ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
Tianyin Pharmaceutical Co., Inc (“TPI” or “the Company”, together with its subsidiaries, herein referred to as “we” “us” and “our”) is a pharmaceutical company. Through our indirect wholly-owned subsidiary Chengdu Tianyin Pharmaceutical Co., Ltd. (“Chengdu Tianyin”), a corporation organized and existing under the laws of the People’s Republic of China (“PRC”), we are engaged primarily in the development, manufacturing, marketing and sales of patented biopharmaceutical medicines, branded generics, modernized traditional Chinese medicines and other pharmaceuticals in China. We currently manufacture a comprehensive portfolio of 58 products, 24 of which are listed in the highly selective National Medical Reimbursement List (“NMRL”) and 7 are listed in the Essential Drug List (“EDL”) of China.
Tianyin Pharmaceutical Co., Inc, previously called Viscorp, Inc., was originally formed as a limited liability company under the laws of the State of Delaware on August 20, 2002. In March 2006, Viscorp changed its status from an LLC to a corporation registered in the State of Delaware. Prior to the Share Exchange transaction described below, Viscorp operated as a developer and retailer of software for optometrists. However, Viscorp did not generate any significant revenue and determined to pursue an acquisition strategy, whereby it sought to acquire a business with a history of operating revenues in markets that provide room for growth. Immediately prior to the Share Exchange under which we acquired Chengdu Tianyin, Viscorp sold all of its assets (consisting solely of the software it had developed) to Charles Driscoll for $100.00. The common stock of the Company currently trades on the NYSE Amex under the symbol “TPI.”
CHENGDU TIANYIN
Chengdu Tianyin, located in Chengdu, Sichuan Province of China, was established in 1994 and acquired by the current management of the Company in 2003. Chengdu Tianyin delivered total revenue of $95.2 million with net income of $15.6 million for the fiscal year ended June 30, 2011, up 48.9% from revenue of $63.9 million and up 31.1% from net income of $11.9 million respectively for the fiscal year ended June 30, 2010.
ACQUISITION OF OUR OPERATING BUSINESS
On January 16, 2008, we entered into and consummated the transactions (the “Share Exchange”) contemplated under a Securities Exchange Agreement (the “Share Exchange Agreement”) by and among us, Raygere Limited (“Raygere”), a company organized under the laws of the British Virgin Islands (“BVI”) and Time Poly Management Limited (“Time Poly”), Happyvale Limited (“Happyvale”) and Fartop Management Limited (“Fartop”), each a BVI company, and Cmark Holding Co., Ltd. (“Cmark”), an exempted company organized under the laws of the Cayman Islands. At the time of the Share Exchange, Time Poly, Happyvale, Fartop and Cmark owed collectively 100% of the capital stock of Raygere. Under the terms of the Share Exchange Agreement, the Raygere stockholders transferred to the Company all the shares of Raygere and Raygere became a wholly-owned subsidiary of the Company. As part of the Share Exchange, the shareholders of Raygere were issued 12,790,800 shares of the Company’s common stock, which represented 87.7% of the 14,587,200 issued and outstanding shares of the Company’s common stock immediately following the Share Exchange.
Raygere was incorporated in the BVI on January 26, 2007 and formed a Hong Kong subsidiary, Grandway Group Holdings Ltd. (“Grandway”) in May 2007. On October 30, 2007, Grandway acquired 100% of the equity interests of Chengdu TianyinPharmaceutical Co., Ltd., our indirect wholly owned subsidiary located in Chengdu, Sichuan Province of the People’s Republic of China that operates our current business, pursuant to a sales and purchase agreement with three of the existing shareholders (“Original Shareholders”) of Chengdu Tianyin, pursuant to which Grandway purchased 100% of the equity interest in Chengdu Tianyin. This transfer was approved by the Bureau of Foreign Trade and Economic Cooperation of Chengdu Economic Technology Development Administration Committee on October 30, 2007, and the registration with the Chengdu Administration of Industry and Commerce was completed on November 5, 2007. As a result of this transfer, Grandway acquired 100% of the equity of Chengdu Tianyin.
As a result of the Company’s acquisition of Raygere, Chengdu Tianyin became our indirect wholly-owned subsidiary. Substantially, all of our operations are conducted in China through Chengdu Tianyin. The transaction was regarded as a reverse merger whereby Raygere was considered to be the accounting acquirer of the Company after the exchange. Although the Company is the legal parent company, Raygere is the continuing entity for financial reporting purposes. In addition, the Company ceased being a shell corporation as that term is defined in Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act.
In accordance with the terms of the Share Exchange Agreement, Charles Driscoll resigned as the Company’s Chief Executive Officer, Chief Financial Officer and President, and also tendered his resignation as our sole director, which became effective on February 15, 2008. Dr. Guoqing Jiang was appointed to serve as the Chairman of our board and our Chief Executive Officer, effective as of the close of the Share Exchange, and nominated Mr. Stewart Lor to serve as one of our directors with such appointment to be effective on February 15, 2008. As of February 29, 2008, our board was expanded by three persons to include Professor Zunjian Zhang, Ph.D., Professor JianpingHou, Ph.D. and Mr. James T. McCubbin.
POST-ACQUISTIION
On January 14, 2008, a majority of our shareholders approved, via written consent, the following actions, as set forth in our Information Statement on Schedule 14C, which was filed on February 11, 2008:
1. To change our corporate name to TIANYIN PHARMACEUTICAL CO., INC.
2. To authorize 25,000,000 shares of preferred stock with a par value of $0.001.
We filed a certificate of amendment to our articles of incorporation with Delaware’s Secretary of State to effect these actions, which became effective on March 11, 2008, and as of such date, our corporate name changed to Tianyin Pharmaceutical Co., Inc. and our authorized capital increased by 25,000,000 shares of preferred stock. Pursuant to the financings we closed in January 2008 and the authority vested in our Board of Directors, we also filed a certificate of designation with Delaware’s Secretary of State to designate 10,000,000 of the 25,000,000 shares of preferred stock as Series A preferred stock. Our current authorized capital now consists of 50,000,000 shares of common stock, 15,000,000 shares of preferred stock, whose terms shall be determined by the board of directors at the time of issuance, and 10,000,000 shares of Series A preferred stock. In connection with our name change, we received a new trading symbol and cusip number. Effective March 11, 2008, we were trading on the Over the Counter Bulletin Board under the symbol “TYNP”; our new cusip number is 88630M104. In September 2008, we applied to trade on the American Stock Exchange. On September 24, 2008 we received notice that our common shares were approved for listing on the American Stock Exchange (the "AMEX"); accordingly, such shares began trading on the AMEX on October 3, 2008 under the ticker symbol “TPI.” Since our common shares have been trading on the AMEX, we have enjoyed all of the same privileges and have been subject to all of the same regulations every other company whose shares are listed on the AMEX.
THE FINANCINGS
2008 FINANCING
On January 16, 2008 and January 25, 2008, we completed private financings totaling $15,225,000, with 27 accredited investors (the “2008 Financing”). The net proceeds from the 2008 Financing were approximately $13,697,000. Consummation of the 2008 Financing was a condition to the completion of the Share Exchange transaction with Raygere and the Raygere Stockholders under the Share Exchange. The securities offered in the 2008 Financing were sold pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) by and among the Company, Raygere, the Raygere stockholders, Grandway and the investors named in the Purchase Agreement (collectively, the “Investors”). In accordance with the Purchase Agreement, we issued a total of 152.25 Units of securities consisting of: 1) An aggregate of $15,225,000 principal amount of our 10% convertible exchangeable notes due on or before June 30, 2009 (the “Notes”); 2) Five (5) year warrants to purchase 4,757,814 shares of our Common Stock, $0.001 par value per share at an initial exercise price of $2.50 per share (the “Class A Warrants”); 3) Seven (7) year warrants to purchase 4,757,814 shares of our Common Stock at an initial exercise price of $3.00 per share (the “Class B Warrants”).
	
Pursuant to the terms of the Purchase Agreement, the $15,225,000 of Notes automatically converted into an aggregate of 9,515,625 shares of our Series A convertible preferred stock, par value 0.001 per share (the “Series A Preferred Stock”) on March 11, 2008, the effective date of the authorization and designation of such class. As issued, the Series A Preferred Stock: 1) Pays an annual 10% dividend, payable at our option either in cash or (if such shares have been registered for resale under the Securities Act of 1933, as amended) in additional shares of the Company’s common stock valued at $1.60 per share; 2) Has a stated or liquidation value of $1.60 per share, or $15,225,000 as to all 9,515,625 shares of Series A Preferred Stock; 3) Each outstanding share of Series A Preferred Stock is convertible at any time at the option of the holder into one (1) full share of the Company’s common stock.
In connection with the 2008 Financing, we granted warrants to purchase 1,522,500 shares of Common Stock with an exercise price of US$1.60, $2.50 and $3.00 per share to TriPoint Global Equities, LLC, the placement agent in the Financing. These warrants have the same terms as the Warrants issued to Investors and included in the Units.
In connection with the 2008 Financing, we also entered into a Registration Rights Agreement with the Investors (the “Investor RRA”) under which we have registered for resale the 21,308,753 shares of common stock being offered for resale by the selling stockholders.
By March 2011, all preferred shares have been converted to common stocks of TPI. As of June 30, 2011, there is -0- preferred shares outstanding.
2009 FINANCING
On October 27, 2009, the Company completed a private equity financing of $4,987,500, with eight accredited investors (the “2009 Financing”). Net proceeds from the offering are approximately $4,490,000. Pursuant to the financing, we issued, for $4,987,500, a total of 1,534,570 units of our securities at $3.25 per unit. Each unit consists of: 1) one share of the Company's common stock, par value $0.001 per share (the "Common Stock"); 2) a Class C Warrant (the "Class C Warrant", together with Class A Warrant and Class B Warrant, are referred sometimes herein below as “Warrants” or “Warrant”), with each Class C Warrant exercisable at $4.50 to purchase one-fifth of a share of Common Stock, such that the total amount of warrants issued to each investor as shall be equal to twenty percent (20%) of the number of units purchased by each purchaser. Each of the warrants has a term of three (3) years.
In connection with this financing, the Company paid cash compensation to the placement agent, Tripoint Global Equities, in the amount of $495,250. In connection with this financing, the Company granted warrants to purchase 122,766 shares of common stock at $3.25 and 24,553 shares at $4.50 to the placement agent or its designees. These warrants have the same terms as the warrants issued to investors and are included in the units.
PRODUCT PORTFOLIO
As of June 30, 2011, we had a comprehensive portfolio of 58 SFDA-approved products comprised of patented biopharmaceutical product, branded generics, modernized Chinese medicines and other pharmaceuticals, 41.3% of our products are reimbursed by the government medical reimbursement program. Our flagship patented product Ginkgo Mihuan Oral Liquid (GMOL, patent number: 20061007800225, which expires on April 30, 2026) contributed approximately 21.6% of the fiscal 2011 revenue. Our products are listed as follows,
(Source: www.sfda.gov.cn, Chinese version or www.tianyinpharma.com)
CHINA HEALTHCARE INDUSTRY AND MARKET
The development of China’s healthcare market continues to be driven by the country’s strong per capita GDP growth, government-backed healthcare reimbursement system, countryside urbanization, the growing aging population, and the increasing healthcare spending. In 2009, Chinese government earmarked $124 billion government funding for the next three years to be dedicated for the further improvement in healthcare coverage in China (Source: http: //www.moh.gov.cn, which is set up by Ministry of Health, China. ).
National Medical Insurance Program
The National Medical Insurance Program (the “Program”), introduced in 1999, provides the guidance on which prescription and over-the-counter (OTC) medicines are included in the program and to what extent the purchases of these medicines are reimbursable. The implementation of the Program is delegated to the provincial governments, with each of which establishing their own medicine catalog. For purchases of provincial catalog medicines to be reimbursable under the program, these medicines must be purchased from hospitals or retail pharmacies authorized under the Program. The inclusion of a medicine in a provincial reimbursement list can enhance its sale by improving the affordability of the medicine. Moreover, the inclusion endorses the safety and the reliability of the medicine based on the stringent tests required during the application. As stated above, we have 24 products currently listed in the national medicine catalog of the Program.
Prescription Medicine and Hospitals
Most people in China seek healthcare services at state-owned hospitals, where doctors may only prescribe medicines that are listed on the hospital’s formulary. Hospital administrators decide to include a particular medicine in their formulary based on factors such as efficacy, affordability and the hospital’s budget. Unlike in the US, where patients typically fill their prescriptions at pharmacies unaffiliated with hospitals, out-patients in China typically fill their prescriptions at hospital pharmacies. Hospitals in China are classified under the Ministry of Health-administered hospital classification system into three classes based upon a number of factors, including reputation, the number of doctors and nurses, total number of in-patient beds, equipment and expertise. The best and largest hospitals are designated as “Class 3” hospitals, and the second and third tiers as “Class 2” and “Class 1”.
OTC Medicines and Retail Pharmacies
While out-patients in China generally fill their prescriptions at hospital pharmacies, they primarily purchase over the counter (OTC) medicines from retail pharmacies. To the extent that a medical condition can be treated with an OTC medicine, many Chinese people prefer to purchase an OTC medicine from the hospital. The retail pharmacy sector in China is highly fragmented. Retail pharmacies in China include pharmacy chain stores, individual stores, retail chain stores with OTC counters, and OTC counters in supermarkets. While they are expanding quickly, neither pharmacy chain stores nor retail chain stores with OTC counters have developed a nationwide presence in China. As a result, retail pharmacies tend to have less bargaining power than hospitals in procuring medicines from pharmaceutical companies. A portion of retail pharmacies in China are authorized under the National Medical Insurance Program. A program participant may be reimbursed for the cost of a medicine included in the provincial medicine catalog only if he or she purchases that medicine from an authorized retail pharmacy. In 2004, the Chinese government authorities began to enforce the regulation prohibiting advertisement of prescription medicines through mass media. However, OTC medicine can be advertised in the mass media. Chinese consumers normally purchase OTC medicines based upon brand name recognition and price. Consumers gain familiarity with an OTC medicine through advertising, word-of-mouth and recommendations by pharmacy salespeople.
SALES AND MARKETING
We sell our products via regional distributors as well as directly to the hospitals, clinics, and pharmacies in China. We are expanding our sales force as well as our coverage with the regional distributors across China. We are dedicated to developing brand recognition through pharmaceutical trade fairs, scientific conferences and seminars, advertisements.
RAW MATERIALS
Our geographical location at Sichuan province facilitates an efficient access to high-grade raw ingredients for both chemical medicine raw material as well as Chinese medicines. The materials used in our products are widely available from a number of different suppliers. For greater purchasing power we utilize a limited number of suppliers for most of the pharmaceutical raw material. For the fiscal year ended June 30, 2011, three major vendors accounted for approximately 36% of our raw material sales, while in the fiscal year ended June 30, 2010, they accounted for approximately 38% of our raw materials sales. Total purchases from these vendors were $12,908,221 and $11,198,171 for the years ended June 30, 2011 and 2010, respectively.
CUSTOMERS
Five major customers accounted for 9% and 11% of the net revenue for the fiscal years ended June 30, 2011and 2010. Total sales to these customers were $8,478,413and $7,508,367, for the years ended June 30, 2011 and 2010, respectively. The loss of any one major customer could have a material adverse effect on our business and operations.
INTELLECTUAL PROPERTY
We rely primarily on a combination of patent, trademark trade secrets and administrative protections, as well as employee and third-party confidentiality agreements to safeguard our intellectual property. Currently, we have a design patent granted and a formulation patent pending for our flagship product: Ginkgo Mihuan Oral Liquid (“GMOL”). The patent No. is 20061007800225 with a protection period of 20 years starting from April 30, 2006 and expiring on April 30, 2026. Although our other products are not subject to patent protection, they are Good Manufacturing Practice (“GMP”)-certified and approved by the SFDA, which is valid for a term of 5 years and renewable at the expiration thereof. The new SFDA product filing and registration policy provides, so long as no other company within our immediate pharmaceutical industry produces a product superior to ours in terms of current advances and major product breakthroughs, protection to formulas and production techniques of approved products, and prohibits producing and selling similar products without the SFDA’s approval. The type of major breakthroughs that the SFDA considers in determining whether another product, similar to one already approved can be produced would be significant improvements to existing products in the following areas: synthesis, extraction methods, physical and chemical nature and purity, dosage, prescription screening, preparation technology, testing methods, quality indicators, stability, pharmacology, toxicology, processing methods, active ingredients, route of administration, etc. As a result of this policy, the government encourages innovation in TCM research and development (“R&D”). Other pharmaceutical companies cannot produce products similar to ours without the SFDA’s approval, unless they have achieved such major breakthroughs and received approval from the SFDA. As of June 30, 2011, we had 58 products protected by the SFDA, including patent-protected GMOL.
In addition, elements of our pharmaceutical composition, formulation and manufacturing processes involve proprietary technologies, technical know-how or un-patentable data, for which we rely on administrative protection, trade secret and confidentiality agreements rather than patents to sustain our competitive advantages. We have also secured our rights in the intellectual properties with confidentiality, non-competition and proprietary information agreements signed by our R&D personnel.
COMPETITION
The traditional Chinese medicine (TCM) industry in China is highly fragmented and intensely competitive. We believe that TCM manufacturers primarily compete on the basis of brand name, reputation, pricing, perceived efficacy, side effects, marketing ability, economics of scale, customer service, customer base and customer loyalty. We face competition from domestic TCM manufacturers, as well as domestic and foreign pharmaceuticals with similar therapeutic effects.
Our competitive strengths include: 1) a comprehensive portfolio of 58 products; 2) approximately 41% or 24 products listed in the National Medical Program that ensures government reimbursement and accessibility for users; 3) sole supplier of several proprietary products with substantial upside market potential; 4) a cooperative partnership R&D model that is cost effective, highly efficient with relatively shorter development cycles; 5) a well-established national distribution sales network tailored to different market segments; and 6) a management team consisting of industry veterans with a proven track record.
GOVERNMENT REGULATION
China’s pharmaceutical industry is highly regulated by the government. The primary regulatory authority is the SFDA, including its provincial and local branches, by which we are subject to regulation and oversight. China’s healthcare laws stipulate the production and sale of pharmaceuticals in China, covering the manufacturing, distributing, packaging, pricing and advertising of pharmaceutical products. We are also subject to other Chinese laws and regulations that are applicable to business operators, manufacturers and distributors in general.
Medicine approval and registration
A medicine must be registered and approved by the SFDA before it can be manufactured. The registration and approval process requires the manufacturer to submit to the SFDA a registration application containing detailed information concerning the efficacy and quality of the medicine and the manufacturing process and the production facilities the manufacturer expects to use. This process generally takes at least several months or longer, depending on the nature of the medicine under review, the quality of the data provided and the workload of the SFDA. To obtain the SFDA registration and approval necessary for commencing production, the manufacturer is also required to conduct pre-clinical trials, apply to the SFDA for permission to conduct clinical trials. Upon the completion of the clinical trials, clinical dataset will be filed with the SFDA for approval.
New Medicine. When a medicine is approved by the SFDA as a new medicine, the SFDA will issue a new medicine certificate to the manufacturer and impose a monitoring period of as long as five years. The length of the monitoring period is specified in the new medicine certificate. During the monitoring period, the SFDA will monitor the safety of the new medicine, and will neither accept new medicine certificate applications for an identical medicine by another pharmaceutical company, nor approve the production or import of an identical medicine by other pharmaceutical companies. For new medicines approved prior to 2002, the monitoring period could be longer than five years. The holder of a new medicine certificate effectively has the exclusive right to manufacture the new medicine during the monitoring period.
Provisional National Production Standard. In connection with the SFDA’s approval of a new medicine, the SFDA will normally direct the manufacturer to produce the medicine according to a provisional national production standard, or a provisional standard. A provisional standard is valid for two years, during which the SFDA closely monitors the production process and quality consistency of the medicine to develop a national final production standard for the medicine, or a final standard. Three months before the expiration of the two-year period, the manufacturer is required to apply to the SFDA to convert the provisional standard to a final standard. Upon approval, the SFDA will publish the final standard for the production of this medicine. There is no statutory timeline for the SFDA to complete its review and grant approval for the conversion. In practice, the approval for conversion to a final standard is time-consuming and could take a few years. However, during the SFDA’s review period, the manufacturer may continue to produce the medicine according to the provisional standard. Although all of our current products have received the final production standard, any new products we produce will need to apply for the standard. We do not anticipate any difficulty in obtaining these approvals from the SFDA, but no assurances can be given as to when or if the approval will be obtained.
