Attached files
| file | filename |
|---|---|
| EX-32.1 - Tongli Pharmaceuticals (USA), Inc. | v175074_ex32-1.htm |
| EX-32.2 - Tongli Pharmaceuticals (USA), Inc. | v175074_ex32-2.htm |
| EX-31.1 - Tongli Pharmaceuticals (USA), Inc. | v175074_ex31-1.htm |
| EX-31.2 - Tongli Pharmaceuticals (USA), Inc. | v175074_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
x
|
Quarterly
report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934.
For
the quarterly period ending December 31,
2009
|
OR
|
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For
the transition period from
________ to ________.
|
Commission
file number: 000-52954
Tongli
Pharmaceuticals (USA), Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
84-1090791
|
|
|
(State
or other jurisdiction
of
incorporation or organization)
|
(IRS
Employer
Identification
number)
|
|
|
136-17 Maple
Avenue, 11H
Flushing,
NY
|
11355
|
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
718-321-8380
(Registrant’s
Telephone Number, Including Area Code)
None
(Former
name, former address and former fiscal year, if changed since last
report)
Securities
registered pursuant to Section 12(b) of the Act:
None
(Title of
Class)
Name of
each exchange on which registered
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $.001 par value per share
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
|
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x.
As of
February 22, 2010, there were 10,345,943
outstanding shares of common stock of the registrant, par value $.001 per
share.
TABLE
OF CONTENTS
|
Cautionary
Note on Forward Looking Statements
|
||
|
PART
I – FINANCIAL INFORMATION
|
||
|
Item
1.
|
Unaudited
Condensed Consolidated Financial Statements
|
|
|
Condensed
Consolidated Balance Sheets as of December 31, 2009 (Unaudited) and March
31, 2009
|
1
|
|
|
Condensed
Consolidated Statements of Income and Comprehensive Income (Unaudited) for
the three months ended December 31, 2009 and 2008 and the nine months
ended December 31, 2009 and 2008
|
2
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited) for the nine months
ended December 31, 2009 and 2008
|
3
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
4
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
8
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
18
|
|
Item
4(T).
|
Controls
and Procedures
|
18
|
|
PART
II – OTHER INFORMATION
|
||
|
Item
1.
|
Legal
Proceedings
|
19
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
19
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
19
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
19
|
|
Item
5.
|
Other
Information
|
19
|
|
Item
6.
|
Exhibits
|
19
|
|
SIGNATURES
|
||
Unless
otherwise provided in this Quarterly Report on Form 10-Q, references to “the
Company,” “the Registrant,” “Tongli,” “we,” “us,” and “our” refer to Tongli
Pharmaceuticals (USA), Inc. together with its wholly-owned
subsidiaries.
In
addition to historical information, this Quarterly Report on Form 10-Q contains
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The forward looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward looking statements. In
some cases, you can identify forward looking statements by terminology such as
“may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “projects,” “potential,” “proposed,” “intended,” or
“continue” or the negative of these terms or other comparable
terminology. Readers are cautioned not to place undue reliance on
these forward looking statements, which reflect management’s opinions only as of
the date thereof. In evaluating such forward looking statements, readers
should carefully review the discussion of risks and uncertainties in this
Quarterly Report on Form 10-Q and in our most recent Annual Report on Form 10-K
as well as in other filings with the Securities and Exchange Commission
including, without limitation, possible changes in capital structure, and other
financial items; changes in approaches to medical treatment; introduction of new
products by others; possible acquisitions of other technologies, assets or
businesses; and possible actions by customers, suppliers, competitors and
regulatory authorities. Although we believe that the expectations
reflected in the forward looking statements are reasonable, we cannot guarantee
future results, growth rates, and levels of activity, performance or
achievements. Except as expressly required by the federal securities laws, there
is no undertaking to publicly update or revise any forward looking statements,
whether as a result of new information, future events, changed circumstances or
any other reason.
The
discussion of risks and uncertainties set forth in this Quarterly Report on Form
10-Q and in our most recent Annual Report on Form 10-K as well as in other
filings with the SEC, is not necessarily a complete or exhaustive list of all
risks facing the Company at any particular point in time. We operate
in a highly competitive, highly regulated and rapidly changing
environment. Therefore, it is likely that new risks will emerge, and
that the nature and elements of existing risks will change, over time. It is not
possible for management to predict all such risk factors or changes therein, or
to assess either the impact of all such risk factors on our business or the
extent to which any individual risk factor, combination of factors, or new or
altered factors, may cause results to differ materially from those contained in
any forward looking statement. We disclaim any obligation to revise or update
any forward looking statement that may be made from time to time by us or on our
behalf.
