=========== ===========
In 2005, our payroll expenses for Harbin Bioengineering increased by 38% due to the increase in the number of employees. HSPL increased its payroll expenses by 958% in 2005 compared to 2004. We completed our acquisition of HSPL in the fourth quarter of 2004 and as a result, the financial statements of our Company reflected only approximately 3 months' operating results of HSPL. However, we consolidated a full year of operations of HSPL in 2005. Therefore, expenses increased in 2005 as compared to 2004.
Increase/
2005 2004 (Decrease)
----------- ----------- ----------
Transportation
Harbin Bioengineering $ 705,605 $ 609,901 16%
HSPL 220,377 5,907 3631%
Promotional materials and fees
Harbin Bioengineering 371,604 423,932 (12%)
HSPL 133,068 7,229 1741%
Offices and sundries
Harbin Bioengineering 315,260 724,013 (56%)
HSPL 168,242 21,392 686%
Other
Harbin Bioengineering 56,847 71,792 (21%)
HSPL 296,906 20,474 1350%
----------- -----------
TOTAL non payroll $2,267,909 $1,884,640 20%
=========== ===========
Transportation expenses for Harbin Bioengineering increased by 16% in 2005 against 2004 as a result of increased sales revenues in 2005. HSPL also increased its transportation expenses by 3631%. This was because we completed our acquisition of HSPL in the fourth quarter of 2004 and as a result, the financials of our Company reflected only approximately 3 months' operating results of HSPL. However, we consolidated full year operation results of HSPL in 2005. Therefore, expenses increased in 2005 as compared to 2004.
Harbin Bioengineering reduced its promotional materials expenses by 12% in 2005 compared to 2004. This was because in 2004 our spending on promotional materials covered a portion of our requirements in 2005 and as a result, our spending in 2005 was reduced as compared to 2004. HSPL, however, increased its expenses in promotional materials by 1741% in 2005 as compared to 2004. We completed our acquisition of HSPL in the fourth quarter of 2004 and as a result, the financials of our Company reflected only approximately 3 months' operating results of HSPL. However, we consolidated full year operation results of HSPL in 2005. Therefore, expenses increased in 2005 as compared to 2004.
Harbin Bioengineering reduced its office sundries expenses by 56% in 2005 compared to 2004. This was because in 2004 our spending on office sundries covered a portion of our requirements in 2005 and as a result, our spending in 2005 was reduced as compared to 2004. HSPL, however, increased its expenses in office sundries by 686% in 2005 as compared to 2004. We completed our acquisition of HSPL in the fourth quarter of 2004 and as a result, the financials of our Company reflected only approximately 3 months' operating results of HSPL. However, we consolidated full year operation results of HSPL in 2005. Therefore, expenses increased in 2005 as compared to 2004.
As a result of the increase in selling and distribution expenses in HSPL, our overall selling and distribution expenses increased by 35% in 2005 as compared to 2004.
Advertising Expenses
Advertising expenses increased by $2,311,557, from $2,926,629 in 2004 to $5,238,186 in 2005. The increase in advertising expenses resulted from an increase in advertising and promotional efforts in 2005 to promote the Company's Protein Peptide product series and new products of Urinstopper Capsule and UrinStopper Patch to increase the sales revenues of our PBP and PBN products.
General and Administrative Expenses
-----------------------------------
General and administrative expenses increased from $4,582,388 in 2004
to $7,076,139 in 2005, or a 54% increase. The details of general and
administrative expenses were as follows:
Increase/
2005 2004 (Decrease)
---------- ---------- ----------
Payroll $ 897,422 $ 536,099 67%
Directors' remuneration 442,000 275,250 61%
Stock compensation - directors 327,509 32,000 923%
Stock compensation - consultants 934,032 1,072,790 (13%)
Office rental 184,570 23,758 677%
Professional fees 1,359,319 498,065 173%
Office sundries 177,426 302,855 (41%)
Transportation 66,337 29,567 124%
Vehicles 192,057 193,118 (1%)
Utilities 175,948 89,908 96%
Research 537,795 309,302 74%
Entertainment 170,206 282,854 (40%)
Provision for bad debts 266,248 -- 100%
Provision for obsolete inventories 842,112 -- 100%
Miscellaneous 503,158 936,822 (46%)
---------- ----------
TOTAL $7,076,139 $4,582,388 54%
========== ==========
Our increase in general and administrative expenses in 2005 against 2004 was as a result of increased general and administrative expenses in our AOB US, AOB Hong Kong, Harbin Bioengineering and HSPL operations.