Transitional Period. Prior to the latter of (1) the expiration of a new medicine’s monitoring period or (2) the date when the SFDA grants a final standard for a new medicine after the expiration of the provisional standard, the SFDA will not accept applications for an identical medicine nor will it approve the production of an identical medicine by other pharmaceutical companies. Accordingly, the manufacturer will continue to have an exclusive production right for the new medicine during this transitional period.
Continuing SFDA Regulation. Pharmaceutical manufacturers in China are subject to continuing regulation by the SFDA. If an approved medicine, its labeling or its manufacturing process is significantly modified, a new pre-market approval or pre-market approval supplement will be required by the SFDA. A pharmaceutical manufacturer is subject to periodic inspection and safety monitoring by the SFDA to determine compliance with regulatory requirements. The SFDA has a variety of enforcement actions available to enforce its regulations including fines and injunctions, product recalls, operating restrictions, partial suspension or complete shutdown of production and criminal prosecution.
Permits and Licenses for Pharmaceutical Manufacturers. A pharmaceutical manufacturer must obtain a pharmaceutical manufacturing permit from the SFDA’s relevant provincial branch. This permit is valid for five years and is renewable upon its expiration.
Good Manufacturing Practice. A pharmaceutical manufacturer must meet the Good Manufacturing Practice standards, or GMP standards, for each of its production facilities in China in respect of each form of pharmaceutical products it produces. GMP standards include staff qualifications, production premises and facilities, equipment, raw materials, environmental hygiene, production management, quality control and customer complaint administration. If a manufacturer meets the GMP standards, the SFDA will issue the GMP certificate with a five-year validity period. However, for a newly established pharmaceutical manufacturer that meets the GMP standards, the SFDA will issue a GMP certificate with only a one-year validity period.
We have received GMP certificates for all of our production facilities in respect of every form of product. All of our GMP certificates are valid for five years. The earliest renewal time for our facilities is in three years. In March 2011, the new GMP standards, which provide further details in regulation and standardization of pharmaceutical production. Our facilities are required to comply with these newly revised GMP standards upon the expiration of the current GMP period..
Pharmaceutical Distribution
A distributor of pharmaceutical products in China must obtain a pharmaceutical distribution permit from the relevant provincial or local SFDA branches. The distribution permit is granted if the relevant SFDA provincial branch receives satisfactory inspection results of the distributor’s facilities, warehouse, hygiene environment, quality control systems, personnel and equipment. A pharmaceutical distribution permit is valid for five years. The SFDA applies Good Supply Practice standards, or GSP standards, to all pharmaceutical wholesale and retail distributors to ensure the quality of distribution in China. The currently applicable GSP standards require pharmaceutical distributors to implement controls on the distribution of medicine, including standards regarding staff qualifications, distribution premises, warehouses, inspection equipment and facilities, management and quality control. A certificate for GSP standards, or GSP certificate, is valid for five years, except for a newly established pharmaceutical distribution company, for which the GSP certificate is valid for only one year.
Price Control
The retail prices of prescription and OTC medicines that are included in the national medicine catalog are subject to price controls administered by the Price Control Office under the National Development and Reform Commission, or the NDRC, and provincial price control authorities, either in the form of fixed prices or price ceilings. The controls over the retail price of a medicine effectively set the limits for the wholesale price of that medicine. From time to time, the NDRC publishes and updates a national list of medicines that are subject to price control. Fixed prices and price ceilings on medicines are determined based on profit margins that the NDRC deems reasonable, the type and quality of the medicine, its production costs, the prices of substitute medicines and the extent of the manufacturer’s compliance with the applicable GMP standards. The NDRC directly regulates the price of some of the medicines on the list, and delegates the power to provincial price control authorities to regulate the remainder on the list. For those medicines under the authority of provincial price control authorities, each provincial price control authority regulates medicines manufactured by manufacturers registered in that province. Provincial price control authorities have the discretion to authorize price adjustments based on the local conditions and the level of local economic development.
Only the manufacturer of a medicine may apply for an increase in the retail price of the medicine and it must apply either to the NDRC, if the price of the medicine is nationally regulated, or to the provincial price control authorities in the province where it is registered, if the price of the medicine is provincially regulated. For a provincially regulated medicine, when provincial price control authorities approve an application, they will file the new approved price with the NDRC for confirmation and thereafter the newly approved price will become binding and enforceable across China.
Other Regulations
In addition to the regulations relating to pharmaceutical industry in China, our operating subsidiaries are also subject to the regulations applicable to a foreign invested enterprise in China.
Foreign Currency Exchange
The functional currency of our operating PRC subsidiary, Chengdu Tianyin, is Renmibi (RMB). Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 1997 and various regulations issued by the China State Administration of Foreign Exchange (the “SAFE”), and other relevant PRC government authorities, the RMB is freely convertible only to the extent of current account items, such as trade-related receipts and payments, interests and dividends. Capital account items, such as direct equity investments, loans and repatriation of investment, require the prior approval from the SAFE or its local counterpart for conversion of RMB into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC. Payments for transactions that take place within the PRC must be made in RMB. Unless otherwise approved, PRC companies other than the foreign invested enterprises, or the FIEs, must convert foreign currency payments they receive from abroad into RMB. On the other hand, FIEs may retain foreign exchange in accounts with designated foreign exchange banks, subject to a cap set by the SAFE or its local counterpart.
Regulation on Overseas Listing
On August 8, 2006, six PRC regulatory agencies jointly adopted the new merger and acquisition (M&A) Rule, which became effective on September 8, 2006. This new M&A Rule requires offshore SPVs that are controlled by PRC companies or individuals and that have been formed for the purposes of seeking a public listing on a stock exchange outside China through acquisitions of PRC domestic companies to obtain the China Securities Regulatory Commission (“CSRC”) approval prior to publicly listing their securities on a stock exchange outside China. On September 21, 2006, the CSRC published a notice on its website specifying the documents and materials required to be submitted to the CSRC when seeking the CSRC approval for their listings outside of China. The interpretation and application of the New M&A Rule remain unclear, and we cannot assure you that the ownership of our securities by offshore entities and their shareholders does not require approval from the CSRC, and if it does, how long it will take us to obtain the approval. See “Risk Factors-Risks Related to Doing Business in China-the approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with the foreign ownership of our securities under a recently adopted PRC regulation.”
Dividend Distribution
The principal regulations governing dividend distributions by wholly foreign-owned enterprises and Sino-foreign equity joint ventures include:
● Wholly Foreign-Owned Enterprise Law (1986), as amended;
● Wholly Foreign-Owned Enterprise Law Implementing Rules (1990), as amended;
● Sino-foreign Equity Joint Venture Enterprise Law (1979), as amended; and
● Sino-foreign Equity Joint Venture Enterprise Law Implementing Rules (1983), as amended.
Under these regulations, wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, these foreign-invested enterprises are required to set aside certain amounts of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends.
RESEARCH AND DEVELOPMENT
We have a proven cooperative partnership model for the research and development (R&D) which is cost effective, efficient and value adding for our organic growth. We focused on innovative products indicated for high incidence diseases with substantial market potential, in addition to the improvement of marketed products. Our R&D partners include a number of most prestigious academic institutions in China, including China Pharmaceutical University, Sichuan University-affiliated West China Center of Medical Sciences, and Shaanxi University of Chinese Medicines.
EMPLOYEES
Prior to the Share Exchange, our President was our only employee. Currently, we have 1,365 employees, consisting of 579 in manufacturing and operation, 15 in research and development, 730 in sales and marketing and 41 in general and administrative. None of our personnel are represented under collective bargaining agreements. We consider our relations with our employees to be good.
FOR ADDITIONAL INFORMATION
We are a reporting company and file annual, quarterly and current reports, proxy statements and other information with the SEC. For further information with respect to the Company, you may read and copy its reports, proxy statements and other information, at the SEC public reference rooms at 100 F. Street, N.E., Washington, D.C. 20549. You can request copies of these documents by writing to the SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the public reference rooms. The Company’s SEC filings are also available at the SEC’s web site at http://www.sec.gov.
Copies of Company’s Annual Reports on Form 10K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are all available on our website ( http://www.tianyinpharma.com ) free of charge, within a week after we file same with the SEC or by sending a request for a paper copy to our outside securities counsel: Hunter Taubman Weiss LLP, 17 State Street, Suite 2000, New York, NY 10004.
ITEM 1A.
ITEM 1A. RISK FACTORS
Risks Related To Our Business
Our growth is dependent on our ability to successfully develop, acquire or license new drugs.
Our growth is supported by continuous investment in time, resources and capital to identify and develop new drugs, dosage and delivery system, via introducing new products or line extensions each year and to expand distribution into new territories each year. This strategy has the advantage of building brands through geographic expansion and establishing incremental capabilities for new product introductions. If we are unable to either develop new products on our own or acquire licenses for new products from third parties, our ability to grow revenues and market share will be adversely affected. In addition, we may not be able to recover our investment in the development of new drugs, given that projects may be interrupted, unsuccessful, not as profitable as initially contemplated or we may not be able to obtain necessary financing for such development if we are unable to fund such development from our future revenues. Similarly, there is no assurance that we can successfully secure such rights from third parties on an economically feasible basis.
We may not be able to secure financing needed for future operating needs on acceptable terms, or on any terms at all.
From time to time, we may seek additional financing to provide the capital required to expand our production facilities, R&D initiatives and/or working capital, as well as to repay outstanding loans if cash flow from operations is insufficient to do so. We cannot predict with certainty the timing or amount of any such capital requirements. If such financing is not available on satisfactory terms, we may be unable to expand our business or to develop new business at the rate desired. If we are able to incur debt, we may be subject to certain restrictions imposed by the terms of the debt and the repayment of such debt may limit our cash flow and our ability to grow. If we are unable to incur debt, we may be forced to issue additional equity, which could have a dilutive effect on our current stockholders.
Expansion of our business may put pressure on our management and the operational infrastructure which could impede our ability to meet an increased demand for our products.
Our business plan is to significantly grow our operations to meet increasing demand for our products. Growth in our business may place a significant strain on our personnel, management, financial systems and other resources. The evolution of our business also presents numerous risks and challenges that include continued acceptance of our products, sales and market share expansion, costs for expansion, technological evolvement and industrial dynamics.
If we are successful in obtaining rapid market growth of our products, we will be required to deliver large volumes of quality products and services to customers on a timely basis at a reasonable cost to those customers. Meeting any such increased demands will require us to expand our manufacturing facilities, to increase our ability to purchase raw materials, to increase the size of our work force, to expand our quality control capabilities and to increase the scale upon which we provide our products and services. Such demands would require more capital and working capital than we currently have available and we may be unable to meet the needs of our customers, which could adversely affect our relationship with our customers and reduce our revenues.
There can be no assurance that we can sustain or increase profitability.
Although we have recently achieved operating profits, there can be no assurance that we can sustain or increase profitability. Unexpected situations, expenses, and delays are frequently encountered in developing and marketing products. These include, but are not limited to, competition, the need to develop customers and market expertise, market conditions, sales, marketing, increases in the cost of raw materials and governmental regulation. Our failure to meet any of these conditions would have a materially adverse effect upon us and may force us to reduce or curtail our operations. We may not achieve our business growth objectives and the failure to achieve such goals would have an adverse impact on our business and results of operations. In addition, we expect to incur additional general and administrative expenses as a public company in the United States which could also have a negative impact on our future profitability.
Our growth strategy includes the pursuit of acquisitions and new product development which could have a material adverse affect on our business, financial condition, results of operations and growth prospects.
Our business strategy includes growth through strategic acquisitions and the development of new products and technologies which will involve significant capital expenditure and risks. Innovative pharmaceutical development involves R&D costs that may achieve no tangible results instead adversely affect our future profitability. In addition, any acquisition or combination that we consummate will likely involve, among other things, the payment of cash, the incurrence of contingent liabilities and the amortization of expenses related to goodwill and other intangible assets, and transaction costs, which may adversely affect our business, financial condition, results of operations and growth prospects. Our ability to integrate and organize any new businesses and/or products, whether internally developed or obtained by acquisition or combination, will likely require significant expansion of our operations. There is no assurance that we will be able to obtain the necessary resources for such expansion, and the failure to do so could have a material adverse effect on our business, financial condition, results of operations and growth prospects. In addition, future acquisitions or combinations by the company involve risks of, among other things, entering markets or segments in which we have no or limited prior experience, the potential loss of key employees or difficulty, delay or failure in the integration of the operations of any such new business with our current business and operating and financial difficulties of any new or newly combined operations, any of which could have a materially adverse effect on our business, financial condition, results of operations and growth prospects. Moreover, there can be no assurance that the anticipated benefits of any internally developed new business segment or business combination will be realized.
Our current products have certain side effects. If side effects associated with our current or future products are not identified prior to their marketing and sale, we may be required to withdraw such products from the market, perform lengthy additional clinical trials or change the labeling of our products, any of which could hinder or adversely impact our growth.
Our current products have certain side effects. If significant side effects of our medicines are identified after they are marketed and sold, 1) those medicines listed in the national and provincial medicine catalogs may be removed from the catalogs or downgraded to a lower tier; 2) regulatory authorities may withdraw or modify their approvals of such medicines; 3) we may be required to reformulate these medicines, change the ways in which they are marketed, conduct additional clinical trials, change the labeling of these medicines or implement changes to obtain new approvals for our manufacturing facilities; 4) we may be less successful in tendering processes used by state-owned hospitals for medicine purchases; 5) we may have to recall these medicines from the market and may not be able to re-launch them; 6) we may experience a significant decline in sales of the affected products; 7) our reputation may suffer; and 8) we may become a target of lawsuits.
The occurrence of any of these events would harm our sales of these medicines and substantially increase the costs and expenses of marketing these medicines, which in turn could cause our revenues and net income to decline. In addition, if any severe side effects are discovered to be associated with another manufacturer’s traditional Chinese medicine products used to treat medical conditions similar to those that our medicines are used to treat, the reputation and, consequently, sales of our medicines could be adversely affected.
We may be subject to product liability claims in the future.
We face an inherent business risk of exposure to product liability claims in the event that the uses of our products are alleged to have caused adverse side effects. Side effects or marketing or manufacturing problems pertaining to any of our products could result in product liability claims or adverse publicity. These risks will exist for those products in clinical development and with respect to those products that receive regulatory approval for commercial sale. Furthermore, although we have not historically experienced any problems associated with claims by users of our products, we do not currently maintain product liability insurance and there could be no assurance that we are able to acquire product liability insurance with terms that are commercially feasible.
We may not be able to obtain manufacturing or marketing approval for our future products, and failure to obtain approvals for our future products could materially harm our business prospects.
All medicines must be approved by the SFDA, before they can be manufactured, marketed or sold in China. The SFDA requires a pharmaceutical manufacturer to have successfully completed clinical trials of a new medicine and demonstrated its manufacturing capability before approval to manufacture that new medicine is granted. Clinical trials are expensive and their results are uncertain. In addition, the SFDA and other regulatory authorities may apply new standards for safety, manufacturing, labeling, marketing and distribution of future products. Complying with these standards may be time-consuming and expensive. Furthermore, our future products may not be efficacious or may have undesirable or unintended side effects, toxicities or other characteristics that may preclude us from obtaining approval or may prevent or limit their commercial use. As a result, we may not be able to obtain SFDA or other governmental approvals for our future products on a timely basis or at all. Even if we do obtain approvals, such approvals may be subject to limitations on the indicated uses for which we may market a product, which may limit the size of the market for such a product.
Failure to obtain approval from the SFDA to convert a provisional national production standard of our principal products to a national final production standard would require us to suspend or cease the production of existing or new products.
After the SFDA approves a new medicine, it normally directs the manufacturer to produce that medicine according to a provisional standard which is valid for two years, during which the SFDA closely monitors the production process and quality consistency of the medicine for developing a national final production standard. Three months before a medicine’s provisional standard expires, the manufacturer of that medicine is required to apply to the SFDA to convert its provisional standard to a final standard. In practice, the SFDA’s approval process could take a few years. However, during the SFDA’s review period (including after the expiration of the two-year provisional standard period), the manufacturer may continue to produce the medicine according to the provisional standard.
The retail prices of our principal products are subject to price controls administered by the government authorities which may limit the pricings of our products. It is also possible that we may be required to lower the wholesale prices of our products as a result of any government-mandated price reductions.
The retail pharmaceutical prices in China are subject to price controls administered by the Price Control Office under the National Development and Reform Commission, or the NDRC, and provincial price control authorities, either in the form of fixed prices or price ceilings. From time to time, the NDRC publishes a list of medicines subject to price controls. The NDRC directly regulates retail prices of certain medicines on the list and authorizes provincial price control authorities to regulate retail prices of the remainder on that list. The limitation on our ability to raise the wholesale prices of our products may prevent us from absorbing or offsetting the effect resulting from any increase in the cost of raw materials or other costs, which would lower our margins.
Furthermore, in response to a rapid increase in prices of medicines, in August 2006, the NDRC lowered the price ceilings of more than 400 medicines in China. This order, which was reported as the NDRC’s nineteenth order for nationwide price reductions for medicines since 1998, resulted in an average reduction of 30% in retail prices of those medicines affected by the order. Should we be required to lower the prices of our principal products in the future as a result of any government-mandated reduction in the price ceilings of our products, our future revenue and profitability would be adversely affected.
Our products that have been included in national and provincial medicine catalogs of the National Medical Insurance Program may be removed from the national or provincial medicine catalogs or downgraded to a lower tier, and our new products may encounter difficulty in seeking inclusion in these catalogs.
The Ministry of Labor and Social Security, or the MLSS, together with other government authorities, determines which medicines are to be included in or removed from the national medicine catalog for the National Medical Insurance Program, and under which tier a medicine should fall, both of which affect the amounts reimbursable to program participants for their purchases of those medicines. These determinations are based on a number of factors, including price and efficacy. Provincial governments are required to include all Tier 1 medicines listed in the national medicine catalog in their provincial medicine catalogs, but can use their discretion to add other medicines to, or exclude the Tier 2 medicines listed in the national medicine catalog from, their provincial medicine catalogs, as long as the combined total numbers of medicines added and excluded do not exceed 15% of the number of the Tier 2 medicines. In addition, provincial governments may use their discretion to upgrade a nationally classified Tier 2 medicine to Tier 1 in their provincial medicine catalogs, but may not downgrade a nationally classified Tier 1 medicine to Tier 2. Depending on which tier a medicine is classified in the provincial medicine catalog, a National Medical Insurance Program participant residing in that province can be reimbursed for the full cost of a Tier 1 medicine and for 80-90% of the cost of a Tier 2 medicine. 22 of our products are currently included in the National Medical Insurance Program. If the relevant government authorities decide to remove our products from the national or provincial medicine catalogs, or downgrade our products currently in Tier 1 to Tier 2, such removal or downgrading would reduce the affordability of our products and change the public perception regarding our products as being efficacious, safe and reliable, which in turn would adversely affect the sales of these products and reduce our net revenues. Furthermore, if we are unable to obtain approval from the relevant government authorities to include our new products in the national or provincial medicine catalogs, sales of our new products may be materially and adversely affected.
The failure to maintain our relationships with our existing customers or the failure to obtain new customers could negatively impact our business.
We maintain purchase orders for the sales of our products to our customers. Although we have entered into agreements to supply our customers, we cannot assure that such agreements will be renewed when the terms of such agreements expire or that our relationships with our customers will be maintained on satisfactory terms or at all. The failure to maintain our relationships with our customers or the failure to obtain new customers could negatively affect our revenues and decrease our earnings or have an adverse impact on our business.
We rely on a limited number of suppliers and the loss of any of our suppliers, or delays or problems in the supply of materials used in our products, could materially and adversely affect our operations and growth.