PART
I
ITEM
1. FINANCIAL
STATEMENTS
|
TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES
|
||||||||
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
||||||||
|
December
31,
|
March
31,
|
|||||||
|
2009
|
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
222,937 | 50,247 | ||||||
|
Accounts
Receivable
|
685,934 | 395,170 | ||||||
|
Inventory
|
317,478 | 19,016 | ||||||
|
Prepaid
expense
|
3,900 | - | ||||||
|
Advance
to suppliers
|
1,465,468 | 986,281 | ||||||
|
Total
current assets
|
2,695,717 | 1,450,714 | ||||||
|
Property
and equipment, net
|
6,827,925 | 7,076,746 | ||||||
|
Contract
deposit
|
1,029,732 | 1,028,736 | ||||||
|
Intangible
assets, net
|
169,495 | - | ||||||
|
Total
assets
|
10,722,869 | 9,556,196 | ||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
153,068 | 119,643 | ||||||
|
Due
to related parties
|
775,311 | 1,063,629 | ||||||
|
Accrued
expenses and other current liabilities
|
487,435 | 542,892 | ||||||
|
Total
current liabilities
|
1,415,814 | 1,726,164 | ||||||
|
Stockholders’
Equity
|
||||||||
|
Preferred
stock, $0.001 par value, authorized 1,000,000 shares; none
issued
|
- | - | ||||||
|
Common
stock, $0.001 par value
|
||||||||
|
Issued
and outstanding- 10,225,932 and 10,186,716 shares,
respectively
|
10,226 | 10,187 | ||||||
|
Additional
paid-in-capital
|
6,723,560 | 6,665,349 | ||||||
|
Retained
earnings
|
1,433,114 | 24,210 | ||||||
|
Accumulated
other comprehensive income
|
1,140,155 | 1,130,285 | ||||||
|
Total
Stockholders’ equity
|
9,307,055 | 7,830,031 | ||||||
|
Total
liabilities and Stockholders’ equity
|
$ | 10,722,869 | $ | 9,556,196 | ||||
See
accompanying notes to the condensed consolidated financial
statements.
1
TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF INCOME AND OTHER COMPREHENSIVE INCOME
(UNAUDITED)
|
For
the three months ended December 31,
|
For
the nine months ended December 31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Revenue
|
$ | 2,928,562 | $ | 1,754,581 | $ | 5,821,937 | $ | 5,065,291 | ||||||||
|
Cost
of sales
|
1,650,817 | 923,525 | 3,241,589 | 2,820,484 | ||||||||||||
|
Gross
Profit
|
1,277,745 | 831,056 | 2,580,348 | 2,244,807 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
General
& administrative expenses
|
105,538 | 148,536 | 360,899 | 453,132 | ||||||||||||
|
Research
& development expenses
|
- | 16,978 | 3,461 | 27,153 | ||||||||||||
|
Depreciation
expenses
|
45,579 | 49,896 | 122,200 | 135,051 | ||||||||||||
|
Selling
expenses
|
14,391 | 106,285 | 42,249 | 142,473 | ||||||||||||
|
Total
operating expenses
|
165,508 | 321,695 | 528,809 | 757,809 | ||||||||||||
|
Operating
income
|
1,112,237 | 509,361 | 2,051,539 | 1,486,998 | ||||||||||||
|
Other
Income (expenses):
|
||||||||||||||||
|
Interest
expense (net of interest income)
|
(23,857 | ) | (44,079 | ) | (65,643 | ) | (130,996 | ) | ||||||||
|
Rental
income
|
- | 69,922 | - | 171,222 | ||||||||||||
|
Total
other income (expenses)
|
(23,857 | ) | 25,843 | (65,643 | ) | 40,226 | ||||||||||
|
Income
before income taxes
|
1,088,380 | 535,204 | 1,985,896 | 1,527,224 | ||||||||||||
|
Income
Taxes
|
302,555 | - | 576,993 | - | ||||||||||||
|
Net
Income
|
785,825 | 535,204 | 1,408,903 | 1,527,224 | ||||||||||||
|
Other
Comprehensive item:
|
||||||||||||||||
|
Foreign
Currency Translation adjustment
|
(768 | ) | 943 | 9,870 | 154,824 | |||||||||||
|
Comprehensive
income
|
785,057 | 536,147 | 1,418,773 | 1,682,048 | ||||||||||||
|
Basic
and diluted income per share
|
$ | 0.06 | $ | 0.05 | $ | 0.14 | $ | 0.15 | ||||||||
|
Basic
and diluted weighted average shares outstanding
|
10,186,716 | 10,033,216 | 10,225,789 | 10,033,216 | ||||||||||||
See
accompanying notes to the condensed consolidated financial
statements.