AOB US and AOB Hong Kong Operations
------------------------------------
For the year ended 2005, the detailed breakdowns of our general and
administrative expenses incurred by AOB US and AOB Hong Kong offices were as
follows:
Increase/
2005 2004 (Decrease)
---------- ---------- ----------
AOB Hong Kong
Payroll $ 153,318 $ 115,385 33%
Office rental 128,983 14,608 783%
Professional fees 54,624 -- 100%
Office sundries 18,815 3,900 382%
Other 81,773 14,097 480%
---------- ----------
TOTAL AOB Hong Kong $ 437,513 $ 147,990 196%
========== ==========
AOB US
Payroll $ 94,522 $ 6,874 1275%
Directors' remuneration 442,000 275,250 61%
Stock compensation - directors 327,509 32,000 923%
Stock compensation - consultants 934,032 1,072,790 (13%)
Office rental 55,587 9,150 508%
Professional fees 1,304,695 498,065 162%
Office sundries 19,200 5,850 228%
Other 76,520 205,975 (63%)
---------- ----------
TOTAL AOB US $3,254,065 $2,105,954 55%
========== ==========
For the year ended 2005, general and administrative expenses incurred in the AOB Hong Kong office increased by 196% as compared to 2004. This was because AOB Hong Kong commenced full scale operations in approximately August 2004 and our general and administrative expenses in 2004 only reflected approximately 4 months of full scale operations while in 2005 a full year of operations were incorporated. As a result, there were increase in expenses in payroll, office rental, professional fees, office sundries and other expense in 2005 as compared to 2004.
For the year ended 2005, general and administrative expenses incurred in the AOB US office increased by 55% as compared to 2004. This was because AOB US commenced full scale operations in approximately October 2004 and our general and administrative expenses in 2004 only reflected approximately 3 months of full scale operations, while in 2005 full year of operations were incorporated. As a result, there were increases in expenses in payroll, office rental, office sundries and other expenses in 2005 as compared to 2004. Director remuneration and stock compensation for directors increased by 61% and 923%, respectively, as a result of the appointment of 2 new independent directors in 2005. Stock based compensation for consultants, however, decreased by 13% because some of the expenses for consultants were fully amortized in 2004 and, as a result, such expenses did not recur in 2005. Professional fees expenses for 2005 increased by 162% as compared to 2004 as a result of an increase in legal and audit services needs for our listing on AMEX and $60.0 million Private Placement.
Harbin Bioengineering and HSPL Operations
-----------------------------------------
For the years ended December 31, 2005 and 2004, the detailed breakdowns
of our general and administrative expenses incurred by Harbin Bioengineering and
HSPL were as follows:
PAYROLL: Increase/
2005 2004 (Decrease)
---------- ---------- ----------
Payroll
Harbin Bioengineering $ 486,918 $ 378,003 29%
HSPL 162,664 35,837 354%
---------- ----------
TOTAL $ 649,582 $ 413,840 57%
========== ==========
For the year ended 2005, our payroll expenses in Harbin Bioengineering increased by 29% as a result of an increased number of employees in 2005 against 2004. Our payroll expenses in HSPL also increased by 354%. This was because we completed our acquisition of HSPL in the fourth quarter of 2004 and, as a result, the financials of our Company in 2004 reflected only approximately 3 months' operating results of HSPL. However, we consolidated a full year of operations of HSPL in 2005. Therefore, expenses increased in 2005 as compared to 2004.
The breakdown for our non-payroll expenses in Harbin Bioengineering and HSPL were as follow:
NON - PAYROLL: Increase/
2005 2004 (Decrease)
---------- ---------- ----------
Research
Harbin Bioengineering $ 515,576 $ 276,562 86%
HSPL 22,219 32,740 (32%)
---------- ----------
TOTAL $ 537,795 $ 309,302 74%
========== ==========
Office sundries
Harbin Bioengineering $ 126,975 $ 290,802 (56%)
HSPL 12,436 2,303 440%
---------- ----------
TOTAL $ 139,411 $ 293,105 (52%)
========== ==========
Provision for bad debts
Harbin Bioengineering $ -- $ -- --
HSPL 266,248 -- 100%
---------- ----------
TOTAL $ 266,248 $ -- 100%
========== ==========
Provision for obsolete inventories
Harbin Bioengineering $ 107,364 $ -- 100%
HSPL 734,748 -- 100%
---------- ----------
TOTAL $ 842,112 $ -- 100%
========== ==========
Other
Harbin Bioengineering $ 619,365 $ 991,714 (38%)
HSPL 330,048 320,483 3%
---------- ----------
TOTAL $ 949,413 $1,312,197 (28%)
========== ==========
In 2005, Harbin Bioengineering increased its research expenses by 86% as compared to 2004. This was because Harbin Bioengineering devoted additional resources to research on new products of UrinStopper Capsule and UrinStopper Patch and, as a result of such research effort, Harbin Bioengineering successfully launched new products to the market in 2005. HSPL also incurred research expenses of $22,219 while there was no research expense in 2004. Such research expenses were incurred on improving Shuanghuanglian Injection Powder. . . . |