We generally rely on a limited number of suppliers for most of the primary materials used in our products. Our suppliers may not be able to supply the necessary materials without interruption and we may not have adequate remedies for such failure, which could result in a shortage of our products. If one of our suppliers fails or refuses to supply us for any reason, it could take time and expense to obtain a new supplier. In addition, our failure to maintain existing relationships with our suppliers or to establish new relationships in the future could negatively affect our ability to obtain the materials used in our products in a timely manner. The search for new suppliers could potentially delay the manufacture of our products, resulting in shortages in the marketplace and may cause us to incur additional expense. Failure to comply with applicable legal requirements subjects our suppliers to possible legal or regulatory action, including shutdown, which may adversely affect their ability to supply us with the materials we need for our products. Any delay in supplying, or failure to supply, materials for our products by any of our suppliers could result in our inability to meet the commercial demand for our products, and could adversely affect our business, financial condition, results of operations and growth prospects.
We may not be able to adequately protect our intellectual property, which could cause us to be less competitive.
We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Unauthorized parties may attempt to copy or otherwise obtain and use our technology. We cannot be certain that our measures will prevent all misappropriations of our technology, particularly in countries where the laws may not protect our intellectual property rights as fully as in other countries such as the U.S. In addition, third parties may seek to challenge, invalidate, circumvent or render unenforceable any intellectual property rights owned by us. From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs, diversion of our management’s attention and diversion of our other resources.
Our existing indebtedness may adversely affect our ability to obtain additional funds and may increase our vulnerability to economic or business downturns.
We are subject to a number of risks associated with our indebtedness, including: 1) we must dedicate a portion of our cash flows from operations to pay debt service costs; 2) we have less funds available for operations and other purposes; it may be more difficult and expensive to obtain additional funds through financings, if available at all; 3) we are more vulnerable to economic downturns and fluctuations in interest rates, less able to withstand competitive pressures and less flexible in reacting to changes in our industry and general economic conditions; 4) if we default under any of our existing credit facilities or if our creditors demand payment of a portion or all of our indebtedness, we may not have sufficient funds to make such payments.
If we are unable to attract, train, retain and motivate our salespeople, our revenues may be materially and adversely affected.
We rely on our prescription medicine and OTC medicine salespeople, who are dispersed across China, to market our products to the regional distributors as well as hospitals and retail pharmacies. We believe that our current sales have resulted, to a significant extent, from the dedication, efforts and performance of our salespeople. We believe that our future success will depend on those same factors. If we are unable to attract, train, retain and motivate our prescription medicine and OTC medicine salespeople, sales of our products may be materially and adversely affected.
Our future success depends in part on our ability to make strategic acquisitions and investments.
Although up till now, we have achieved the compounded annual growth with pure organic growth, as part of our plan to expand our manufacturing capacity and product offerings, we may make strategic acquisitions in the highly-fragmented traditional Chinese medicine sector. Strategic acquisitions could subject us to uncertainties and risks, including:1) high acquisition and financing costs; 2) potential ongoing financial obligations and unforeseen or hidden liabilities; 3) failure to achieve the intended objectives, benefits or revenue-enhancing opportunities; 4) cost of and difficulties in integrating acquired businesses and managing a larger business; and 5) diversion of our resources and management attention. Our failure to consummate or handle the risks associated with these acquisitions and investments could have a material adverse effect on our market penetration and revenues growth.
The failure to increase our current manufacturing capacity as the market demand for our products grow could materially and adversely affect our business, financial condition, results of operations and growth prospects.
We currently have one pre-extraction plant, one formulated pharmaceutical manufacturing plant and one active pharmaceutical ingredient production plant.
In case of fire, earthquake or other disasters, we would have to resort to alternative sources of manufacturing which may cause significant delays. Any increase in costs, slowdowns or shutdowns could have a material adverse affect on our business, financial condition, results of operations and growth prospects.
According to the market demand, management may add facilities, use high-efficiency equipment, increase employees’ working hours or extend hours of operation. We believe that we can adjust the existing capacity and future production capacity in a very short period of time to meet the market needs. We intend to expand our manufacturing operations by adding production lines, but there is no assurance that we will have the financial resources required for this planned expansion or that any such expansion will be successful or completed in a timely fashion or within budget. Additionally, although we could quickly adjust our capacity, we may encounter difficulties and significant unexpected costs and delays in scaling up our manufacturing operations. The failure to scale-up manufacturing operations in a timely and cost-effective way may adversely affect our income. Our formulated pharmaceutical facility is running at 90% saturation. If our manufacturing capacity could not meet the market demand for our products, our business operation, financial condition, and growth prospects would be adversely affected
The loss of one or more members of our management team or other key employees could affect our operation and growth.
Our future growth depends on the continued service of our management team and other key employees. If one or more members of our management or other key employees were unable to serve as our employees, our revenue growth, business and future prospects would be affected. In addition, our ability to execute our business plan is dependent on our ability to attract and retain additional highly skilled personnel.
If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our Common Stock.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We maintain a system of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, 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.
As a public company, we will have significant additional requirements for enhanced financial reporting and internal controls. We will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.
We cannot assure you that we will not, in the future, identify areas requiring improvement in our internal control over financial reporting. We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth. If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our Common Stock.
Risks Related To Our Industry
We face intense competition that may prevent us from maintaining or increasing market share for our existing products and gaining market acceptance of our future products. Our competitors may develop or commercialize products before or more successfully than us.
The pharmaceutical market in China is intensely competitive, rapidly evolving and highly fragmented. Our competitors may develop products that are superior to or more affordable than ours or they may more effectively market products that compete with ours. We also face competition from manufacturers of western medicines, including multinational companies, that manufacture western medicines with similar curative effects and that can be used as substitutes for our products. Our competitors’ greater size in some cases provides them with a competitive advantage with respect to manufacturing costs because of their economies of scale and their ability to purchase raw materials at lower prices. Many of our competitors also have better brand name recognition, more established distribution networks and larger customer bases. Our failure to adapt to changing market conditions and to compete successfully with existing or new competitors may materially and adversely affect our financial condition and results of operations.
The production of pharmaceuticals depends on the supply of quality medicinal raw materials.
The supply and market prices of pharmaceutical raw materials may be influenced by various factors such as weather conditions and the occurrence of natural disasters or sudden increases in demand that would impact our costs of production. There is no assurance that we would be able to pass on any resulting increase in costs to our customers and therefore any substantial fluctuation in supply or the market prices of raw materials may adversely affect our results of operations and profitability.
If we do not keep pace with rapid technological change, we will be unable to sustain a meaningful market position.
The pharmaceutical industry in China is characterized by rapid changes in technology, constant enhancement of industrial know-how and the frequent emergence of new products. Future technological improvements and continued product developments in the pharmaceutical market may render our existing products obsolete or affect their viability and competitiveness. Failure to respond to frequent technological advances by improving our existing products or developing new products in a timely manner and achieving desirable level of market acceptance may adversely affect our business and profitability.
Pharmaceutical companies in China are required to hold a number of permits and licenses to carry on their business. Our ability to obtain and maintain these regulatory approvals is uncertain.
All pharmaceutical manufacturing companies in China are required to obtain certain permits and licenses from various PRC government authorities, including a pharmaceutical manufacturing permit and a GMP certificate, for each of its production facilities in China [See “Regulations-Regulations Relating to Pharmaceutical Industry”]. We have obtained permits, licenses and GMP certificates for production facilities we use in the manufacture of our pharmaceutical products which are subject to periodic renewal and/or reassessment by the relevant PRC government authorities, and the standards of compliance required in relation to them may change from time to time. We intend to apply for the renewal of these permits and licenses when required by applicable laws and regulations. Our failure to obtain such renewals may prevent us from continuing those portions of our business that require these permits and licenses. Furthermore, any changes in compliance standards or new laws or regulations that may be introduced in the future may prohibit or render it more restrictive for us to conduct our business or may increase our compliance costs, which may adversely affect our operations or profitability.
The ongoing anti-corruption campaign initiated by the Chinese government targeting state-owned hospitals could adversely affect our sales designated for hospitals.
The Chinese government has recently launched a nationwide campaign against corrupt practices that have been frequently engaged by state-owned hospitals in China, including their acceptance of kickbacks or other illegal gains and benefits in connection with their providing medical services and purchasing medical equipment and medicines. In mid 2006, the China’s Ministry of Health ordered all state-owned hospitals to review, among other things, their procurement policies and procedures and rectify problems and deficiencies, if any, by the end of 2006. As a result of this campaign, many state-owned hospitals have since diverted a significant portion of their attention and resources to their internal inspection and rectification activities and are reviewing their procurement policies. If the anti-corruption campaign becomes more intensified, causing a significant change to the hospitals’ procurement policies and procedures or otherwise resulting in a further delay for state-owned hospitals to resume their normal procurement of our products, our sales designated for hospitals, which account for a very substantial portion of our total sales, could be adversely affected.
Risks Related To Doing Business in China
Changes in China’s political or economic situation could harm us and our operational results.
Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the government could change these economic reforms or any of the legal systems at any time. The influencing factors include level of government involvement in the economy, control of foreign exchange, methods of allocating resources, balance of payments position, international trade restrictions and conflict.
Our business is largely subject to the uncertain legal environment in China and your legal protection could be limited.
The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which precedents set in earlier legal cases are not generally used. The overall effect of legislation enacted over the past 20 years has been to enhance the protections afforded to foreign invested enterprises in China. However, these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to foreign shareholders, such as the right of foreign invested enterprises to hold licenses and permits such as requisite business licenses. Because most of our officers and directors, after the Share Exchange, will reside outside of the United States, it may be difficult, if not impossible, to acquire jurisdiction over those persons if a lawsuit is initiated against us and/or our officers and directors by a shareholder or group of shareholders in the United States. Also, because our officers will likely be residing in China when a suit is initiated, achieving service of process against such persons would be extremely difficult. Furthermore, because the majority of our assets are located in China it would also be extremely difficult to access those assets to satisfy an award entered against us in United States court. Moreover, we have been advised that the PRC does not have treaties with the United States providing for the reciprocal recognition and enforcement of judgments of courts.
Recent PRC regulations relating to the establishment of offshore companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to distribute profits to us or otherwise adversely affect us.
China State Administration of Foreign Exchange (the “SAFE”), has promulgated several regulations, including the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or Notice 75, effective on November 1, 2005 and its implementation rules. These regulations require that a PRC resident shall register with a local branch of the SAFE in connection with their direct or indirect shareholding in an overseas special purpose vehicle, or SPV, established for the purpose of overseas equity financing (including convertible debt financing). In addition, any PRC resident who is a direct or indirect shareholder of a SPV, is required to update its filed registration with the local branch of SAFE with respect to that SPV, to reflect any material change. If any PRC shareholder fails to make the required registration or to update the previously filed registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contribution into its subsidiary in China.
PRC residents who directly or indirectly hold our shares, including those who may indirectly hold our shares through the participation and exercise of stock options or to purchase shares of Time Poly Management Limited (one of our shareholders), are required to file in accordance with Notice 75 or its implementation rules. We required all our shareholders who are PRC residents to comply with any SAFE registration requirements, if required by Notice 75 or other applicable PRC laws and regulations, although we have no control over either our shareholders or the outcome of such registration procedures. Any failure or inability by such individuals to comply with the SAFE regulations may subject us to fines or legal sanctions, such as restrictions on our cross-border investment activities or Chengdu TPI’s ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, our company or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.
The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with our acquisition of Chengdu Tianyin under the PRC laws and regulations.
On August 8, 2006, six PRC regulatory agencies: the PRC Ministry of Commerce, or MOFCOM, the State Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or CSRC, and the SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or new M&A Rule, which became effective on September 8, 2006 and was amended on June 22, 2009. The new M&A Rule purports, among other things, to require offshore special purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.
There are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations, including the new M&A Rule. Although we do not believe that our Share Exchange transaction required prior CSRC approval, the interpretation and application of the new M&A Rule remains unclear. Accordingly, we cannot assure you that the Share Exchange transaction, wherein we indirectly acquired Chengdu Tianyin, did not require the prior approval of the CSRC. If CSRC approval was required for us to consummate the Share Exchange, our failure to obtain or delay in obtaining the CSRC approval would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies. These sanctions could include fines and penalties on our operations in China, restriction or limitation on our ability to pay dividends outside of China, and other forms of sanctions that may cause a material and adverse effect on our business, results of operations and financial conditions. However, the new M&A Rule does not stipulate the specific penalty terms, so we are not able to predict what penalties we may face, and how such penalties will affect our business operations or future strategy.
Recently enacted regulations in China may make it more difficult for us to pursue growth through acquisitions.
The new M&A Rule also established additional procedures and requirements that are expected to make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise that owns well-known trademarks for China’s traditional brands. Besides, the Notice of the General Office of the State Council regarding the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors issued by the General Office of the State Council on February 3, 2011 and took effect on March 5, 2011 and the Regulations on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors which was issued by the Ministry of the Commerce on August 25, 2011 and took effect on September 1, 2011provide that takeovers by foreign investors of local companies engaged in industries related to military or crucial to national security shall be subject to prior security review by the government. We may grow our business in part by acquiring other traditional Chinese medicine businesses. Complying with the requirements of the new M&A Rule and other regulations in completing this type of transaction could be time-consuming, and any required approval processes, including Ministry of Commerce approval, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
We may not be guaranteed a continuance to receive the preferential tax treatment we currently enjoy, and dividends paid to us from our operations in China may become subject to income tax.
The PRC Enterprise Income Law, or EIT Law and its implementing rules, both of which became effective on January 1, 2008, have adopted a uniform statutory enterprise income tax rate of 25% to all enterprises in China. The EIT Law and its implementation rules also permit qualified ‘‘high and new technology enterprises’’ (“HNTEs”), to enjoy a preferential enterprise income tax rate of 15% upon filing with competent tax authorities. The qualification as a HNTE generally has a valid term of three years and the renewal of such qualification is subject to review by the relevant authorities in China. Pursuant to the Notice of Tax Preferences Policies for the Development of Western Regions (Caishui [2001] No.202), promulgated on December 30, 2001, or the Tax Notice 202, both domestic companies and FIEs, which are established in the western regions (including Sichuan Province) and were engaged in the encouraged industries (including the TCM manufacture business), shall be entitled to a 15% national enterprise income tax rate for a period commencing from January 2001 to December 2010. Chengdu Tianyin has been entitled to the preferential tax treatment until December 31, 2010. After the preferential tax treatment period was ended, Chengdu Tianyin is currently subject to 25% income taxes. Chengdu Tianyin has submitted application for the renewal of its HNTE status in Chengdu, Sichuan Province of China. The successful renewal of the High Tech status would reduce the current enterprise income tax to 15% for another three years from the beginning of 2012 calendar year. However, there is no assurance that Chengdu Tianyin would successfully obtain the approval for the renewal.
The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.
China only recently has permitted provincial and local economic autonomy and private economic activities and, as a result, we are dependent on our relationship with the local government in the province in which we operate our business. Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.
Future inflation in China may inhibit our activity to conduct business in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. During the past ten years, the rate of inflation in China has been as high as 20.7% and as low as -2.2%. The inflation is reflected in an increase of raw material prices which directly impacted the margins of pharmaceutical sales. To curtail inflation, the Chinese government may adopt various corrective measures to restrict the availability of credit or regulate growth. The high inflation may in the future cause Chinese government to impose credit controls or price ceilings or other actions which could inhibit economic activity in China, and thereby limit the market for our products.
Government regulations regarding environmental matters in China may adversely impact our business.
Our manufacturing operations are subject to numerous laws, regulations, rules and specifications relating to human health and safety and the environment. These laws and regulations regulate, among other matters, wastewater discharge, air quality and the generation, handling, storage, treatment, disposal and transportation of solid and hazardous wastes and release of hazardous substances into the environment. In addition, third parties and governmental agencies in some cases have the power under such laws and regulations to require remediation of environmental conditions and, in the case of governmental agencies, to impose fines and penalties. We make capital expenditures from time to time to stay in compliance with applicable laws and regulations.
We have obtained all permits and approvals and filed all registrations required for the conduct of our business, except where the failure to obtain any permit or approval or file any registration would not have a material adverse effect on our business. The PRC governmental authorities have not revealed any material environmental liability that would have a material adverse effect on us. We have not been notified by any governmental authority, of any continuing noncompliance, liability or other claims in connection with any of our properties or business operations, nor are we aware of any other material environmental condition with respect to any of our properties or arising out of our business operations at any other location. However, in connection with the ownership and operation of our properties (including locations where we may have sent waste in the past) and the conduct of our business, we potentially may be liable for damages or cleanup, investigation or remediation costs.
No assurance can be given that all potential environmental liabilities have been identified or properly quantified or that any prior owner, operator, or tenant has not created an environmental condition unknown to us. Moreover, no assurance can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the properties will not be affected by the condition of land or operations in the vicinity of the properties (such as the presence of underground storage tanks), or by third parties unrelated to us. State and local environmental regulatory requirements change often. It is possible that compliance with a new regulatory requirement could impose significant compliance costs on us. Such costs could have a material adverse effect on our business, financial condition and results of operations.
We may have difficulty establishing adequate management, legal and financial controls in the PRC.
The PRC historically has been deficient in Western style management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.
Changes in foreign exchange regulations in the PRC may affect our ability to pay dividends in foreign currency or conduct other foreign exchange business.
Renminbi, or RMB, is not a freely convertible currency at the moment. The restrictions on currency exchange may limit our ability to use revenues generated in RMB to fund our business activities outside the PRC or to make dividends or other payments in U.S. dollars. The PRC government strictly regulates conversion of RMB into foreign currencies. Over the years, foreign exchange regulations in the PRC have significantly reduced the government’s control over routine foreign exchange transactions under current accounts. In the PRC, the State Administration for Foreign Exchange, or the SAFE, regulates the conversion of the RMB into foreign currencies. Pursuant to applicable PRC laws and regulations, foreign invested enterprises incorporated in the PRC are required to apply for “Foreign Exchange Registration Certificates.” Currently, conversion within the scope of the “current account” (e.g. remittance of foreign currencies for payment of dividends, etc.) can be effected without requiring the approval of SAFE. However, conversion of currency in the “capital account” (e.g. for capital items such as direct investments, loans, securities, etc.) still requires the approval of SAFE.
Risks Relating to Our Securities
Insiders have substantial control over us, and they could delay or prevent a change in our corporate control even if our other stockholders wanted it to occur.
Our executive officers, directors, and principal stockholders own, in the aggregate, approximately 30.92%of our outstanding Common Stock. As a result of their stockholdings, these stockholders are able to assert substantial control over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could delay or prevent an outside party from acquiring or merging with us even if our other stockholders wanted it to occur.
The market price of our Common Stock may be volatile and there may not be sufficient liquidity in the market for our securities in order for investors to sell their securities.
During the past two years our Common Stock has had a trading price range between $1.00 per share to $5.25 per share. The market price of our Common Stock has been and will likely continue to be highly volatile, as is the stock market in general. Factors that may materially affect the market price of our Common Stock are beyond our control, these factors may materially adversely affect the market price of our Common Stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. These broad market fluctuations may influence the market price of our Common Stock. There is currently only a limited public market for our Common Stock, which is listed on the NYSE Amex, and there can be no assurance that a trading market will develop further or be maintained in the future. As of September 26, 2011, the closing bid price of our Common Stock was $1.29 per share and we had approximately 272 shareholders of record of our Common Stock, not including shares held in street name.
The outstanding warrants may adversely affect us in the future and cause dilution to existing shareholders.
There are currently 8,487,718 warrants outstanding. The terms of these warrants expire as early as January 2013 and as late as January 2015. The exercise price of these warrants range from $1.60 to $4.50 per warrant. Exercise of the warrants may cause dilution in the interests of other shareholders as a result of the additional Common Stock that would be issued upon exercise. In addition, sales of our Common Stock issuable upon exercise of the warrants could have a depressive effect on the price of our stock, particularly if there is not a coinciding increase in demand by purchasers of our Common Stock. Further, the terms on which we may obtain additional financing during the period any of the warrants remain outstanding may be adversely affected by the existence of these warrants as well.
Our Common Stock may be considered a “penny stock” and may be difficult to sell.
The SEC has adopted regulations which generally define a “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our Common Stock is less than $5.00 per share and, therefore, it may be designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our Common Stock and may affect the ability of investors to sell their shares.
The market for penny stocks has experienced numerous frauds and abuses which could adversely impact investors in our stock.