2
|
TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES
|
||||||||
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
|
(UNAUDITED)
|
||||||||
|
For
the nine months ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities
|
||||||||
|
Net
income
|
$ | 1,408,903 | $ | 1,527,224 | ||||
|
Adjustments
to reconcile net income to net cash provided (used in) operating
activities:
|
||||||||
|
Depreciation
and amortization
|
261,847 | 258,861 | ||||||
|
Bad
debt
|
(13,391 | ) | ||||||
|
Amortization
of stock compensation
|
38,250 | - | ||||||
|
Accrued
interest- related party
|
65,730 | - | ||||||
|
Stock
issued for services
|
20,000 | 17,500 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(290,278 | ) | (124,584 | ) | ||||
|
Inventory
|
(298,337 | ) | (47,082 | ) | ||||
|
Advances
to suppliers
|
(478,063 | ) | (585,209 | ) | ||||
|
Prepaid
expenses
|
(3,900 | ) | (38,429 | ) | ||||
|
Accounts
payable
|
33,299 | (855,181 | ) | |||||
|
Accrued
expenses and other current liabilities
|
(55,808 | ) | 171,116 | |||||
|
Net
cash provided by operating activities
|
701,643 | 310,825 | ||||||
|
Cash
flows from investing activities
|
||||||||
|
Acquisition
of property and equipment
|
- | (661 | ) | |||||
|
Refundable
deposit related to terminated acquisitions
|
405,643 | |||||||
|
Contract
deposit
|
(1,025,514 | ) | ||||||
|
Acquisition
of intangible assets
|
(175,710 | ) | ||||||
|
Payment
made on Aim Smart acquisition
|
- | (276,000 | ) | |||||
|
Net
cash used in investing activities
|
(175,710 | ) | (896,532 | ) | ||||
|
Cash
flows from financing activities
|
||||||||
|
Payment
of bank loans, net
|
- | (7,899 | ) | |||||
|
Proceeds
from (repayment of) related party loans
|
(353,331 | ) | 506,616 | |||||
|
Net
cash provided by (used in) financing activities
|
(353,331 | ) | 498,717 | |||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
88 | 2,288 | ||||||
|
Net
increase (decrease) in cash
|
172,690 | (84,702 | ) | |||||
|
Cash
balance, beginning of the period
|
50,247 | 130,630 | ||||||
|
Cash
balance, end of the period
|
$ | 222,937 | $ | 45,928 | ||||
|
Supplemental
cash flow information
|
||||||||
|
During
the period, cash was paid for the following:
|
||||||||
|
Income
taxes
|
$ | 530,667 | $ | - | ||||
|
Interest
paid
|
$ | - | $ | 101,134 | ||||
|
Noncash
investing and financing activities
|
||||||||
|
Reduction
of related debt in connection with terminated construction
project
|
$ | - | $ | 588,886 | ||||
|
Payment
made by the officer on Aim Smart acquisition
|
$ | - | $ | 249,000 | ||||
|
Common
stock issued for stock-based compensation
|
$ | - | $ | 17,500 | ||||
See
accompanying notes to the condensed consolidated financial
statements.
3
TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES
NOTES
TO CONSENDED CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
BASIS
OF PRESENTATION
|
Tongli
Pharmaceuticals (USA), Inc., through a wholly-owned subsidiary, Harbin Tianmu
Pharmaceuticals Co., Ltd. (“Tianmu Pharmaceuticals”), develops, produces and
sells a wide variety of pharmaceuticals and healthcare products in the People’s
Republic of China (“PRC” or “China”) that are based on traditional Chinese
medicine (“TCM”).
