American Oriental Bioengineering: Questionable Acquisitions

GLP Acquisition:

On April 18, 2006, American Oriental Bioengineering, Inc. (AOB) completed the acquisition of a privately-held Chinese company called Guangxi Lingfeng Pharmaceutical Company Limited (“GLP”). AOB paid approximately $24.5 million for GLP, comprised of $18.9 million in cash and $5.6 million in stock, according to AOB’s 2006 10-K.

AOB’s Form 8-K dated June 30, 2006 shows that AOB acquired GLP from an individual, Yu Xiaosheng, who owned 100% of the company. Xiaosheng is shown owning 29% of GLP at December 31, 2005, but then acquired the other 71% in February 2006 for $707,554, according to the 8-K.

Two months later Yu Xiaosheng sold his GLP shares to AOB for $24.5 million.

Based upon AOB’s filing it appears that Xiaosheng “flipped” the newly-acquired 71% of GLP to AOB for approximately $17.4 million, over 24 times his cost just two months later. AOB’s SEC filings do not appear to provide any explanation for this transaction.

Filings with the China State Administration for Industry and Commerce (“SAIC”) show that Xiaosheng appears to have been a significant stakeholder in AOB’s operating company, Harbin Three Happiness Bioengineering Co., Ltd., prior to its reverse merger with a U.S. shell in 2002.

The attached document shows that 25% of Harbin Three Happiness was acquired by Harbin Xiaosheng Advertising Company (see translation). AOB’s 8-K filed June 30, 2006 states that Harbin Xiaosheng Advertising is owned by Yu Xiaosheng.

Despite the Chinese filing showing Xiaosheng Advertising’s 25% stake in Harbin Three Happiness, neither Xiaosheng Advertising nor Yu Xiaosheng appears as a shareholder in AOB’s reverse merger.

CAXG Acquisition:

On April 16, 2008, American Oriental Bioengineering, Inc. (NYSE: AOB $4.57) paid $18 million in cash for a 38% stake in China Aoxing Pharmaceutical Co., Inc. (CAXG.OB), according to AOB’s and CAXG’s SEC filings. (See AOB’s filing and CAXG’s filing.) According to CAXG’s 2008 10-K, on April 16, 2008, CAXG ‘simultaneously’ acquired Shijazhuang Lerentang Pharmaceutical Company, Ltd. (“LRT”) for $22.9 million, comprised of $12.4 million in cash from the funds it received from AOB and 8 million shares of CAXG common stock valued at $10.5 million.

One year before AOB’s investment in CAXG (and CAXG’s simultaneous acquisition of LRT), CAXG stated that it had signed a letter of intent to acquire LRT for “approximately $10 Million,” according to CAXG’s 2007 10-K.

Like AOB, CAXG is a Chinese company listed in the U.S. through a reverse merger. AOB’s CAXG investment presents several issues.

CAXG’s auditor is a firm called Paritz & Company, P.A. Paritz has one office in Hackensack, New Jersey.

Paritz has given CAXG a “going concern” qualification for the past four consecutive years, commencing in 2006, two years prior to AOB’s investment. Even after AOB’s investment, Paritz still found that CAXG’s working capital deficit raises “substantial doubt about its ability to continue as a going concern.” The auditor also notes that “the Company is in default of the repayment of note payable-bank of $6,094,428.” (Click here to see auditor’s letters from past four CAXG 10-Ks.)

CAXG’s restated 2007 earnings show interest expense of more than $16 million with under $2 million of revenue. CAXG also restated its earnings for 2006. (Click here to see 2006 and 2007 income statement.)

In 2008, CAXG recorded a gain on “change in fair value of warrant and derivative liabilities” of $8.5 million, which was greater than CAXG’s $7.1 million in revenue for the year. (Click here to see 2008 and 2009 income statement.)

CAXG reported an operating loss each fiscal year since its reverse merger in 2006.

AOB and CAXG appear to be connected by Warner Technology and Investment Corp. and possibly American Union Securities.

Warner obtained an option to acquire 551,415 CAXG shares in connection with CAXG’s reverse merger, and also later served as consultant. Warner’s English website describes its business as “assisting private companies seeking to become public company [sic] through IPO or reverse merger processes” and cites AOB as one of its “case studies”. Warner also appears as an agent for AOB in certain of AOB’s SEC filings from 2002, around the time of AOB’s reverse merger. Warner’s Chinese website shows a statement from Huakang Zhou, Warner’s chairman, discussing arranging CAXG’s reverse merger and working with American Union Securities to arrange financing for CAXG (see translation).