Penny stocks are frequent targets of fraud or market manipulation. Patterns of fraud and abuse include: Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;“Boiler room" practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons; Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
All land in China is owned by the State. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes. In the case of land used for industrial purposes, the land use rights are granted for a period of 50 years. This period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations. Chengdu Tianyin currently owns land use rights to approximately 29,651 square meters of land and approximately 10,780 square meters of buildings consisting of manufacturing facilities, employee quarters and office buildings in Chengdu, China. Chengdu Tianyin holds five State-owned Land Use Rights Certificates and eight Building Ownership Certificates for the land use rights and buildings owned by it, which include the State-owned Land Use Rights Certificate (No.: Qingyangguoyong [2007] No. 12133), State-owned Land Use Rights Certificate (No.: Qingyangguoyong [2007] No. 12132), State-owned Land Use Rights Certificate (No.: Longguoyong [2002] No. 17188), State-owned Land Use Rights Certificate (No.: Longguoyong [2007] No. 76483), State-owned Land Use Rights Certificate (No.: Qingguoyong [2007] No. 12575); Building Ownership Certificate (No.: ChengfangquanjianzhengJianzhengZi No.1570035), Building Ownership Certificate (No.: ChengfangquanjianzhengJianzhengZi No.1599930), Building Ownership Certificate (No.: ChengfangquanzhengJianzhengZi No.1570039) , Building Ownership Certificate (No.: LongfangquanzhengJianzhengZi No.0119728), Building Ownership Certificate (No.: LongfangquanzhengJianzhengZi No.0119727), Building Ownership Certificate (No.: LongfangquanzhengJianzhengZi No.0119729) and, Building Ownership Certificate (No.: Longfangguan No. 0070870) and the Building Ownership Certificate (No.: Longfangguan No. 0070869).
In April 2009, we entered into a land supply agreement with the Sichuan Xinjin County Government to acquire 100 mu (approximately 66,700 square meters) of land within the Xinjin Chemical Industrial Park.
We currently rent office space located at 23rd Floor, UnionsunYangkuo Plaza, No. 2, Block 3, Renmin Road South, Chengdu, Postal Code: 610041, China. The rental agreement is renewed annually and the rent, which is US$147,059 per annum, is paid quarterly.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not aware of any pending or threatened legal proceeding that, if determined in a manner adverse to us, could have a material adverse effect on our business and operations.
ITEM 4.
ITEM 4. (REMOVED AND RESERVED)
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITY
The Company’s common stock is traded on the AMEX under the symbol “TPI”; our cusip number is 88630M104. We first began trading on August 14, 2007 on the Over the Counter Bulletin Board. Beginning on October 1, 2008, we began trading on the AMEX under the symbol “TPI.” Accordingly, the following table sets forth the quarterly high and low bid prices for the common stock since the quarter ended September 30, 2008. The prices set forth below represent inter-dealer quotations, without retail markup, markdown or commission and may not be reflective of actual transactions.
On September 26, 2011, the closing bid price of the common stock was $1.29 and we had approximately 272 record holders of our commons stock. This number excludes any estimate by us of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed.
In 2008, we granted five (5) year Class A Warrants to purchase 4,757,814 shares of our Common Stock, $0.001 par value per share at an initial exercise price of $2.50 per share, and seven (7) year Class B Warrants to purchase 4,757,814 shares of our Common Stock at an initial exercise price of $3.00 per share. In 2009, we granted three (3) year warrants to purchase 306,914 shares of our Common Stock, at an initial exercise price of $4.50 per share, subject to adjustment. The exercise prices of the Warrants were subject to weighted average and other anti-dilution adjustments which were later removed. As of September 28, 2010, 3,898,438 of the Class A Warrants, 4,257,814 of the Class B Warrants and 306,913 of the Class C Warrants were outstanding. We also granted warrants to purchase 1,522,500 shares of Common Stock with an exercise price of US$1.60, $2.50 and $3.00 per share to TriPoint Global Equities, LLC, the placement agent in the 2008 Financing. In connection with the 2009 Financing, we granted warrants to purchase 122,766 shares of common stock at $3.25 and 24,553 shares at $4.50 to TriPoint Global Equities, LLC, the placement agent or its designees of such financing. As of September 27, 2011, there are 430,462 placement agent warrants outstanding.
Dividend Policy
Preferred share dividend
On December 31, 2009, the Company recorded $98,538 as dividends to the investors of the Company’s 2008 Financing, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. This resolution was approved by the Company’s Board and the Company decided to pay the dividends in cash to those investors.
On January 11, 2010, the Company declared a quarterly cash dividend to be paid to its common stock shareholders. The dividend of $0.025 per common share, with the total amount of $403,085 has been declared to shareholders of record as of January 31, 2010 and actually paid on February 25, 2010.
On March 31, 2010, the Company recorded $82,541 as dividends to the investors of the Company’s 2008 Financing, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. This resolution was approved by the Company’s Board and the Company decided to pay the dividends in cash to those investors.
On June 30, 2010, the Company recorded $72,995 as dividends to the investors of the Company’s 2008 Financing, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. This resolution was approved by the Company’s Board and the Company decided to pay the dividends in cash to those investors.
As of June 30, 2010, 8,155,375 shares of Series A Preferred Stock were converted into 8,155,375 shares of common stock in total, of which 5,786,250 were converted during the fiscal year ended June 30, 2010.
As of June 30, 2010, 859,376 Class A and 500,000 Class B Warrants of the Company have been exercised for respective equivalent number of shares of common stock. The exercise prices of Class A and Class B Warrants are $2.50 and $3.00 per share, respectively. In addition, the warrants to placement agent to purchase 542,394 shares of common stock at $1.60, 15,025 shares of common stock at $2.50 and the options issued to external service providers to purchase 165,000 shares of common stock at $2.00 per share have also been exercised. As a result, an aggregate of 2,081,795 shares of outstanding common stock have been added and a total of $4,591,958 net proceeds have been received from the exercise of these warrants and options.
On September 30, 2010, the Company recorded $54,857 as dividends to the investors of the Company’s 2008 Financing, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. This resolution was approved by the Company’s Board and the Company decided to pay the dividends in cash to those investors.
On December 31, 2010, the Company recorded $53,501 as dividends to the investors of the Company’s 2008 Financing, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. This resolution was approved by the Company’s Board and the Company decided to pay the dividends in cash to those investors.
By March 18, 2011, under the mandatory conversion agreement, the remaining totaled 1,360,000 preferred shares were converted to common shares as 1:1 exchange ratio.
As of September 27, 2011, there were 29,396,276 common shares outstanding with -0- outstanding preferred shares.
Common stock dividend
On March 26, 2009, we announced that the Board of Directors declared an annual cash dividend of $0.10 per common share that will be paid quarterly. The initial dividend of $.025 was paid to common shareholders of record on April 30, 2009, with the actual distribution occurring around June 10, 2009. The cash dividend was paid solely to common stockholders and was not be paid on shares owned by management, advisors or other inside shareholders, all of whom have agreed to waive receipt of the dividend. The majority of the Company's Series A Preferred Shareholders approved the cash dividend as of April 14, 2009.
On July 8, 2009, the Company declared a quarterly cash dividend to be paid to its common stock shareholders. The dividend of $0.025 per common share, with the total amount of $172,023 had been declared to shareholders of record as of July 31, 2009 and paid on September 9, 2009.
On October 5, 2009, the Company declared a quarterly cash dividend to be paid to its common stock shareholders. The dividend of $0.025 per common share, with the total amount of $344,322 has been declared to shareholders of record as of October 30, 2009 and actually paid on December 10, 2009.
On January 11, 2010, the Company declared a quarterly cash dividend to be paid to its common stock shareholders. The dividend of $0.025 per common share, with the total amount of $403,085 has been declared to shareholders of record as of January 31, 2010 and actually paid on February 25, 2010.
On May 12, 2010, we announced the temporary suspension of common stock dividend in our 3rd quarterly report. We believe by focusing the capital on our strategic growth plan instead of paying a dividend at the present time to our common shareholders, we should be able to capture greater long-term returns for our shareholders. Given the opportunities presented by China’s ongoing healthcare reform and the necessary approvals that we are required from our preferred holders to continue to pay a dividend to our common shareholders, we decided to suspend our common share dividend program. As a policy management believes that in the event we experience a shortage of opportunities to efficiently invest and grow our business with our excess cash on hand, then a dividend payable is an appropriate use of excess capital.
Description of Equity Compensation Plans
The Company adopted an Equity Incentive Plan in 2008 (the “2008 Equity Incentive Plan”). On July 15, 2010, the Company’s Compensation Committee recommended an incentive compensation schedule for certain Company employees pursuant to the 2008 Equity Incentive Plan, which the Company's Board approved. Pursuant thereto, the Company issued 614,500 shares of common stock to certain employees. One-fourth of the total number of shares vested immediately on July 15 2010; One-fourth of the total number of shares vested on October 15, 2010; and the remaining shares vested on January 15, 2011.
Sales of Unregistered Securities
During the past three years, we effected the following transactions in reliance upon exemptions from registration under the Securities Act as amended. Unless stated otherwise; (i) that each of the persons who received these unregistered securities had knowledge and experience in financial and business matters which allowed them to evaluate the merits and risk of the receipt of these securities, and that they were knowledgeable about our operations and financial condition; (ii) no underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with the transactions; (iii) the transactions did not involve a public offerings; and (iv) each certificate issued for these unregistered securities contained a legend stating that the securities have not been registered under the Act and setting forth the restrictions on the transferability and the sale of the securities.
To accomplish the Share Exchange with Raygere, we issued an aggregate of 12,790,800 shares of common stock in exchange for all of the issued and outstanding capital stock of Raygere. The shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act for issuances not involving any public offering.
Pursuant to the Securities Purchase Agreement, we issued an aggregate of $15,225,000 Notes, which are initially convertible into an aggregate of 9,515,625 shares of our Series A Preferred Stock and Warrants to purchase an aggregate of 9,515,628 shares of our Common Stock. The shares were issued to 27 accredited investors pursuant to the exemption from registration provided by Section 4(2) of the Securities Act for issuances not involving any public offering.
In connection with the financings we completed on January 16, 2008 and January 25, 2008, we issued TriPoint Global Equities, LLC, the placement agent to the Financings, placement agent warrants, identical to those issued to the Investors pursuant to the Securities Purchase Agreement, to purchase up to an aggregate of 1,522,500 shares of our common stock. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering.
On May 9, 2008, we issued 20,000 shares of Common stock to employees. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering.
On June 30, 2008, we issued 236,488 shares of common stock to the investors of our 2008 Financing as payment of the quarterly dividend per the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. The dividend shares were issued to these investors pursuant to the exemption from registration provided by Section 4(2) of the Securities Act for issuances not involving any public offering.
On December 31, 2008, we issued 223,558 shares of common stock to the investors of our 2008 Financing as payment of the quarterly dividend per the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. The dividend shares were issued to these investors pursuant to the exemption from registration provided by Section 4(2) of the Securities Act for issuances not involving any public offering.
On March 31, 2009, we issued 216,610 shares of common stock to the investors of our 2009 financings as payment of the quarterly dividend per the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. The dividend shares were issued to these investors pursuant to the exemption from registration provided by Section 4(2) of the Securities Act for issuances not involving any public offering.
On May 5, 2009, we issued 45,000 shares of common stock to Chesapeake Group, Inc., for the investor relates services they will provide to us, The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering.
On October 27, 2009, we completed a private equity financing of $4,987,500, with eight accredited investors (the “2009 Financing”). Net proceeds from the offering are approximately $4,490,000. Pursuant to the financing, we issued, for $4,987,500, a total of 1,534,570 units of our securities at $3.25 per unit. Each unit consists of (i) one share of the Company's common stock, par value $0.001 per share (the "Common Stock"), and (ii) a Class C Warrant, with each Class C Warrant exercisable at $4.50 to purchase one-fifth of a share of Common Stock, such that the total amount of warrants issued to each investor as shall be equal to twenty percent (20%) of the number of units purchased by each purchaser. Each of the warrants has a term of three (3) years. In connection with this financing, we granted warrants to purchase 122,766 shares of common stock at $3.25 and 24,553 shares at $4.50 to TriPoint Global Equities, LLC, the placement agent or its designees.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD-LOOKING INFORMATION
This report contains forward-looking statements regarding our plans, expectations, estimates and beliefs. Actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We have based these forward-looking statements largely on our expectations.
Forward-looking statements are subject to risks and uncertainties, certain of which are beyond our control. Actual results could differ materially from those anticipated as a result of the factors described in the “Risk Factors” and detailed in our other Securities and Exchange Commission filings.
Because of these risks and uncertainties, the forward-looking events and circumstances discussed in this report or incorporated by reference might not transpire. Factors that cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in the “Risk Factors” section and elsewhere in this report.
We did not conduct any operations during periods up through the date of the Share Exchange. However, we have included elsewhere in this report the historical consolidated financial statements of the Company and its subsidiaries, which we own as a result of the Share Exchange. The following discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of this report. Actual results may differ materially from those contained in any forward-looking statements.
The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of the Company for the year ended June 30, 2011 and should be read in conjunction with such financial statements and related notes included in this report.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of TPI for the fiscal years ended June 30, 2011 and 2010 and should be read in conjunction with such financial statements and related notes included in this report.
Overview
We are engaged primarily in the development, manufacturing, marketing and sale of patented biopharmaceuticals, branded generics, modernized Chinese medicines and other pharmaceuticals in China. We currently manufacture and market a comprehensive portfolio of 58 products approved by the SFDA including the patented Gingko Mihuan Oral Liquid (“GMOL”), 24 of which are included in the highly selective National Medicine Catalog of the National Medical Insurance program. And as of June 30, 2011, we had 10 drug candidates pending the SFDA approval. Additionally, we have 6 trademarks granted and 16 trademarks pending.
Chengdu Tianyin Pharmaceutical Co., Ltd (“Chengdu Tianyin” or “CTY”), was established in 1994 in Chengdu, Sichuan Province of China as a pharmaceutical company that manufactures and sells modernized traditional Chinese medicines and branded generics. The current management of the Company acquired 100% of the equity interest of CTY in 2003. On October 30, 2007, Grandway completed the acquisition of the 100% of the equity interest and now owns 100% of the equity interest of CTY, headquartered at Chengdu, China that operates our business.
In June 2009, CTY invested $723,500 to establish a wholly-owned trading subsidiary, Chengdu Tianyin Medicine Trading Co., Ltd (“TMT”) for sales and distribution of medicine produced by CTY. We expect the operation of TMT to optimize our business model through stronger distribution channels.
On August 21, 2009, Sichuan Jiangchuan Pharmaceutical Co., Ltd (“JCM”) was established by TPI, along with Sichuan Mingxin Pharmaceutical and an individual investor to produce pharmaceutical raw materials as its major business. Total registered capital of JCM is $2,934,000, of which TPI accounts for 77%. JCM will serve as TPI’s foundation for its business in the rapidly growing macrolide antibiotics industry in China.
Competitive environment
The market for pharmaceutical products is highly competitive. Our operations may be affected by government policies, post-market studies, pipeline development, technological advance by competitors, industrial consolidation, patents granted to competitors, competitive combination products, new products offered by our competitors, as well as new information provided by other marketed products and/or other post-market studies. In addition, the ongoing healthcare reform in China provides opportunities as well as challenges to our pipeline development and market expansion.
Development and Growth Strategy
Research and Development
The cornerstone of our business development strategy relies upon our partnership-based research and development (R&D) efforts which support us in developing and commercializing our product pipeline and ultimately with our marketing and sales through our expanding distribution network. Under this R&D model, we are entitled to purchase the exclusive ownership and intellectual properties of new drugs developed by research institutes upon SFDA approval. Prior to our purchase, the institutes take the full financial responsibility for the costs incurred during the R&D phase. The purchase price for these drugs ranges from $250,000 to $800,000 per candidate, which is based upon the development costs for individual products and the expected revenue from the product. Usually, we expect the material net cash inflows from drugs in late stage development to begin within three years upon SFDA approval. Since the projects are targeted for well defined marketable products and TPI will retain the full ownership of these SFDA-approved products and related intellectual properties, the subsequent commercialization is expected to be accretive upon new products’ market entry. In addition, we are able to leverage these R&D resources to further facilitate market recognition and commercialization of these products. With this strategy in place, we increased market penetration and revenue growth in fiscal year 2010 and plan to continue to expand and enhance marketing and sales going forward. Part of this strategy involves increasing and improving our marketing and sales activities to enhance the market leadership of our key leading products and to increase the sales of other products by expanding our sales force, solidifying our distribution network and expanding our market segment coverage, while increasing our marketing and promotional activities.
Currently, we have 10 pipeline drugs with our partnership research institutes, of which we are entitled to purchase the exclusive ownership and intellectual properties upon the SFDA approval. They are Huangtengsu Tablets, Lifei Tablets, Fuyang Granules, Shuxiong Tablets, Suxiao Zhixie Capsules, Shuanghuang Xiaoyan Tablets, Huoxiang Zhengqi Capsules, Jiegu Xujing Ointment, Runing Tablets, Dengzhan Huasu Tablet. These drugs are currently pending for SFDA approval. Though the pending period of SFDA approval varies from one to several years depending on the individual drug, we expect to receive SFDA approvals for these drugs within one and a half to two years based on our past experience.
This R&D model reduces the financial risks from a prolonged or uncertain approval process and limits the impact on our financial position and liquidity by the unexpected delay of any individual drug approval. The possible uncertainties in receiving the approval involve endpoint measurement during these clinical trials. To facilitate successful trials, we assist our partnership institutes with development during the early stage of the trials, including patient and control group selection, trial design, endpoint measurement and etc. A successfully run trial depends on a variety of well-calibrated scientific and technical indices that are required for SFDA approval. If some of these indices are unable to reach satisfactory result, we can either troubleshoot or terminate the development in the early stage, which will not impact us financially.
As part of our continuing growth strategy, we will continue our partnership-based R&D efforts to further commercialize and broaden our product pipeline. We usually begin drug commercialization within 6 months of the SFDA approval. However, there are several factors that may lead to delays in this process including: mass manufacturing capacity readiness, marketing network preparedness and the indication seasonality. On average, we expect the material net cash flow to be positive from these drugs within two years to two and half years after their market entry.
As of September 27, 2011, we have received 2 SFDA drug approvals as the following and the material net cash inflows from these drugs to begin in the year of 2013:
The following is a list of SFDA approved products in the fiscal 2011:
Clindamycin Tablets for various bacterial infections.
Gliclazide Tablets for Diabetes Mellitus.
Management plans to selectively pursue strategic acquisitions and licensing opportunities as effective means to broaden our product portfolio, leverage our resources and expand our market coverage.
Jiangchuan Macrolide Facility (“JCM”)
In April 2009, we entered into a land supply agreement with the Sichuan Xinjin County Government to acquire 100 mu (approximately 66,700 square meters) of land within the Xinjin Chemical Industrial Park to establish a manufacturing plant for Active Pharmaceutical Ingredients (“API”) of macrolides antibiotics. In August 2009, we partnered with Sichuan Mingxin Pharmaceutical Co., Ltd. in the launch of a new joint venture, Sichuan Jiangchuan JV (“JCM”), which primarily engages in the R&D, manufacturing, sales and marketing of API and chemical intermediates of macrolide antibiotics. The joint venture is 77% owned by TPI. JCM is funded through TPI’s internal cash flow with a total investment of approximately $20 million (Phase I: $10 million for plant construction, auxiliary facilities construction and equipment purchase; Phase II: $10 million for construction of high output manufacturing lines). The JCM construction was completed early 2011. The facility is currently undergoing GMP certification. We expect to receive GMP certification of JCM by October, 2011.
Tianyin Medicine Trading Distribution Business - TMT
We have been developing the distribution portfolio of TMT which distributes products manufactured by both TPI and other pharmaceutical companies to fuel our expanding sales network as well as to provide synergy to our existing organic product portfolio. TMT has been distributing mainly TPI's own products since its inception in 2009. In early November 2010, we successfully obtained one-year distribution rights from one of the most celebrated national brand injection pharmaceutical manufacturers, Jiangsu Lianshui Pharmaceutical, to distribute Lianshui-branded generic injection products including cough suppressant, antibiotics, anti-inflammatory medicines and products for other healthcare indications. The annual distribution revenue from TMT reached $17.1 million for the fiscal year 2011.