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and pursuant to the requirements for reporting on Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of the management, all adjustments (consisting only
of normal recurring accruals) considered necessary for a fair presentation have
been included. Results shown for interim periods are not necessarily indicative
of the results to be obtained for a full year. The information included in this
Form 10-Q should be read in conjunction with Management’s Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and notes thereto included in the Company’s Annual Report on Form
10-K for the fiscal year ended March 31, 2009.
The
balance sheet as of March 31, 2009 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by GAAP for the complete financial statements.
The
Company has evaluated events after the date of these financial statements
through February
15, 2010, the date that these financial statements were
issued. There were no material subsequent events as of that
date.
|
2.
|
NEW
ACCOUNTING PRONOUNCEMENTS
|
In
October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605) –
Multiple- Deliverable Revenue Arrangements – a Consensus of the FASB Emerging
Issues Task Force” (“ASU 2009-13”). ASU 2009-13 addresses the
accounting for multiple-deliverable arrangements to enable vendors to account
for products or services (deliverables) separately rather than as a combined
unit. The amendments in this update will be effective prospectively
for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption is
permitted. The Company is currently evaluating this
update.
In June
2009, FASB established Accounting Standards Codification TM (“ASC”) as the
single source of authoritative accounting principles recognized by the FASB in
the preparation of financial statements in conformity with the GAAP. The
Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification will become non-authoritative. The Codification is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. We adopted the new guidance for the quarter ended
September 30, 2009, which changed the way we reference accounting standards in
our disclosures. Adoption of the Codification did not have a material impact on
the Company’s financial statements.
In June
2009, FASB updated the accounting standards related to the consolidation of
variable interest entities (“VIEs”). The standard amends current consolidation
guidance and requires additional disclosures about an enterprise’s involvement
in VIEs. The standard shall be effective as of the beginning of each reporting
entity’s first annual reporting period that begins after November 15, 2009, for
interim periods within the first annual reporting period, and for interim and
annual reporting periods thereafter. Earlier application is prohibited. The
Company does not expect the adoption to have a material impact on the Company’s
results of operations or financial position.
4
TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES
NOTES
TO CONSENDED CONSOLIDATED FINANCIAL STATEMENTS
In May
2009, FASB issued new guidance establishing general standards of accounting for
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued, or subsequent
events. The Company adopted this standard on July 1, 2009. This standard did not
have a material impact on the Company’s financial statements.
|
3.
|
GOING
CONCERN
|
The
report of our independent registered public accounting firm on the financial
statements for the fiscal year ended March 31, 2009 includes an explanatory
paragraph indicating substantial doubt as to the Company’s ability to continue
as a going concern. The Company has taken certain actions and continues to
implement changes designed to improve its financial results and operating cash
flows. The actions include certain cost-saving initiatives and continuous
development of new and existing clients. The Company believes that these actions
will enable it to move towards profitability and improve cash flow in its
continuing operations through the coming year. As of December 31, 2009, the
Company’s working capital has improved to $1,279,903.
|
4.
|
INVENTORY
|
As of
December 31, 2009 and March 31, 2009, inventory consists the
following:
|
December 31, 2009
|
March 31, 2009
|
|||||||
|
Raw
materials
|
$ | 56,298 | $ | 15,100 | ||||
|
Finished
goods
|
261,180 | 3,916 | ||||||
|
Total
|
$ | 317,478 | $ | 19,016 | ||||
|
5.
|
INTANGIBLE
ASSETS
|
Intangible
assets primarily represent the exclusive rights to manufacture and sell a new
product pursuant to an agreement entered into by the Company with a third party
Harbin Sanmu Pharmaceuticals Inc. (“Sanmu”). In August 2009, the
Company entered into an agreement with Sanmu and purchased the exclusive rights
to use the product’s trademark, manufacture and sell the product nationwide in
the PRC for seven years for a total amount of RMB 1,200,000 (equivalent to USD
175,710) which was paid in October 2009. Management believes that
this new product has great market potentials and will generate additional
revenue for fiscal year 2010 and beyond. The Company amortizes such
product sales right using straight-line method for seven years. The
amortization expense for the three months ended December 31, 2009 totaled
$6,215.
In
October 2009, the Company entered into a three-year agreement with a distributor
which give the distributor an exclusive right to sell this product in all areas
of China.