American Union Securities is currently majority owned by Dong Dong “Peter” Zhou, who may be related to Huakang Zhou of Warner. American Union’s founder, former majority owner and former President, John C. Leo, was a director of CAXG from the time of CAXG’s reverse merger in April 2006 until January 2007.

A person named Jason Liu has appeared on websites for Warner and American Union apparently as an employee of Warner and consultant to American Union. A Jason Liu also appears as a shareholder of a Hong Kong company, Silver Linkage Holdings Limited, where AOB’s Chairman Tony Liu is the controlling shareholder, according to filings with the Hong Kong Companies Registry (“HKCR”). Silver Linkage is discussed in a previous asensio.com report. HKCR filings show Jason Liu transferring his Silver Linkage shares to Tony Liu in 2008. Like Tony Liu, Jason Liu is listed in HKCR filings with a passport from the Commonwealth of Dominica, with a passport number two digits apart from Tony Liu’s.

Disclosure: No position in AOB.

Comments

[China Expert:]

Regarding CAXG....I guess the author simply "forgot" that On August 6, 2009 China Aoxing Pharmaceutical Company completed the sale of 5,263,158 shares of its common stock to fifteen investors. The shares were sold for $.95 per share in cash for total proceeds of $5,000,000. Someone put a "value" on this company clearly more than AOB paid...and now the company continues to be funded. Oooo one other thing... I guess the author failed to mention the list of 14 proprietary drugs that CAXG will be marketing over the next 2-3 years. Gee.... I wonder what the "new cash" and "new drugs" will do for the "going concern" statement going forward that auditor included as the company was in the development stage ? Someone these "minor" details slipped the author's mind..... Ooops I forgot the author would say . Gee....also.... maybe the author also forgot that most drug development companies incurr losses and bear the "going concern" off and on until their products go to market. I wonder who might help CAXG distribute these new drugs ? Gee... I wonder ??? Just maybe CAXG will become very profitable and AOB will look like a FOX for purchasing a company with very unique drugs that will result in both financial and strategic success. But I guess these facts are NOT important and that is why they slipped the authors mind. Darn how that happens !

Nov 12 02:50 PM

[KongPL:]

and the China expert here forgot that these drugs are "unique" only in the minds of the CAXG guys. Wow, 14 innovative proprietary drugs, in 2-3 years.....Pfizer would be licking its fingers to get the hands just on two of them and pay a few 100 million for this! Just to put it in perspective: most drug companies spend a few USDbillion every year on R&D, without the guarantee of a single drug coming out of that. And here we have a company that spends/loses a few million and has 14 (!). Get real, AOB is the hype Asensio makes it. I have followed the case since a few years, and no facts have emerged that would make me change my judgment.


On Nov 12 02:50 PM China Expert wrote:

> Regarding CAXG....I guess the author simply "forgot" that On August
> 6, 2009 China Aoxing Pharmaceutical Company completed the sale of
> 5,263,158 shares of its common stock to fifteen investors. The shares
> were sold for $.95 per share in cash for total proceeds of $5,000,000.
> Someone put a "value" on this company clearly more than AOB paid...and
> now the company continues to be funded. Oooo one other thing... I
> guess the author failed to mention the list of 14 proprietary drugs
> that CAXG will be marketing over the next 2-3 years. Gee.... I wonder
> what the "new cash" and "new drugs" will do for the "going concern"
> statement going forward that auditor included as the company was
> in the development stage ? Someone these "minor" details slipped
> the author's mind..... Ooops I forgot the author would say . Gee....also....
> maybe the author also forgot that most drug development companies
> incurr losses and bear the "going concern" off and on until their
> products go to market. I wonder who might help CAXG distribute these
> new drugs ? Gee... I wonder ??? Just maybe CAXG will become very
> profitable and AOB will look like a FOX for purchasing a company
> with very unique drugs that will result in both financial and strategic
> success. But I guess these facts are NOT important and that is why
> they slipped the authors mind. Darn how that happens !

Nov 19 08:26 PM