Future Forecast
We have met and exceeded the $90.0 million fiscal year 2011 revenue forecast. The forecasted net income excludes any non-cash expenses associated with stock compensation plans or stock option expenses. Pro forma net income for fiscal year 2011 is $17.5 million including the $1.9 million of stock compensation expenses added back to the net income of $15.6 million.
Based on the pricing pressure on generic pharmaceutical products nationwide as a result of the ongoing healthcare reform, the revenue of our generic division, which makes up approximately 40% of our total revenue, has been under pressure. We expect this pricing pressure to continue for the next several quarters.
Our analysis of the market condition suggests that although the pricing pressure is likely to continue, the JCM revenue along with the TMT distribution revenue are expected to support the growth of TPI for the coming fiscal year. Our forecast for the revenue contribution of the JCM macrolide revenue for the fiscal year 2012 is approximately $30 million.
Our current facilities operate at approximately 90% of the total capacity on 24 hours per day schedule. We are in the process of optimizing the usage of the remaining capacity and expanding the existing capacities to meet the increasing market demand.
Management will continue to evaluate the Company's business outlook and communicate any changes on a quarterly basis or as when appropriate.
Discussion on Operating Results
Comparison of results (in $ million) for the fiscal years ended June 30, 2011 and 2010
Sales for the fiscal year ended June 30, 2011 was $95.2 million up 49.0% from $63.9 million for the fiscal year ended June 30, 2010, supported by the sales channel expansion and market penetration for our current product portfolio. The fiscal 2011 revenue exceeded our targeted $90.0 million revenue guidance for the fiscal year 2011. This validates our market analysis and growth plans. Among the revenue mix, TPI’s organic portfolio delivered $78.1 million compared with $63.9 million, a gain of 22.2% year over year. We are exploring various growth strategies to sustain the current momentum. In addition to introducing distribution revenue from TMT and macrolide API revenue from JCM, for our core product portfolio, we are focusing on AAA and AA hospitals in major cities of China as an in-depth approach to develop high end hospital pharmaceutical market. Our top five products by sales are:
Product Description Amount
Ginkgo Mihuan Oral Liquid (GMOL) $20.5 million
Apu Shuangxin Granules(APU) $6.6 million
Xuelian Chongcao (XLCC) $4.1 million
Azithromycin Dispersible Tablets (AZI) $3.9 million
Qingre Jiedu Oral Liquid (QRE) $2.9 million
The core product portfolio totaled $38.0 million or 48.7% of the organic portfolio revenue.
Cost of Sales for the fiscal year ended June 30, 2011 was $52.7 million or 55.4% of the revenue, compared with $30.6 million or 47.9% of the revenue for the fiscal year ended June 30, 2010. Our cost of sales primarily consists of the costs of direct raw materials, labor, depreciation and amortization of manufacturing equipment and facilities, and other overhead. The increase of our cost of sales from the previous year was due to 1) the additional distribution business through TMT amounting to $17.1 million at 11% gross margin, 2) pricing pressure on generic pharmaceutical sales, and 3) increase of raw material costs.
Gross profit for fiscal year 2011 was approximately $42.5 million with 44.6% gross margins compared with $33.3 million with 52.1% gross margin for fiscal year 2010. The decrease in gross margins was attributable to the addition of TMT revenues, the distribution arm of TPI, whose gross margins average approximately 11%. The pricing pressure on our generic products also contributed to the reduction of the gross margins. During the fiscal year 2011, our organic product portfolio delivered approximately 52.0% gross margins, about 0.8% lower than 52.8% in fiscal year 2010. Given the blend of the TMT lower margin distribution revenue and recent gross margin reduction associated with our proprietary portfolio under the current pricing trend, we anticipate that our overall gross margin in the near term, on a quarter to quarter comparison basis, may trend lower, but on a sequential basis should stabilize and improve depending upon the revenue mix percentages of TMT revenue, upcoming JCM macrolide API revenue as compared to the proprietary portfolio’s revenue performance. The factors that influence the gross margins of our major products include 1) raw material price (85% of the cost of goods sold) and 2) production cost (15% of the cost of goods sold).
Operating and R&D Expenses were $24.4 million in fiscal year 2011 compared with $18.6 million in fiscal year 2010. Continuing sales payroll and marketing expense increases are the main components of the operating expenses. We anticipate these costs may continue to increase but will be in line with our revenue growth. Operating expenses also included $1.9 million of share-based compensation payment for TPI employees.
Net income was $15.6 million in fiscal year 2011 compared with $11.9 million in fiscal year 2010. The increase in our net income was mainly driven by the revenue growth. The Pro forma net income excludes the non-cash share-based compensation payment.
Foreign Currency Translation Adjustment. Our reporting currency is the US dollar. We have evaluated the determination of its functional currency based on the guidance in ASC Topic, “Foreign Currency Matters,” which provides that an entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. Wehave raised financings in the U.S. dollar, paid operating expenses primarily in the U.S. dollar, paid dividends to its shareholders of common stock and expected to receive any dividends that may be declared by its subsidiaries in U.S. dollars. Therefore, it has been determined that our functional currency is the U.S. dollar based on the expense and financing indicators, in accordance with the guidance in ASC 830-10-85-5. However, the functional currency of Chengdu Tianyin, our indirectly owned operating subsidiary is Renminbi (RMB). Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. 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.
Currency translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of shareholders' equity and amounted to $3.23 million as of June 30, 2011. The balance sheet amounts with the exception of equity at June 30, 2011 were translated at 6.46412 RMB to 1.00 US dollars as compared with 6.78887 RMB to 1.00 US dollar at June 30, 2010. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the years ended June 30, 2011 and 2010 were the average exchange rates during the years.
Comprehensive Income was $18.9 million in fiscal year 2011 compared with $12.8 million in fiscal year 2010.
Liquidity and Capital Resources
Discussion of cash flow
Operating activities
As of June 30, 2011, we had working capital totaling $38.5 million, including cash and cash equivalents of $31.7 million. Net cash generated from operating activities was $14.2 million for fiscal year 2011 as compared with $15.4 million for fiscal year 2010 which was mainly due to the change in fair value of warrant liability of $(1.6) million compared with $0.16 million in the previous year. In fiscal year 2011, the accounts receivable also improved: $9.0 million, 9.5% of the total revenue as compared with $8.2 million 12.8% of the fiscal year 2010 revenue. We believe that TPI is adequately funded to meet all of our working capital and capital expenditure needs for fiscal year 2012.
Investing activities
Net cash used in investing activities for the fiscal year ended June 30, 2011 totaled $(11.7) million compared with $(8.8) million in 2010 which are related to the acquisition of intangible drug, and property and equipment. The increase of cash used in investing activities during the fiscal year 2011 was mainly the result of our pipeline development and the JCM construction.
Financing activities
Net cash provided by financing activities for fiscal year 2011 totaled $1.1 million which is related short term bank loan of $1.2 million, as compared with $8.0 million in fiscal year 2010 mainly due to the $1.4 million paid dividends and $8.9 million additional paid in capital related to the 2009 financing.
Borrowings and Credit Facilities
The short-term bank borrowings outstanding as of June 30, 2011 and 2010 were $2.8 million and $1.5 million, respectively. We paid an average interest rate of 6.383% and 5.629% per annum, respectively. These loans were made from CITIC bank and secured by the property and equipment of Chengdu Tianyin. They do not contain any additional financial covenants or restrictions. The borrowings have one year terms and contain no specific renewal terms.
Stock Repurchase Program
On October 27, 2008, the Board of Directors authorized the Company to repurchase up to $3.0 million of its common stock from time to time in the open-market or through privately negotiated transactions. The Company's original announcement stated that the buyback would be conducted through January 2009, but we later extended the buyback through June 30, 2009. As of June 30, 2010, a total of 83,785 shares had been bought back at prevailing market prices. Shares purchased were retired to treasury.
Cash dividend
On March 26, 2009, we announced that the Board of Directors declared an annual cash dividend of $0.10 per common share that will be paid quarterly. The initial dividend of $0.025 per common share was paid to common shareholders of record on April 30, 2009, with the actual distribution occurring around June 10, 2009. The cash dividend was paid solely to common stockholders and was not paid to shares owned by the management, advisors or other inside shareholders, all of whom have agreed to waive receipt of the dividend. The majority of the Company's Preferred Shareholders had approved the cash dividend as of April 14, 2009.
On July 8, 2009, October 5, 2009, and January 11, 2010, respectively, the Company declared quarterly cash dividends to be paid to its common stock shareholders. The dividend of $0.025 per common share, with total amount of $172,023, $344,322 and $403,085, were paid to shareholders of record as of July 31, 2009, October 30, 2009 and February 25, 2010, respectively.
In May 2010, we announced the suspension of our dividend to our common stock shareholders. The China health care industry, through the ongoing reform, is currently evolving and realizing an ever changing and dynamic competitive landscape. As a result of the reform, opportunities exist for TPI to capture a greater market share by investing the internal capital resources in our strategic growth plan. We believe by utilizing the capital in our strategic growth plan, we should be able to generate greater long-term returns for our shareholders. Given these opportunities, we have decided to suspend our common share dividend program.
As a policy, management believes that in the event we experience a shortage of opportunities to efficiently invest and grow our business with our excess cash on hand, then a dividend payable is an appropriate use of excess capital.
Critical Accounting Policies and Estimates
Our consolidated financial information has been prepared in accordance with generally accepted accounting principles in the United States, which requires us to make judgments, estimates and assumptions that affect (1) the reported amounts of our assets and liabilities, (2) the disclosure of our contingent assets and liabilities at the end of each fiscal period and (3) the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
When reviewing our financial statements, you should consider (1) our selection of critical accounting policies, (2) the judgment and other uncertainties affecting the application of those policies, and (3) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgment and estimates used in the preparation of our financial statements.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the Unites States of America (GAAP).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
In accordance with Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows," we consider all highly liquid instruments with original maturities of three months or less to be cash and cash equivalents.
Accounts Receivable and Bad Debt Reserve
Accounts receivable are stated at the amount management expects to collect from balances outstanding at the end of the period. Sales of goods are subject to revenue recognition condition. Even if we have not received the payment, they should be recognized as revenue and increase accounts receivable accordingly. Based on its assessment of the credit history with customers having outstanding balances and our current relationships with such customers, management decides whether any realization of losses on balances outstanding at the end of the period will be deemed uncollectible based on the age of the receivables. As such, we reserve 1% of accounts receivable balances that have been outstanding less than one year, 50% of accounts receivable balances that have been outstanding between one year and two years, and 100% of receivable balances that have been outstanding for more than two years. The allowance for doubtful accounts at June 30, 2011 and 2010 was $510,903 and $421,079, respectively.
Accounts receivable was $9.0 million for the year ended June 30, 2011 as compared to $8.2 million for the year ended June 30, 2010, an increase of approximately $0.8 million. During the year ended June 30, 2011, sales revenue was $95.2 million as compared to $63.9 million for fiscal year 2010. Based upon our periodic review of customers using credit, we believe our credit risk remains under control and do not have any significant changes. We only grant credit to customers with proven sales records and all credit sales must be approved by the CEO and our finance department. Moreover, we conduct a credit review at least annually for each of our customers that we grant credit. In addition, we have an internal policy that requires finance staff and sales personnel to closely monitor the collection and credit status of each client with credit. If the credit sales exceed the credit granted to a customer, or the account receivable is over 60 days, we will suspend all sales to that customer until we receive their payments and their account is brought current. Customers without any sales history must pay prior to the shipment of goods.
Inventory	
Ending inventory is stated at the lower of cost or market at the balance sheet date. Subsequent measurement of inventory uses the "lower of cost and net realizable value" accounting principle which is related to the historical cost and net realizable value on accounting measurement basis. Inventory is determined using the weighted-average cost method. Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. Management continually evaluates the recoverability based on assumptions about customer demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves or write-downs may be required that could negatively impact our gross margin and operating results. The inventory reserve at June 30, 2011 and 2010 was $-0- and $139,014, respectively. The inventory reserve was for obsolete raw material with carrying value less than the net realizable value.
Two major factors account for our low level of inventory relative to our growth in production. First, we have optimized our product portfolio to contain more products with higher gross margin. As a result, the increase in inventory is lower than the increase in revenue. Second, after adopting lean production processes, we have increased our product turnover by shortening the business cycle between accepting orders and delivering products.
Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-line method, over 5 and 40 years. The carrying value of long-lived assets is evaluated whenever changes in circumstances indicate the carrying amount of such assets may not be recoverable. If necessary, we recognize an impairment loss for the difference between the carrying amount of the assets and their estimated fair value. Fair value is based upon current and anticipated future undiscounted cash flows. Expenditures for maintenance and repairs are charged to operations as incurred; additions, renewals and betterments are capitalized. Based upon its most recent analysis, we believe that no impairment of property and equipment exists for the year ended June 30, 2011.
Valuation of Long-Lived Assets
We adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Per SFAS 144, we are required to periodically evaluate the carrying value of long-lived assets and to record an impairment loss when indicators of impairment are present and the discounted cash flows estimated to be generated by those assets are less than the asset’s carrying amounts.
In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.
Revenue Recognition
We recognize revenue of product sales and the cost related when title has been transferred, the risks and rewards of ownership have been transferred to the customer, both the cost and the revenue are determinable, and the collection of the related receivable is probable, which is generally at the time of shipment. The shipment term for most of our customer sales is “Cost plus Freight” (“C&F”). Our contracted logistic companies pick up the goods from our warehouse and deliver them to the warehouses designated by our customers. We grant credit to customers with proven sales records. Sales to customers without sales records require advance payment prior to shipment of goods. Our CEO and Finance Department must pre-approve all credit sales. We conduct a credit review, on at least an annual basis, for each of our customers that we grant credit. In addition, we call on our finance staff and sales personnel to closely monitor the credit recovery and credit status of each client with credit. Our internal controls require that we identify any obsolete and/or excess inventory, and estimate accruals based on the principle of lower of costs and market value (“LCM”). Although we have adopted the principle of lean production, such accruals are generally not significant. Currently we do not have any sales on consignment and we do not use consignment sales as our sales method. After products arrive at customers’ warehouses (FOB destination), both the risk and ownership of the products are transferred to customers. Since all of our products received GMP certification and we maintain high quality standards, returns of products are basically negligible. Finally, although the pharmaceutical is highly competitive, we believe that the GMP certification and high quality of our products, coupled with the new SFDA product filing and registration policy, which provides, so long as no other company within our immediate pharmaceutical industry produces a product superior to ours in terms of current advances and product breakthroughs, protection to formulas and production techniques of our approved products, prohibits producing and selling similar products without the SFDA’s approval, and thus other companies are prevented from producing and distributing new products that would compete directly with ours. As a result of the aforementioned, the bad debt provision for the year ended June 30, 2011 and year ended June 30, 2010 was $67,081 and $247,131 respectively.
Cost of Goods Sold
Based on the matching principle, we recognize cost of goods sold at the same time when the related revenue has been recognized. We adopt the “weighted average method” to determine the cost of goods sold, using the average unit cost weighted by the number of units acquired at the various units cost times the sales volume during the accounting period. If the sales revenue or inventory accounting estimates change because of the changes in accounting principles on which these estimates relied or we obtain new information, and accumulate more experience, in such cases, we may revise our accounting estimates based on the new circumstances. We utilize prospective method to account for changes in accounting estimates. As a result, changes in accounting estimates only affect the current period; the impact will be recognized only for the current period. Any changes that affect both current and future periods, should be recognized for both the current and future periods.
Advertising Costs
We expense the cost of advertising as incurred. Advertising costs for the years ended June 30, 2011 and 2010 was $4,693,636 and $3,536,694, respectively.
Impairment of Intangible Assets
We evaluate the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. Such circumstances could include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. We measure the carrying amount of the asset against the estimated discounted future cash flows associated with it at a risk-free rate of interest. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires us to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. During the year ended June 30, 2011, we had no impairment losses.
Income Taxes
Deferred income taxes are computed using the asset and liability method, such that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial reporting amounts and the tax basis of existing assets and liabilities based on currently enacted tax laws and tax rates in effect in the People’s Republic of China for the periods in which the differences are expected to reverse. Income tax expense is the tax payable for the period plus the change during the period in deferred income taxes. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. No differences were noted between the book and tax bases of our assets and liabilities, respectively. Although we do not believe that we have significant tax liability in the U.S., since we recently paid cash dividends, we are seeking to engage an international tax expert to advise us with regard to U.S. and international tax compliance.
We are subject to PRC Enterprise Income Tax at a rate of 25%.
Fair Value of Financial Instruments
We consider the carrying amounts reported in the balance sheet for current assets and current liabilities qualifying as financial instruments and approximating fair value.
Foreign Currency Translation and Transactions
We have evaluated the determination of its functional currency based on the guidance in ASC Topic, “Foreign Currency Matters,” which provides that an entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. On the TPI level, we have raised financings in the U.S. dollar, paid our operating expenses primarily in the U.S. dollar, paid dividends to our shareholders of common stock and expected to receive any dividends that may be declared by our subsidiaries in U.S. dollars.
Therefore, it has been determined that our functional currency is the U.S. dollar based on the expense and financing indicators, in accordance with the guidance in ASC 830-10-85-5.The Company uses United States dollars (“U.S. Dollar” or “US$” or “$”) for financial reporting purposes. The subsidiaries within the Company maintain their books and records in their respective functional currency, being the primary currency of the economic environment in which their operations are conducted. Assets and liabilities of a subsidiary with functional currency other than U.S. Dollar are translated into U.S. Dollars using the applicable exchange rates prevailing at the balance sheet date. Items on the statements of income and comprehensive income and cash flows are translated at average exchange rates during the reporting period. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Other
Inflation has not had a significant effect on our operations, as increased costs to us have generally been offset by increased prices of products and services sold.
ITEM 7A
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Tianyin Pharmaceutical Co., Inc.
We have audited the accompanying consolidated balance sheets of Tianyin Pharmaceutical Co., Inc. (the “Company”) as of June 30, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 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 audits 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 consolidated 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 consolidated financial position of Tianyin Pharmaceutical Co., Inc. as of June 30, 2011 and 2010, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Patrizio & Zhao
Patrizio & Zhao
Parsippany, New Jersey
September 27, 2011
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Note 1 - Organization and Nature of Business
Tianyin Pharmaceutical Co., Inc. (Formerly Viscorp, Inc.), a public shell company as defined in Rule 12b-2 of the Exchange Act of 1934, was established under the laws of Delaware on August 20, 2002. The accompanying consolidated financial statements include the financial statements of Tianyin Pharmaceutical Co., Inc. and its subsidiaries (the “Company” or “TPI”). The Company’s primary business is to develop, manufacture and sell pharmaceutical products.
On January 16, 2008, Viscorp Inc. (“Viscorp”) completed a reverse acquisition of Raygere Limited (“Raygere”), which was incorporated in the British Virgin Islands on January 26, 2007. To accomplish the exchange of shares Viscorp issued 12,790,800 shares of common stock on a one to one ratio for a 100% equity interest in Raygere, per the terms of the Share Exchange and Bill of Sale of assets of Viscorp and Charles Driscoll. Viscorp was delivered with zero assets and zero liabilities at time of closing. Following the reverse acquisition, Viscorp changed the name to Tianyin Pharmaceutical Co., Inc. The transaction was regarded as a reverse merger whereby Raygere was considered to be the accounting acquirer as its shareholders retained control of TPI after the exchange. Although the Company is the legal parent company, the share exchange was treated as a recapitalization of Raygere. Thus, Raygere is the continuing entity for financial reporting purposes. The financial statements have been prepared as if Raygere had always been the reporting company and then on the share exchange date, had changed its name and reorganized its capital stock.
In September 2007, Raygere acquired 100% interest in Grandway Groups Holdings Ltd. (“Grandway”), which was incorporated on May 25, 2007, in the city of Hong Kong, the People’s Republic of China (“PRC”). On October 30, 2007, Grandway acquired 100% equity interest in Chengdu Tianyin Pharmaceutical Co., Ltd (“Chengdu Tianyin”), which was incorporated on April 1, 1994 in the city of Chengdu, PRC. As a result of the acquisition, Chengdu Tianyin became the wholly owned subsidiary of Grandway and an indirect wholly owned subsidiary or Raygere. The transaction was regarded as a reverse merger whereby Chengdu Tianyin was considered to be the accounting acquirer as both Grandway and Raygere were holding companies with no significant operations and Chengdu Tianyin continues as the primary operating entity even after the exchange, although Raygere is the legal parent company. As such, Chengdu Tianyin (and its historical financial statements) is the continuing entity for financial reporting purposes. The consolidated financial statements reflect all predecessor statements of income and cash flow activities from the inception of Tianyin in July 2007.
In June 2009, Chengdu Tianyin invested $723,500 to establish a wholly-owned trading subsidiary, Chengdu Tianyin Medicine Trading Co., Ltd (“Tianyin Medicine Trading” or “TMT”) for sale and distribution of medicine produced by Chengdu Tianyin. As of June 30, 2011, the financial results of TMT are consolidated into the consolidated financial statements presented herein.
On August 21, 2009, Sichuan Jiangchuan Pharmaceutical Co., Ltd (“JCM”) was established by Chengdu Tianyin, Sichuan Mingxin Pharmaceutical and an individual investor with active pharmaceutical ingredient (API) production as its major business. Total registered capital of JCM is $2,934,000, of which Chengdu Tianyin accounts for 77%. As of June 30, 2011, registered capital of $1,173,600 has been invested and the results of JCM are consolidated into the consolidated financial statements presented herein.
Note 2 - Summary of Significant Accounting Policies
Basis Of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United Stated of America. The consolidated financial statements include the accounts of TPI and its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.
In preparing the accompanying unaudited consolidated financial statements, the Company evaluated the period from June 30, 2011 through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. No such events were identified for this period.
TIANYIN PHARMACEUTICAL CO., INC.
Notes To Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in accordance 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 and 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. Significant estimates include valuation reserves for accounts receivable, inventory and income taxes. Actual results could differ from those estimates.
Cash and Cash Equivalents
In accordance with FASB ASC Topic 230, "Statement of Cash Flows", the Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from balances outstanding at the end of the period. Based on its assessment of the credit history with customers having outstanding balances and current relationships with them, management makes conclusions whether any realization of losses on balances outstanding at the end of the period will be deemed uncollectible based on the age of the receivables. The Company reserves 1% of accounts receivable balances that have been outstanding less than one year, and 50% of accounts receivable balances that have been outstanding more than one year. The allowance for doubtful accounts at June 30, 2011 and 2010 was $510,903 and $421,079, respectively.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using the weighted-average cost method. Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. Management continually evaluates the recoverability based on assumptions about customer demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves or write-downs may be required that could negatively impact our gross margin and operating results. The inventory reserve at June 30, 2011 and 2010 was $-0- and $139,014, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated based on the straight-line method over the estimated useful lives of the assets as follows:
Estimated Useful Life
Vehicles 5 to 10 years
Furniture, machinery and equipment 5 to 10 years
Buildings and improvements 10 to 50 years
Construction in progress primarily represents the renovation costs of plant, machinery and equipment Costs incurred are capitalized and transferred to property and equipment upon completion, at which time depreciation commences.
Cost of repairs and maintenance is expensed as incurred. Gain or loss on disposal of property and equipment, if any, is recognized in the consolidated statements of operations.
TIANYIN PHARMACEUTICAL CO., INC.
Notes To Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (continued)
Long-lived Assets
In accordance with FASB ASC Topic 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company reviews the recoverability of its long-lived assets on a periodic basis in order to identify business conditions, which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future discounted cash flows. If the total of the expected future discounted cash flows is less than the total carrying value of the assets, a loss is recognized for the difference between the fair value (computed based upon the expected future discounted cash flows) and the carrying value of the assets.
Intangible Assets
Intangible assets comprised of approved drugs and rights to use land. Intangible asset is carried at cost, less related accumulated amortization. Intangible assets representing approved drugs are separated into two groups: Traditional Chinese Medicine (TCM) and Non Traditional Chinese Medicine (NTCM). TCM are subject to impairment test at least annually to determine if the carrying value of the asset is impaired. NTCM drugs are amortized on a straight-line basis over their estimated useful life of 10 years.
Rights to use land with a finite useful life is being amortized on a straight line basis over its estimated useful life of 50 years.
Impairment of Intangible Assets
The Company applies the provisions of Financial Accounting Statement No. 142 “Goodwill and Other Intangible Assets (SFAS 142)” which addresses how goodwill and other acquired intangible assets should be accounted for in financial statements. In this regard, the Company tests these intangible assets for impairment annually or more frequently if indicators of potential impairment are present. Such circumstances could include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the asset against the estimated discounted future cash flows associated with it at a risk-free rate of interest. Should the present value of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value.
The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. During the year ended June 30, 2011, the Company applied a five-year benchmark borrowing interest rate of 6.65% as the discount rate and recorded the impairment loss of $-0- related to intangible assets for the years ended June 30, 2011 and 2010, respectively.
Revenue Recognition
The Company derives its revenues primarily from sale of pharmaceutical products. In accordance with the provisions of Staff Accounting Bulletin No. 104, codified in ASC Topic 480, revenue should not be recognized until it is realized or realizable and earned. Revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. In this regard, the Company’s revenue is recognized when merchandise is received by customers or shipped by the Company pursuant to contractual terms of sales, title and risk of loss passes to the customers and the collectability is reasonably assured.
Research and Development
Research and development costs are expensed when incurred. Research and development costs for the years ended June 30, 2011 and 2010 was $1,072,519 and $852,848, respectively.
TIANYIN PHARMACEUTICAL CO., INC.
Notes To Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (continued)
Advertising Costs
The Company expenses the cost of advertising as incurred. Advertising costs for the years ended June 30, 2011 and 2010 was $4,693,636 and $3,536,694, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
A valuation allowance is provided to reduce the carrying amount of deferred tax assets if it is considered more likely than not that some portion, or all, of the deferred tax assets will not be realized. No differences were noted between the book and tax bases of the Company’s assets and liabilities, respectively. The operating subsidiary, Chengdu Tianyin, is a wholly foreign-owned enterprise incorporated in the PRC and subject to PRC Foreign Enterprise Income Tax (“FEIT”) Law. Chengdu Tianyin is entitled to a preferential tax treatment as a direct result of opening a production facility in Western China in Sichuan Province. The applicable reduced preferential state Enterprise Income Tax (“EIT”) rate under this policy was 15% until December 31, 2010 and increased to 25% on January 1, 2011. The Company’s TMT subsidiary and JCM partnership, both domestic invested companies, also are taxed at the 25% rate. The Company is not subject to any income taxes in the United States.
Fair Value of Financial Instruments
The Company’s financial instruments include cash equivalents, accounts receivable, notes receivable, accounts payable, short-term debt and other financial instruments associated with the issuance of the common stock. The carrying values of cash equivalents, accounts receivable, notes receivable, and accounts payable approximate their fair value because of the short maturity of these instruments. The carrying amounts of the Company’s bank borrowings under its credit facility approximate fair value because the interest rates are reset periodically to reflect current market rates.
The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”) on January 1, 2008.SFAS 157 has been codified as ASC 820-10, “Fair Value Measurements.” ASC 820-10, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820-10 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions
TIANYIN PHARMACEUTICAL CO., INC.
Notes To Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (continued)
Foreign Currency Translation and Transactions
The Company has evaluated the determination of its functional currency based on the guidance in ASC Topic, “Foreign Currency Matters,” which provides that an entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash.
On its own, the Company raises financing in the U.S. dollar, pays its own operating expenses primarily in the U.S. dollar, paid dividends to its shareholders of common stock and expects to receive any dividends that may be declared by its subsidiaries in U.S. dollars.
Therefore, it has been determined that the Company’s functional currency is the U.S. dollar based on the expense and financing indicators, in accordance with the guidance in ASC 830-10-85-5.
The Company uses United States dollars (“U.S. Dollar” or “US$” or “$”) for financial reporting purposes. The subsidiaries within the Company maintain their books and records in Renminbi (“RMB”), the currency of the currency of China, the economic environment in which the Company’s primary subsidiaries conduct their operations. Assets and liabilities of the subsidiaries in RMB are translated into U.S. Dollars using the applicable exchange rates prevailing at the balance sheet date. Items on the statements of income and comprehensive income and cash flows are translated at average exchange rates during the reporting period. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.
The exchange rates used to translate amounts in RMB into US Dollars for the purposes of preparing the condensed combined financial statements were as follows:
June 30, 2011 June 30, 2010
Balance sheet items, except for shareholders’
equity items RMB 1: US$0.15470 RMB 1: US$0.14730
June 30, 2011 June 30, 2010
Amounts included in the statements of
income, and statements of cash flows for
the years then ended RMB 1: US$0.15112 RMB 1: US$0.14667
Shareholders’ equity items Historical rate Historical rate
Comprehensive Income
The Company has adopted SFAS No. 130, codified in ASC Topic 220-10, Reporting Comprehensive Income, which establishes rules for the reporting and display of comprehensive income, its components and accumulated balances. ASC 220-10 defines comprehensive income to include all changes in equity, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on available-for-sale marketable securities, except those resulting from investments by owners and distributions to owners.
Share Based Compensation
The Company accounts for stock based compensation issued to non-employees in accordance with SFAS No. 123R, codified in ASC Topic 718, and Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in conjunction with Selling Goods or Services.” The EITF No. 96-18 reached a consensus that the issuer should measure the fair value of the equity instruments using the stock price and other measurement assumptions as of the earlier of either of the following: (1) The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a "performance commitment"); or (2) The date at which the counterparty's performance is complete.
TIANYIN PHARMACEUTICAL CO., INC.
Notes To Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (continued)
Earnings Per Share
In accordance with ASC Topic 260, “Computation of Earnings Per Share” and ASC 260, “Participating Securities and the Two-Class Method under FASB Statement No. 128” (“EITF No. 03-6”),basic earnings per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. The Company’s Series A redeemable convertible preferred shares are participating securities. Diluted earnings per share is calculated by dividing net income attributable to ordinary shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the year. Ordinary equivalent shares consist of the ordinary shares issuable upon the conversion of the convertible preferred shares (using the if-converted method) and ordinary shares issuable upon the exercise of outstanding share options (using the treasury stock method).
Recent Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.2010-17, Revenue Recognition-Milestone Method (Topic 605) - Revenue Recognition (ASU 2010-17). ASU 2010-17 provides guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research or development transactions is appropriate. It provides criteria for evaluating if the milestone is substantive and clarifies that a vendor can recognize consideration that is contingent upon achievement of a milestone as revenue in the period in which the milestone is achieved, if the milestone meets all the criteria to be considered substantive. ASU 2010-17 is effective for us in fiscal 2012 and should be applied prospectively. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.
In January 2010, the FASB issued the following ASC Updates:
l ASU No. 2010-01- Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. This Update clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this Update are effective for interim and annual periods ending on or after December 15, 2009 with retrospective application.
l ASU No. 2010-02- Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This Update amends Subtopic 810-10 and related guidance to clarify that the scope of the decrease in ownership provisions of the Subtopic and related guidance applies to (i) a subsidiary or group of assets that is a business or nonprofit activity; (ii) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity, but does not apply to: (i) sales of in substance real estate; and (ii) conveyances of oil and gas mineral rights. The amendments in this Update are effective beginning in the period that an entity adopts FAS 160 (now included in Subtopic 810-10).
l ASU No. 2010-06- Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This Update amends Subtopic 820-10 that requires new disclosures about transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. This Update also amends Subtopic 820-10 to clarify certain existing disclosures. 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, which are effective for fiscal years beginning after December 15, 2010.
TIANYIN PHARMACEUTICAL CO., INC.
Notes To Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements (continued)
The Company expects that the adoption of the above Updates issued in January 2010 did not and will not have any significant impact on its financial position and results of operations.
In January 2010, the FASB expanded the disclosure requirements for fair value measurements relating to the transfers in and out of Level 2 measurements and amended the disclosure for the Level 3 activity reconciliation to be presented on a gross basis. In addition, valuation techniques and inputs should be disclosed for both Levels 2 and 3 recurring and nonrecurring measurements. The new requirements are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about the Level 3 activity reconciliation which are effective for fiscal years beginning after December 15, 2010. The Company adopted the new disclosure requirements on January 1, 2010 except for the disclosure related to the Level 3 reconciliation, which will be adopted on January 1, 2011. The adoption will not have an impact on its consolidated financial condition, results of operations or cash flows.
Reclassification
Certain amounts as of June 30, 2010 were reclassified for comparative presentation purposes.
Note 3- Inventory
Inventory consisting of material, labor and manufacturing overhead as of June 30, 2011 and 2010 consists of the following:
Note 4- Property and Equipment
Property and equipment at June 30, 2011 and 2010 consists of the following:
Depreciation expense for the fiscal years ended June 30, 2011 and 2010 was $544,679 and $518,573, respectively.
TIANYIN PHARMACEUTICAL CO., INC.
Notes To Consolidated Financial Statements
Note 5 - Intangible Assets
Intangible assets at June 30, 2011 and 2010 consist of the following:
Amortization expense for the fiscal years ended June 30, 2011 and 2010was $643,091 and $435,194, respectively. The estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows:
Note 6 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
The carrying value of accounts payable and accrued expenses approximates their fair value due to the short-term nature of these obligations.
Note 7 - Short-Term Bank Loans
Short-term bank loans consist of the following:
TIANYIN PHARMACEUTICAL CO., INC.
Notes To Consolidated Financial Statements
Note 8- Income Taxes
Raygere is incorporated in the British Virgin Islands. Under the corporate tax laws of British Virgin Islands, it is not subject to tax on income or capital gain.
The operating subsidiary Chengdu Tianyin is a wholly foreign-owned enterprise incorporated in the PRC and subject to PRC Foreign Enterprise Income Tax (“FEIT”) Law. Chengdu Tianyin is entitled to the preferential tax treatment for Opening Up its production facility in Western China in Sichuan Province. The applicable reduced preferential state EIT rate under this policy is 15% until December 31, 2010. Starting January 1, 2011, the effective tax rate for Chengdu Tianyin became 25%. And the effective tax rates of TMT and JCM are both 25% each from their operations. For the years ended June 30, 2011 and 2010, the income tax provision for the Company was $4,091,905 and $2,626,143, respectively.
In July 2006, the FASB issued FASB Interpretation No.48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN48 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Company does not recognize any benefits in the financial statements for the fiscal year ended June 30, 2011.
Note 9- Stockholders’ Equity And Related Financing Agreements
On January 16, 2008 the shareholders of Raygere were issued 12,790,800 shares of Viscorp’s Common Stock, under a Share Exchange Agreement (SEA) pursuant to a claim of exemption under Section 4(2) of the Securities Act of 1933, as amended, for issuances not involving a public offering. Under the SEA, after the transfer of all of its shares, Raygere became a wholly-owned subsidiary of Viscorp, which has changed its name to Tianyin Pharmaceutical Co., Inc. (hereinafter TPI).
On January 16 and 25, 2008, TPI (formerly Viscorp.) completed private financings totaling $15,225,000, with 27 accredited investors (the “January 2008 Financing”). The net proceeds from the financing were approximately $13,697,000. Consummation of the financing was a condition to the completion of the Share Exchange transaction with Raygere and the Raygere Stockholders under the Share Exchange Agreement. The securities offered in the financing were sold pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) by and among TPI (formerly Viscorp.), Raygere, the Raygere stockholders, Grandway and the investors named in the Purchase Agreement (collectively, the “Investors”). In accordance with the Purchase Agreement, Tianyin (formerly Viscorp.) issued a total of 152.25 Units of securities consisting of: (i) An aggregate of $15,225,000 principal amount of TPI 10% convertible exchangeable notes due on or before June 30, 2009 (the “Notes”); (ii) Five (5) year warrants to purchase 4,757,814 shares of TPI Common Stock, $0.001 par value per share at an initial exercise price of $2.50 per share (the “Class A Warrants”), and (iii) Seven (7) year warrants to purchase 4,757,814 shares of TPI Common Stock at an initial exercise price of $3.00 per share (the “Class B Warrants” and together with the Class A Warrants, the “Warrants”). The exercise prices of the Warrants are subject to weighted average and other anti-dilution adjustments.
Pursuant to the terms of the Purchase Agreement, the $15,225,000 of Notes automatically converted into an aggregate of 9,515,625 shares of TPI Series A convertible preferred stock, par value 0.001 per share (the “Series A Preferred Stock”) on March 11, 2008, the effective date of the authorization and designation of such class. As issued, the Series A Preferred Stock:
Pays an annual dividend of 10%, payable at TPI’s option either in cash or (if such shares have been registered for resale under the Securities Act of 1933, as amended) in additional shares of TPI Common stock valued at $1.60 per share;
Has a stated or liquidation value of $1.60 per share, or $15,225,000 as to all 9,515,625 shares of Series A Preferred Stock.
Each outstanding share of Series A Preferred Stock is convertible at any time at the option of the holder into one (1) full share of TPI Common stock.
TIANYIN PHARMACEUTICAL CO., INC.
Notes To Consolidated Financial Statements
Note 9- Stockholders’ Equity And Related Financing Agreements (continued)
Until June 30, 2009, there has been 2,369,125 shares of Series A Preferred Stock converted to 2,369,125 shares of TPI Common stock in total, of which 2,237,875 shares converted in the fiscal year ended June 30, 2009.
On May 9, 2008, TPI issued 20,000 shares of Common stock to employees. The company recorded this transaction to the General and Administrative expense at the share price on the date of the issuance, amounting to $68,000.
In connection with the financing, TPI granted warrants to purchase 1,522,500 shares of Common Stock with an exercise price of US$1.60, $2.50 and $3.00 per share to TriPoint Global Equities, LLC, the placement agent in the financing. These warrants have the same terms as the warrants issued to investors and are included in the units.
On July 29, 2008, the Company issued 236,488 shares of common stock, representing the fiscal year 2008 fourth quarter dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock.
On September 30, 2008, the Company recorded $361,332 as dividends to the investors of the Company’s 2008 Financing, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. This resolution was approved by the Company’s Board and the Company decided to issue common stock to those investors in lieu of cash.
On October 29, 2008, the Company issued 225,932 shares of common stock, representing the fiscal year 2009 first quarter dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock.
On December 31, 2008, the Company recorded $357,694 as dividends to the investors of the Company’s 2008 Financing, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. This resolution was approved by the Company’s Board and the Company decided issue common stock to those investors in lieu of cash.
On January 5, 2009, the Company issued 223,558 shares of common stock, representing the fiscal year 2009 second quarter dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock.
On March 31, 2009, the Company recorded $346,578 as dividends to the investors of the Company’s 2008 Financing, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. This resolution was approved by the Company’s Board and the Company decided to issue common stock to those investors in lieu of cash.
On April 14, 2009, the Company issued 216,609 shares of common stock, representing the FY 2009 third quarter dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock.
On April 14, 2009, the company announced that its Series A Preferred shareholders approved an annual cash dividend of $0.10 per common share that will be paid quarterly for each quarter of this fiscal year to common shareholders. The initial dividend of $0.025 per common share, which amounted to $73,944, was paid to common shareholders of record on April 30, 2009, with the actual distribution on June 10, 2009. The cash dividend was paid solely to common stockholders and not paid on shares owned by management, advisors or other inside shareholders, all of whom have agreed to waive receipt of the dividend.
On June 30, 2009, the Company recorded $325,417 as dividends to the investors of the Company’s 2008 Financing, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. This resolution was approved by the Company’s Board and the Company decided to pay the dividends in cash to those investors.
On July 8, 2009, the Company declared a quarterly cash dividend to be paid to its common stock shareholders. The dividend of $0.025 per common share, with the total amount of $172,023 had been declared to shareholders of record as of July 31, 2009 and actually paid on September 9, 2009.
TIANYIN PHARMACEUTICAL CO., INC.
Notes To Consolidated Financial Statements
On September 30, 2009, the Company recorded $233,683 as dividends to the investors of the Company’s 2008 Financing, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. This resolution was approved by the Company’s Board and the Company decided to pay the dividends in cash to those investors.
On October 5, 2009, the Company declared a quarterly cash dividend to be paid to its common stock shareholders. The dividend of $0.025 per common share, with the total amount of $344,322 has been declared to shareholders of record as of October 30, 2009 and actually paid on December 10, 2009.On October 27, 2009, the Company completed a private equity financing of $4,987,500, with eight accredited investors (the “October 2009 Financing”). Net proceeds from the offering are approximately $4,490,000. Pursuant to the financing, we issued, for $4,987,500, a total of 1,534,570 units of our securities at $3.25 per unit. Each unit consists of (i) one share of the Company's common stock, par value $0.001 per share (the "Common Stock"), and (ii) a Series C Warrant (the "Series C Warrant"), with each Series C Warrant exercisable at $4.50 to purchase one-fifth of a share of Common Stock, such that the total amount of warrants issued to each investor as shall be equal to twenty percent (20%) of the number of units purchased by each purchaser. Each of the warrants has a term of three (3) years.
In connection with this financing, the Company paid cash compensation to the placement agent, Tripoint Global Equities, in the amount of $495,250. In connection with this financing, the Company granted warrants to purchase 122,766 shares of common stock at $3.25 and 24,553 shares at $4.50 to the placement agent or its designees. These warrants have the same terms as the warrants issued to investors and are included in the units.
On December 31, 2009, the Company recorded $98,538 as dividends to the investors of the Company’s 2008 Financing, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. This resolution was approved by the Company’s Board and the Company decided to pay the dividends in cash to those investors.
On January 11, 2010, the Company declared a quarterly cash dividend to be paid to its common stock shareholders. The dividend of $0.025 per common share, with the total amount of $403,085 has been declared to shareholders of record as of January 31, 2010 and actually paid on February 25, 2010.
On March 31, 2010, the Company recorded $82,541 as dividends to the investors of the Company’s 2008 Financing, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. This resolution was approved by the Company’s Board and the Company decided to pay the dividends in cash to those investors.
On June 30, 2010, the Company recorded $72,995 as dividends to the investors of the Company’s 2008 Financing, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. This resolution was approved by the Company’s Board and the Company decided to pay the dividends in cash to those investors. As of June 30, 2010, 8,155,375 shares of Series A Preferred Stock were converted into 8,155,375 shares of common stock in total, of which 5,786,250 were converted during the fiscal year ended June 30, 2010.
As of June 30, 2010, 859,376 Class A and 500,000 Class B Warrants of the Company have been exercised for respective equivalent number of shares of common stock. The exercise prices of Class A and Class B Warrants are $2.50 and $3.00 per share, respectively. In addition, the warrants to placement agent to purchase 542,394 shares of common stock at $1.60, 15,025 shares of common stock at $2.50 and the options issued to external service providers to purchase 165,000 shares of common stock at $2.00 per share have also been exercised. As a result, an aggregate of 2,081,795 shares of outstanding common stock have been added and a total of $4,591,958 net proceeds have been received from the exercise of these warrants and options.
On September 30, 2010, the Company recorded $54,857 as dividends to the investors of the Company’s 2008 Financing, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. This resolution was approved by the Company’s Board and the Company decided to pay the dividends in cash to those investors.
On December 31, 2010, the Company recorded $53,501 as dividends to the investors of the Company’s 2008 Financing, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. This resolution was approved by the Company’s Board and the Company decided to pay the dividends in cash to those investors.
TIANYIN PHARMACEUTICAL CO., INC.
Notes To Consolidated Financial Statements
By March 18, 2011, under the mandatory conversion agreement, the remaining totaled 1,360,000 preferred shares were converted to common shares as 1:1 exchange ratio.
On March 31, 2011, the Company recorded $34,661 as dividends to the investors of the Company’s 2008 Financing, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. This resolution was approved by the Company’s Board and the Company decided to pay the dividends in cash to those investors.
By March 18, 2011, under the mandatory conversion agreement, the remaining totaled 1,360,000 preferred shares were converted to common shares as 1:1 exchange ratio.
As of June 30, 2011, there were 29,396,276 common shares outstanding with -0- outstanding preferred shares.
Note 10 - Employee Welfare Plan
The Company has established an employee welfare plan in accordance with Chinese laws and regulations. Full-time employees of the Group in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance and other welfare benefits are provided to employees. PRC labor regulations require the Group to accrue for these benefits based on a certain percentage of the employees’ salaries. The total contribution for such employee benefits was $660,353 and $402,257 for the fiscal years ended June 30, 2011 and 2010, respectively.
Note 11 - RISK FACTORS
The Company's operations are 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 as well as by the general state of the PRC’s economy. The Company's business may be influenced 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.
TIANYIN PHARMACEUTICAL CO., INC.
Notes To Consolidated Financial Statements
Note 12 - Risk of Concentrations and Credit Risk
The fiscal years ended June 30, 2011, three major vendors accounted for approximately 36% of the Company’s raw materials, while the fiscal years ended June 30, 2010, three major vendors accounted for approximately 38% of the Company’s raw materials. Total purchases from these vendors were $12,908,221 and $11,198,171 for the years ended June 30, 2011 and 2010, respectively.
Five major customers accounted for 9% and 11% of the net revenue for the fiscal years ended June 30, 2011 and 2010. Total sales to these customers were $8,478,413 and 7,508,367, for the years ended June 30, 2011 and 2010, respectively.
Financial instruments which potentially subject the Company to credit risk consist principally of cash on deposit with financial institutions. Management believes that the financial institutions that hold the Company’s cash and cash equivalents are financially sound and minimal credit risk exists with respect to these investments.
Note 13 - Supplemental Cash Flow Disclosures
The following is supplemental information relating to the consolidated statements of cash flows:
Note 14- Earnings Per Share
The Company presents earnings per share (“EPS”) on a basic and diluted basis. Basic earnings per share have been computed by dividing net earnings by the weighted average number of common shares outstanding. Diluted earnings per share has been computed by dividing net earnings plus convertible preferred dividends and interest expense (after-tax) on convertible debt by the weighted average number of common shares outstanding including the dilutive effect of equity securities. The weighted average number of common shares calculated for Diluted EPS excludes the potential common stock that would be exercised under the options and warrants granted to officers because the inclusion of the potential shares from these options and warrants would cause an antidilutive effect by increasing the net earnings per share.
TIANYIN PHARMACEUTICAL CO., INC.
Notes To Consolidated Financial Statements
Note 15 - Share - Based Payments
In March, April and November 2009, the Company granted to external service providers 45,000 restricted shares of common stock and options to purchase 195,000, 75,000 and 180,000 shares of common stock at $1.60, $2.00 and $3.28 per share, respectively, with all expected lives of 5 years in addition to cash compensations. The fair value of each option granted is estimated on the measurement date per ASC 505-50 (formerly “EITF 96-18”) using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the fiscal years ended June 30, 2010: expected volatility of 121.47 percent and risk-free interest rate of 1.80 percent.
In July 2009, the Company granted options to purchase 50,000 shares of common stock at $2.00 per share with both expected lives of 3 years to an external service provider in addition to cash compensations. The fair value of each option grant is estimated on the measurement date per ASC 505-50 (formerly “EITF 96-18”) using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the fiscal years ended June 30, 2010: expected volatility of 121.47 percent and risk-free interest rate of 1.00 percent.
On July 15 2010, the Company’s Compensation Committee recommended an incentive compensation schedule for certain Company employees, which the Company's Board approved. Pursuant thereto, the Company issued 614,500 shares of common stock to certain employees. One-fourth of the total number of shares shall vest immediately on July 15 2010; One-fourth of the total number of shares shall vest on October 15, 2010; and the remaining shares shall vest on January 15, 2011.
Accordingly, an aggregate of $1,913,453 and $1,037,686 share based payments were recognized in the income statements for the fiscal years ended June 30, 2011 and 2010, respectively.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
We have not changed, nor had any disagreements with our accountants regarding our accounting or financial disclosure in the last two fiscal years.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded as of the date of this report that our disclosure controls and procedures are effective in ensuring that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission, and are effective in providing reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
(b) Changes in internal control over financial reporting
In our Management’s Report on Internal Control Over Financial Reporting included in our Form 10-K for the year ended June 30, 2010, management concluded that our internal controls over financial reporting were effective. Management did however identify a significant deficiency as of June 30, 2010, as discussed in our Form 10-K for the year ended June 30, 2010. In connection with our review of our internal controls and procedures over financial reporting as of our last fiscal year, ended June 30, 2011, and based on certain comments that we received from the staff of the SEC regarding the accounting treatment and subsequently the non-cash/non-operational financial charges of Series A and B Warrants, which resulted in our having to amend and restate financial statements from July 1, 2009 till December 31, 2010, management has concluded that the Company has a material weakness. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected. Management identified the following material weaknesses during its assessment of our internal control over financial reporting as of June 30, 2011: 1) lack of sufficient knowledge regarding U.S. GAAP reporting by our existing accounting staff; 2) lack of sufficient accounting staff which results in a lack of segregation of duties necessary for an efficient internal control system; and 3) lack of sufficient documentation with our existing financial processes, risk assessment and internal controls.
Currently we do not have sufficient in-house expertise in US GAAP reporting. Since the end of our last fiscal year, management has met on numerous occasions and discussed the following plans to remedy the material weaknesses discussed above. We are seeking to do the following: 1) recruit experienced professionals to augment and upgrade our financial staff for sufficient US GAAP, financial reporting, which would improve our controls and procedure, with the regard to the financial statements preparation; and 2) improve the knowledge of U.S. accounting standards for our current accounting staff.
We believe that the remediation measures we are taking, if effectively implemented and maintained, will remediate the material weaknesses discussed above.
Except as described above, there have been no changes in our internal controls over financial reporting that occurred during the fiscal year to which this Annual Report on Form 10-K relates that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
Item 9b.
Item 9b. Other Information.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table and text set forth the names and ages of all directors and executive officers as of June 30, 2011. The Board of Directors is comprised of only one class. All of the directors will serve until the next annual meeting of shareholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. There are no family relationships among our directors and executive officers. Also provided herein are brief descriptions of the business experience of each director, executive officer and advisor during the past five years and an indication of directorships held by each director in other companies subject to the reporting requirements under the Federal securities laws.
Other than Mr. McCubbin, none of our directors held directorship in any other public companies (Mr. McCubbin’s directorship are included in his bio below). Additionally, during the past 10 years, none of our directors have been involved in any of the following types of legal proceedings: (a) any judicial or administrative proceedings resulting from involvement in mail or wire fraud or fraud in connection with any business entity; (b) any judicial or administrative proceedings based on violations of federal or state securities, commodities, banking or insurance laws or regulations, or any settlement to such actions; or (c) any disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self regulatory organization.
Name Age
Position
Dr. Guoqing Jiang
Chairman of the Board, Chief Executive Officer and President
Tao Yang
Professor Zunjian Zhang, Ph.D.
Chief Operating Officer
Director
Professor JianpingHou, Ph.D.
Director
James T. McCubbin
Director
James J. Tong M.D. Ph.D.
Director, Chief Financial Officer, Chief Business & Development Officer
Dr. Guoqing Jiang, Chairman of the Board, Chief Executive Officer. Dr. Jiang has led the current management to acquire Tianyin Pharmaceutical Co., Ltd. in 2003 and successfully transformed the Company from a regional player into one of the leading TCM manufacturers in China. Prior to TPI, Dr. Jiang served as CEO at Kelun Pharmaceutical Group and built the company from inception to its current status as the world’s leading producer of intravenous solution products. Dr. Jiang is a charismatic, natural leader and well-respected industry veteran with over 15 years of extensive experience and a proven track record in the pharmaceutical and modernized traditional Chinese medicine industry. Dr. Jiang once served as a lecturer and resident physician for over 5 years after graduating as a Medical Doctor from Jiangsu University Medical School.
James J. Tong, M.D. Ph.D. Director, Chief Financial Officer, Chief Business & Development Officer. Dr. Tong joined TPI as our CFO, CBDO and Director since April 2010. Dr. Tong was the former Head of China Healthcare Investment Banking at ROTH Capital Partners, Newport Beach, CA. He initially joined ROTH as an equity research analyst, covering a series of U.S.-listed Chinese pharmaceutical, biotech, medical devices and drug retail businesses. Prior to that, Dr. Tong was a biotechnology analyst at Rodman & Renshaw, New York, covering biotech entities focusing on molecular diagnostics and cures for Alzheimer's disease, multiple sclerosis and cancer. Before his Wall Street career, Dr. Tong was Principal Investigator at Marine Biological Laboratory (MBL) sponsored by Grass Foundation at Woods Hole, MA and a Senior Research Fellow at University of California, Irvine (UCI). Dr. Tong was awarded Ph.D. in Neurobiology and Behavior from Cold Spring Harbor Laboratory / Stony Brook University Neuroscience program. He developed an innovative method to significantly extend life spans of animals based on his work on mitochondria, aging and learning disorders in Neurofibromatosis-1 (NF1) disease. He published three first-authored Nature articles and currently holds two patents. Dr. Tong received his medical degree from Peking University Health Science Center.
Tao Yang, Chief Operating Officer. Mr. Yang has been a well-known certified pharmaceutical sale training specialist with more than 20 years of experience in sales and marketing. He was a former sales training specialist and marketing manager for Astra Zeneca and Bayer. He has been managing the training services of many well-known domestic and international pharmaceuticals during the past ten years, including Grünenthal- San Huan Pharmaceutical (China) Co., Ltd., Beaufour Ipsen Pharmaceutical Co., Ltd., and Yangtze River Pharmacy Group, etc. Mr. Yang has served as BPIP implementation consultant of CPDF launched by World Bank since 2001, and the executive advisor of the policy system program in 2007, which is a training system formed by the Chinese and British government to support the domestic small to medium size businesses.
Professor Zunjian Zhang, Ph.D., Director. Professor Zhang is Executive Director at the Center for Instrument Analysis and the Deputy Director of the School of Pharmacy at China Pharmaceutical University. His responsibility also includes the Key Laboratory of Drug Quality Control and Pharmacovigilance, Ministry of Education at the university. He is a member of the Chinese Pharmacopoeia Commission, a price evaluation expert of the State Commission of Development and Reform and a SFDA expert review committee member for new drugs and health food products. Professor Zhang is Deputy Executive Director at the Analytical Division of the Jiangsu Provincial Society of Chemistry and Chemical Engineering. He also serves as an editor for Journal of China Pharmaceutical University and Journal of Chinese Traditional and Herbal Drugs etc. Professor Zhang is mainly engaged in the in vitro and in vivo quality evaluation of pharmaceuticals, specializing on the efficacy of in vivo pharmaceuticals and the chromatography / spectrometry / mass spectrometry analysis of the TCM active ingredients. Professor Zhang has been the lead investigator of more than 10 national research projects: the major scientific project "Innovative Researches of Major New Medicines" during the Eleventh Five-year plan - focusing on the drug quality control techniques of the large integrated pharmaceuticals discovery platform, major national scientific projects of the Tenth Five-year, the National Natural Science Foundation of China, the specific scientific research projects of the State Administration of Traditional Chinese Medicine Medical, the Natural Science Foundation of Jiangsu Province and the high-level personnel funding projects on the provincial level. Professor Zhang has also been the principle investigator of more than 100 registered categories of Chinese and Western new medicines for the quality control, fingerprinting, process analysis and quality evaluation, preclinical and clinical pharmacokinetic studies. Professor Zhang has published more than 150 peer-reviewed research papers in well recognized journals worldwide, more than 70 of which were SCI papers. Dr. Zhang provides scientific, drug development and healthcare policy expertise to the board of TPI.
Professor Jianping Hou, Ph.D., Director. Professor Hou is currently a graduate school faculty advisor at Shaanxi University of Traditional Chinese Medicine. He has published over dozens of peer-reviewed research papers and participated in the compiling and editing of a number of college textbooks in traditional Chinese medicine. Professor Hou is a principal investigator in more than 10 national research projects and has received the scientific achievement award from the State Administration of Traditional Chinese Medicine. Professor Hou is a SFDA expert review committee member for new drugs and health food products. He is also an expert review panel member for new drugs and side effects at SFDA Shaanxi Province. Professor Hou is Executive Director at Shaanxi Pharmacological Society and the Clinical Pharmacology Committee of Shaanxi Pharmaceutical Association. He has also held various senior management positions at Sizhuang Research Institute of Nutriceutics, Xikang Pharmaceutical Co., Ltd. and Sizhuang Pharmaceutical Co., Ltd. Professor Hou received his Bachelor of Pharmacy and Master’s degree in Pharmacology of Traditional Chinese Medicine from Shaanxi University of Traditional Chinese Medicine. Dr. Hou provides both scientific and drug development expertise to the board of TPI. He earned his Ph.D. degree in Pharmacology of Traditional Chinese Medicine from Beijing University. Professor Hou also completed an EMBA training program for top pharmaceutical executives at Beijing University.
Mr. James T. McCubbin, Director. Mr. McCubbin currently serves as a Director, Executive Vice President and Chief Financial Officer at WidePoint Corporation, an American Stock Exchange listed company (NYSE AMEX: WYY). Prior to the commencement of his employment with WidePoint, he held various senior financial management positions with several companies in the financial and government sectors. Mr. McCubbin is a director, and serves on the audit committee for Quigley Corporation, a pharmaceutical company that is listed on NASDAQ under the symbol QGLY. Mr. McCubbin was on the Board of Directors of Redmile Entertainment, a worldwide developer and publisher of interactive entertainment software, and served as its Audit Committee Chairman until his resignation on March 1, 2008. Mr. McCubbin provides financial consulting services to small cap companies and has either served on or assisted various Boards of Directors over the past seven years. Mr. McCubbin is a graduate of the University of Maryland with a Bachelor of Science Degree in Finance and a Master’s Degree in International Management.
Significant Employees
The following are employees who are not executive officers, but who are expected to make significant contributions to our business:
Mr. Xintao You, Vice President of Operations. Mr. You has over 20 years of industry experience. Prior to joining Tianyin, Mr. You was a Research Scientist at Sichuan Industrial Institute of Antibiotics, Faculty Member at West China School of Pharmacy Sichuan University, Visiting Scholar at Osaka University and Director of quality system at the Sichuan Qili Pharmaceutical Co. Mr. You received his Bachelors degree and Masters degree in pharmacy, respectively from China Pharmaceutical University and Sichuan University-affiliated West China Center of Medical Sciences.
Dr. Daqiao Zhang, Vice President of Marketing and Sales. Dr. Zhang is an innovative pharmaceutical and TCM industry as an innovative marketing and sales expert with over 15 years of experience. Dr. Zhang served in various senior marketing and sales positions at Simcere Pharmaceutical Group (NYSE: SCR) and Nanjing Medical Company (SHSE: 600713). Dr. Zhang graduated from Jiangsu University Medical School and he also received an MBA degree from Macau University of Sciences and Technology.
Corporate Governance
Corporate governance is the system that allocates duties and authority among a company’s stockholders, board of directors and management. The stockholders elect the board of directors and vote on extraordinary matters; the board of directors is a company’s governing body, responsible for hiring, overseeing, and evaluating management, particularly the chief executive officer; and management runs a company’s day-to-day operations. Our Board of Directors currently consists of five seats.
Board Leadership Structure and the Board’s Role in Risk Oversight.
The Board of Directors maintains a structure with the Chief Executive Officer of the Company holding the position as Chairman of the Board of Directors.
The Board does not have a policy regarding the separation of the roles of Chief Executive Officer and Chairman of the Board as the Board believes it is in the best interests of the Company to make that determination based on the position and direction of the Company and the membership of the Board. The Board believes that there is no one best leadership structure model that is most effective in all circumstances and retains the authority to separate the position of Chairman and Chief Executive Officer in the future if such change is determined to be in our best interests and the best interests of our shareholders.
The Board of Directors utilizes a leadership structure that has the Chief Executive Officer (who is the Corporation’s principal executive officer and a director) who also acts in the capacity as Board Chairman, without a designated independent lead director. This structure creates efficiency in the preparation of the meeting agenda and related Board material as the Company’s Chief Executive Officer is more connected to the overall daily operations of the Company. Agenda are also prepared with the permitted input of the full Board of Directors allowing for any concerns or risks of any individual director to be discussed as deemed appropriate. The Board believes that the Company has benefited from this structure and, based upon Dr. Jiang’s leadership, Dr. Jiang’s continuation in the combined role of the Chairman and Chief Executive Officer is in the best interests of the shareholders.
The Company believes that this structure is appropriate and allows for efficient and effective oversight, given the Company’s relatively small size (both in terms of number of employees and in scope of operational activities directly conducted by the Company), its corporate strategy and its focus on research and development. The Board of Directors does not have a specific role in risk oversight of the Company. The Chairman, President and Chief Executive Officer and, as needed, other executive officers and employees of the Company provides the Board of Directors with information regarding the Company’s risks.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our officers, directors and persons who own more than 10% of any class of our securities registered under Section 12(g) of the Exchange Act to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.
Based on our review of copies of such reports, we believe that there was compliance with all filing requirements of Section 16(a) applicable to our officers, directors and 10% stockholders during fiscal year 2011.
Code of ethics
The Company has always encouraged its employees, including officers and directors to conduct business in an honest and ethical manner. Additionally, it has always been our policy to comply with all applicable laws and provide accurate and timely disclosure.
We have always encouraged our employees, including officers and directors to conduct business in an honest and ethical manner. Additionally, it has always been our policy to comply with all applicable laws and provide accurate and timely disclosure. Due to our lack of operations and small employee base prior to the Share Exchange, we did not maintain a formal written code of ethics. However, as a result of the Share Exchange, we decided to adopt formal written codes of ethics for our executive officers, our directors and our employees.
Our codes of ethics are designed to deter wrongdoing and promote honest and ethical conduct and compliance with applicable laws and regulations. These codes also incorporate our expectations of our executives that enable us to provide accurate and timely disclosure in our filings with the Securities and Exchange Commission and other public communications. Our codes of ethics are attached as exhibits to the Current Report on Form 8-K that we filed with the SEC on March 4, 2008 and are available on our website, http://www.tianyinpharma.com/index.html. Any future changes or amendments to our code of ethics, and any waiver of our codes of ethics will also be posted on our website when applicable.
Board Independence and Committees
Presently, we are required to comply with the director independence requirements of the NYSE Amex. In determining whether our directors are independent, we comply with the rules of the NYSE Amex. The board of directors will also consult with counsel to ensure that the boards of director’s determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence of directors, including those adopted under the Sarbanes-Oxley Act of 2002 with respect to the independence of audit committee members. The NYSE AMEX listing standards define an “independent director” generally as a person, other than an officer of a company, who does not have a relationship with the company that would interfere with the director’s exercise of independent judgment. Professor Zhang, Professor Hou and Mr. McCubbin are “independent” as that term is defined by Section 121(A) of the NYSE Amex Listing Standards; accordingly, we satisfy the “independent director” requirements of the NYSE AMEX, which requires that a majority of a company’s directors be independent.
Audit Committee, comprised of James T. McCubbin (Chair), Professor Hou and Professor Zhang. The Board has determined that all of these members are independent, as that term is defined in Section 121(A) of the NYSE Amex Listing Standards.
Compensation Committee, comprised of James T. McCubbin (Chair), Professor Hou and Professor Zhang. The Board has determined that all of these members are independent, as that term is defined in Section 121(A) of the NYSE Amex Listing Standards.
Nominating Committee, which is comprised of James T. McCubbin (Chair), Professor Hou and Professor Zhang. The Board has determined that all of these members are independent, as that term is defined in Section 121(A) of the NYSE Amex Listing Standards.
Audit Committee and Financial Expert
Our Audit Committee focuses its efforts on assisting our Board of Directors to fulfill its oversight responsibilities with respect to our:
Quarterly and annual consolidated financial statements and financial information filed with the Securities and Exchange Commission;
System of internal controls;
Financial accounting principles and policies;
Internal and external audit processes; and
Regulatory compliance programs.
The committee will meet periodically with management to consider the adequacy of our internal controls and financial reporting process. It will also discuss these matters with our independent auditors and with appropriate financial personnel that we employ. The committee will review our financial statements and discusses them with management and our independent auditors before those financial statements are filed with the Securities and Exchange Commission.
The committee has the sole authority to retain and dismiss our independent auditors and periodically reviews their performance and independence from management. The independent auditors have unrestricted access and report directly to the committee. The committee intends to meet as often as is necessary throughout the year to carry out its duties.
James T. McCubbin is our Audit Committee Financial Expert, as that term is defined in Item 407 of Regulation S-K and the Board has determined that Mr. McCubbin is independent, as that term is defined in Section 121 of the NYSE Amex Listing Standards and Section 10A(m)(3) of the Securities Exchange Act of 1934. Mr. McCubbin’s qualifications as an audit committee financial expert are described in his biography above.
Compensation Committee
The Compensation Committee is responsible for setting executive compensation, for making recommendations to the full Board concerning director compensation and for general oversight of the compensation and benefit programs for other employees. The committee intends to meet as often as is necessary throughout the year to carry out its duties.
Our overall compensation policies are monitored by the Compensation Committee. The duties and responsibilities of the Compensation Committee are to:
● administer the employee benefit plans of our company designated for such administration by the board;
● establish the compensation of our Chief Executive Officer (subject to the terms of any existing employment agreement);
● with input from our Chief Executive Officer, establish or recommend to the board the compensation of our other executive officers (subject to the terms of any existing employment agreements); and
● monitor our overall compensation policies and employment benefit plans.
Dr. Jiang, our Chief Executive Officer, will participate in determinations of the compensation and design of our benefit programs for all employees, including our other executive officers except his own compensation.
We believe that an appropriate compensation program should draw a balance between providing rewards to executive officers while at the same time effectively controlling compensation costs. We reward executive officers in order to attract highly qualified individuals, to retain those individuals in a highly competitive marketplace for executive talent and to motivate them to perform in a manner that maximizes our corporate performance. We want our compensation to provide our executives with an overall competitive compensation package that seeks to align individual performance with our long-term business objectives. Going forward, we may establish salary ranges and other compensation matters based on the industrial standard.
Nominating Committee
The Nominating Committee nominates candidates for the Board and will consider nominees recommended by shareholders. The Nominating Committee is responsible for selecting and nominating persons for election or appointment by our Board as Board members. Pursuant to the Nominating Committee Charter, the Committee will consider recommendations for nominees from shareholders submitted to our Secretary at our corporate offices. A nomination submission must include information regarding the recommended nominee, including all of the information that is required to be disclosed in solicitations or proxy statements for the election of Board members, as well as information sufficient to evaluate the factors to be considered by the Committee, including character and integrity, business and professional experience, and whether the person has the ability to apply sound and independent business judgment and would act in the interests of the Registrant and its shareholders; nominees must also state in advance his or her willingness and interest in serving on the board of directors. Nomination submissions are required to be accompanied by a written consent of the individual to stand for election if nominated by the Board and to serve if elected by the shareholders, and such additional information must be provided regarding the recommended nominee as reasonably requested by the Committee.
To date, we have not engaged third parties to identify or evaluate or assist in identifying potential nominees, although we reserve the right in the future to retain a third party search firm, if necessary. The committee intends to meet as often as is necessary throughout the year to carry out its duties.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
Prior to the Share Exchange, we had not paid any compensation to our chief executive officer or any other executive officer during the fiscal year ended December 31, 2006, 2005 or 2004, nor did we issue any options or equity awards to our executive officers. Additionally, prior the Share Exchange, our directors did not receive any compensation for acting as such, but were reimbursed for out-of-pocket expenses incurred while attending board meetings.
The following table sets forth the compensation paid by Raygere, through Chengdu Tianyin to our chief executive officer and to all other executive officers for services rendered during the preceding two fiscal years. In reviewing the table, please note that:
● The compensation amounts paid to Dr. Jiang, reflects compensation paid to him by the operating subsidiaries of Raygere during the reported periods; and
● No other officer earned more than US$100,000 per annum.
SUMMARY COMPENSATION TABLE
Grants of Plan-Based Award, Outstanding Equity Awards at Fiscal Year-End and Option Exercises
In January 2011, we issued 50,000 shares of restricted common stock to Dr. James J. Tong as a part of the annual compensation for Dr. Tong’s service as the CFO in 2010 calendar year. In addition, management team members and significant employees were also given restricted stock awards in fiscal year 2011 to reward their efforts in consistently expanding TPI’s operation for the past three years. The details of these equity awards can be found in the ITEM 12
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
As of September 27, 2011, we had a total of 29,396,276 shares of Common Stock outstanding.
The following table sets forth, as of September 27, 2011: (a) the names and addresses of each beneficial owner of more than five percent (5%) of our Common Stock known to us, the number of shares of Common Stock beneficially owned by each such person, and the percent of our Common Stock so owned before and after the Share Exchange; and (b) the names and addresses of each director, executive officer and significant employee before and after the Share Exchange, the number of shares our Common Stock beneficially owned, and the percentage of our Common Stock so owned, by each such person, and by all of our directors and executive officers as a group before and after the Share Exchange. Each person has sole voting and investment power with respect to the shares of our Common Stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of Common Stock, except as otherwise indicated. Individual beneficial ownership also includes shares of Common Stock that a person has the right to acquire within 60 days from September 27, 2011.
Pursuant to a Share Transfer Agreement, dated as of January 16, 2008, certain of Chengdu Tianyin Pharmaceutical’s executive officers, including Dr. Jiang, have an immediately exercisable option to purchase from Stewart Shiang Lor 100% of the equity of Time Poly Management, Ltd. Dr. Jiang has the option to purchase 77.12% of the Time Poly equity and therefore he will have the voting, dispositive and investment power over Time Poly after he exercises his option. The parties to the Share Transfer Agreement entered into Distribution Agreement on March 10, 2010 to adjust the distribution arrangement set forth in the original Share Transfer Agreement. On April 12, 2010, the executive officers to the Share Transfer Agreement exercised their options to purchase all shares of Time Ploy from Mr. Lor. See “Certain Relationships and Related Transactions” below.
* Less than one percent
(1) 8,421,304 represents shares of our Common Stock that are held by Time Poly Management Ltd., a British Virgin Islands company (“Time Poly”). Time Poly was previously a wholly-owned by Stewart Shiang Lor, who had the sole voting and dispositive power over the shares of Time Poly. Pursuant to a Share Transfer Agreement, dated as of January 16, 2008, certain of TPI’s executive officers, including Dr. Jiang, exercised their options to purchase from Mr. Lor’s 100% of the equity of Time Poly on April 12, 2010, after which such executive officers have the voting, dispositive and investment power over Time Poly. See “Certain Relationships and Related Transactions” below.
(2) Pursuant to the Share Transfer Agreement, dated as of January 16, 2008, as amended on March 10, 2010 (the “Share Transfer Agreement”), Dr. Jiang had an immediately exercisable option to purchase from Mr. Lor (the previous owner of 100% of the share capital of Time Poly) up to 38,560 shares of Time Poly equity, which, upon exercise on April 12, 2010, entitled Dr. Jiang to have control of Time Poly. Accordingly, through his ownership of Time Poly, Dr. Jiang indirectly owns 7,230,127 shares of our Common Stock, however, he maintains the voting, dispositive and investment power (through his control of Time Poly) of all Common Stock that Time Poly owns. See “Certain Relationships and Related Transactions” below. In addition, on July 15, 2010, 228,180 shares of common stock of the Company were issued to Dr. Jiang pursuant to certain incentive compensation schedule approved by the Board of Directors on the same day.
(3) Pursuant to the Share Transfer Agreement, Mr. You had an immediately exercisable option to purchase from Mr. Lor up to 3,835 shares of Time Poly equity, which was exercised on April 12, 2010. Accordingly, through his ownership of Time Poly, Mr. You indirectly owns 717,285 shares of our Common Stock. See “Certain Relationships and Related Transactions” below. In addition, the Board of Directors approved certain incentive compensation schedule on July 15, 2010, pursuant to which, 46,810 shares of common stock of the Company were issued to Mr. You.
(4) Pursuant to the Share Transfer Agreement, Mr. Zhang had an immediately exercisable option to purchase from Mr. Lor up to 1,125 shares of Time Poly equity, which was exercised on April 12, 2010. Accordingly, through his ownership of Time Poly, Mr. Zhang indirectly owns 98,029 shares of our Common Stock. See “Certain Relationships and Related Transactions” below. In addition, the Board of Directors approved certain incentive compensation schedule on July 15, 2010, pursuant to which, 58,510 shares of common stock of the Company were issued to Mr. Zhang, 30,000 shares of which were sold on the open market in May 2011.
(5) Mr. Tao Yang was granted 81,910 shares of our restricted common stock on July 15, 2010 as incentive compensation for his service as the Chief Operating Officer.
(6) Pursuant to his agreement to serve as our Audit Committee Chairman, Mr. McCubbin was granted 36,000 stock options on February 28, 2008, that vest on a 1/12 monthly basis over a twelve month period beginning on the grant date. The exercise price of the options is $2.80, which represents the Fair Market Value of the Company on February 28, 2008. All of these options have now vested.
(7) On February 16, 2011, Dr. Tong was granted 50,000 shares of our restricted common stock as incentive compensation for his service as the Chief Financial Officer. On November 23, 2010 and May 20, 2011, Dr. Tong purchased a total number of 2,000 shares of our common stock on the open market.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We have not entered into any transactions during the last two fiscal years with any director, executive officer, director nominee, 5% or more shareholder, nor have we entered into transactions with any member of the immediate families of the foregoing person (include spouse, parents, children, siblings, and in-laws) nor is any such transaction proposed, except as follows:
On January 16, 2008, pursuant to a Share Transfer Agreement, Stewart Shiang Lor, a director nominee, issued stock options to the executive officers and management team of Chengdu Tianyin Pharmaceutical Co., Ltd., (the “Executives”) our wholly owned subsidiary located in Chengdu, Sichuan Province of the People’s Republic of China that operates our business. Pursuant to the agreement, Mr. Lor granted to the Executives the option to acquire all of the shares of Time Poly Management Limited (“Time Poly”), a British Virgin Islands corporation that owns 39,000 shares of equity interest in Raygere, which prior to the Share Exchange represented 78% of Raygere’s equity, and received 9,976,824, shares of our Common Stock in the Share Exchange transaction. Mr. Lor was the sole shareholder of Time Poly. Under the terms of the Share Transfer Agreement, the Executives will have the right and the option to purchase 100% of the outstanding shares of capital stock of Time Poly at any time through November 15, 2008. Although the Executives may exercise their options at any time during the term of the option, the exercise price of the options depends upon the fulfillment of certain performance targets based on the future revenues of Chengdu Tianyin, as set forth in the Share Transfer Agreement. The exercise prices of these options range from $1,293 to $660,975. The options vest on a one-third basis per quarter for three specified quarters and may be exercised in whole or in part after Chengdu Tianyin’s revenues for such quarter is determined, which shall not be later than 45 days following the applicable fiscal quarter. On March 30, 2010, management of Chengdu Tianyin exercised their option and the ownership of Time Poly has been changed to Dr. Guoqing Jiang, Mr. Xintao You, Mr.Yong Zhan, Mr. Daqiao Zhang, Ms. Li Zhou and Mr. Hongcai Li.
Time Poly, a shareholder of more than 10% of our equity, entered into a Rule 10b5-1 Trading Plan on October 11, 2010 (the “Trading Plan”), pursuant to which a total number of 1,000,000 shares of our Common Stock will be sold by Time Poly during the period from October 11, 2010 to June 30, 2011 (the “Trading Plan Period”) according to the specific trading instructions as set forth in the Trading Plan. Throughout the Trading Plan Period, a total number of 306,133 shares of our Common Stock have been sold by Time Poly at various prices above $3.00/share pursuant to the Trading Plan. However, on May 24 and May 25, 2011, Time Poly purchased a total number of 18,000 shares at various prices below $1.80/share on the open market. We demanded Time Poly to disgorge to us the short-swing profits it realized from the transactions as calculated under rules of Section 16 of the Securities Exchange Act of 1934. Time Poly has agreed to disgorge its profit of $23,940 back to the Company on or before October 30, 2011.
TriPoint Global Equities, LLC (“TriPoint Global”), the placement agent in our 2008 Financing and 2009 Financing, received certain placement agent warrants to purchase shares of our common stock. A member of our outside securities counsel, Mr. Louis Taubman, indirectly owns a minority stake in TriPoint Global, although he does not have voting, dispositive or investment powers over TriPoint Global. We agreed to waive any conflicts between the counsel’s representation of us and its affiliation with TriPoint Global; however, if either we or the counsel feel it is in appropriate to continue the counsel’s representation of us as a result of such conflicts, either party may terminate the representation upon written notice.
Review, Approval and Ratification of Related Party Transactions
Given our small size and limited financial resources, we had not adopted prior to the Share Exchange formal policies and procedures for the review, approval or ratification of transactions, such as those described above, with our executive officers, directors and significant shareholders. However, we intend that such transactions will, on a going-forward basis, be subject to the review, approval or ratification of our board of directors, or an appropriate committee thereof.
Promoters and Certain Control Persons
On January 16, 2008, we entered into a Share Exchange Agreement with Raygere Limited (“Raygere”), a company organized under the laws of the British Virgin Islands (“BVI”) and Time Poly Management Limited, Happyvale Limited and Fartop Management Limited, each a BVI company, and Cmark Holding Co., Ltd., an exempted company organized under the laws of the Cayman Islands (collectively, the “Raygere Stockholders”) , pursuant to which all the shares of Raygere were transferred to us and Raygere became our wholly-owned subsidiary. Together, the Raygere Stockholders owned shares constituting 100% of the issued and outstanding ordinary shares of Raygere. Pursuant to the terms of the Share Exchange Agreement, the Raygere Stockholders transferred to us all of their shares in Raygere in exchange for the issuance of an aggregate of 12,790,800 shares of our common stock to the Raygere Stockholders. As a result of this share exchange, Raygere became our wholly-owned subsidiary and the Raygere Stockholders acquired approximately 87.68% of the 14,587,200 issued and outstanding shares of our Common Stock following the Share Exchange, but before the dilution resulting from the Financings described elsewhere in this Form 10-K.
Our only “promoters” (within the meaning of Rule 405 under the Securities Act), or person who took the initiative in the formation of our business or in connection with the formation of our business received 10% of our debt or equity securities or 10% of the proceeds from the sale of such securities in exchange for the contribution of property or services, during the last five years have been Time Poly Management, Ltd. and Cmark Holdings, Co., Ltd. As disclosed elsewhere in this report, in connection with the Share Exchange, Time Poly and Cmark, the majority shareholders of Raygere, received 9,976,824 and 2,165,503 shares of our common stock, respectively, representing approximately 68.39% and 14.85%, respectively, of our issued and outstanding shares at the close of the Share Exchange.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
(1) AUDIT FEES
The aggregate fees billed for professional services rendered by Patrizio& Zhao for the audit of the registrant's annual financial statements and review of financial statements included in the registrant's Form 10-K or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for fiscal years 2011 and 2010 were $150,000 and $180,000, respectively.
(2) AUDIT-RELATED FEES
NONE
(3) TAX FEES
NONE
(4) ALL OTHER FEES
NONE
(5) AUDIT COMMITTEE POLICIES AND PROCEDURES
The policy of our Audit Committee is to pre-approve all audit and permissible non-audit services to be performed by the Company’s independent auditors during the fiscal year.
No services related to Audit-Related Fees, Tax Fees or All Other Fees described above, were approved by the Audit Committee.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(1) AND (2) Financial Statements and Financial Statement Schedules See “Index to Consolidated Financial Statements” on page
(3) EXHIBITS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Tianyin Pharmaceutical Co., Inc
By: /s/ Guoqing Jiang
Guoqing Jiang
PRESIDENT AND CHIEF EXECUTIVE OFFICER, CHIEF ACCOUNTING OFFICER
By: /s/ James Jiayuan Tong
James Jiayuan Tong
CHIEF FINANCIAL OFFICER
Date: September 27, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: September 27, 2011 By: /s/ Guoqing Jiang
Guoqing Jiang
PRESIDENT, CHIEF EXECUTIVE OFFICER, CHIEF ACCOUNTING OFFICER, DIRECTOR
Date: September 27, 2011 By: /s/ Zunjian Zhang
Zunjian Zhang
DIRECTOR
Date: September 27, 2011 By: /s/ Jianping Hou
JianpingHou
DIRECTOR
Date: September 27, 2011 By: /s/ James T. McCubbin
James T. McCubbin
DIRECTOR
Date: September 27, 2011 By: /s/ James Jiayuan Tong
James Jiayuan Tong
CHIEF FINANCIAL OFFICER, DIRECTOR