5
TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES
NOTES
TO CONSENDED CONSOLIDATED FINANCIAL STATEMENTS
During
three months ended December 31, 2009, the company did not manufacture the
product, but purchased the product from Sanmu and sold to the
distributor.
|
6.
|
DUE
TO RELATED PARTIES
|
Amounts
due to related parties consist of the following:
|
December 31, 2009
|
March 31, 2009
|
|||||||
|
Harbin
Tianmu Real Estate Development Co., Ltd. (a)
|
$ | (303,345 | ) | $ | (688,808 | ) | ||
|
Chairman
of the Company (a)
|
(451,379 | ) | (354,234 | ) | ||||
|
US
Hua Sky International Investment LLC. (b)
|
(20,587 | ) | (20,587 | ) | ||||
|
Total
|
$ | (775,311 | ) | $ | (1,063,629 | ) | ||
|
|
(a)
|
Harbin
Tianmu Real Estate Development Co., Ltd. is owned by the Company’s
Chairman. These loans bear 7% interest rate per annum and are due on
demand.
|
|
|
(b)
|
This
amount is non-interest bearing and due on demand. US Hua Sky International
Investment LLC is owned by the Company’s
Chairman.
|
|
7.
|
TAXES
|
For the
nine months ended December 31, 2009 and 2008, respectively, a reconciliation of
tax at United States federal statutory rate to provision for income tax recorded
in the financial statements is as follows:
|
For
the nine months ended
|
||||||||
|
December 31, 2009
|
December 31, 2008
|
|||||||
|
U.S.statutory
income tax rate
|
35.0 | % | 35.0 | % | ||||
|
Foreign
tax rate difference between US and China
|
(10.0 | )% | (10.0 | )% | ||||
|
Effect
of tax deduction due to NOL from China
|
0.0 | % | (25 | )% | ||||
|
NOL
from U.S. with 100% valuation allowance
|
4.0 | % | - | |||||
|
Actual
consolidated income tax rate
|
29.0 | % | 0.0 | % | ||||
|
8.
|
COMMITMENTS
AND CONTINGENCIES
|
The
Company entered into agreements with three distributors to provide agreed upon
amounts of products at pre-agreed price. These agreements expire in March
2010. In the event a distributor does not purchase a fixed percentage
of the agreed upon amounts for three consecutive months, the Company may
terminate the agreement. In addition, one agreement provides, among other
things, that the distributor can become the exclusive distributor for a
geographical area if certain sales targets are met. Revenues for the nine months
ended December 31, 2009 and 2008 were immaterial from these
agreements.
6
TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES
NOTES
TO CONSENDED CONSOLIDATED FINANCIAL STATEMENTS
|
9.
|
VULNERABILITY
DUE TO OPERATIONS IN PRC
|
The
Company’s operations may be adversely affected by significant political,
economic and social uncertainties in the PRC. Although the PRC government has
been pursuing economic reform policies for more than thirty years, no assurance
can be given that the PRC government will continue to pursue such policies or
that such policies may not be significantly altered, especially in the event of
a change in leadership, social or political disruption or unforeseen
circumstances affecting the PRC’s political, economic and social conditions.
There is also no guarantee that the PRC government’s pursuit of economic reforms
will be consistent or effective.
Substantially
all of the Company’s businesses are transacted in RMB, which is not freely
convertible. The People’s
Bank of China or other banks are authorized to buy and sell foreign currencies
at the exchange rates quoted by the People’s
Bank of China. Approval of foreign currency payments by the People’s Bank of
China or other institutions requires submitting a payment application form
together with suppliers’ invoices, shipping documents and signed
contracts.
Since the
Company has its primary operations in the PRC, the majority of its revenues will
be settled in RMB, not U.S. Dollars. Due to certain restrictions on currency
exchanges that exist in the PRC, the Company’s ability to use revenue generated
in RMB to pay any dividend payments to its shareholders outside of China may be
limited.
The
Company’s business depends on maintaining licenses of its current products from
China State Food & Drug Administration (“SFDA”). Obtaining licenses for
additional products can be expensive and is usually time consuming. Failure to
obtain the required licenses can cause the Company’s business plan to be
delayed. If the delays prevent the Company from generating positive cash flows
or introducing a significant number of products, there will be a material
adverse effect on the Company.
7
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS 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 Tongli Pharmaceuticals (USA) Inc. for the three months
ended December 31, 2009 and 2008 and nine months ended December 31, 2009 and
2008, and should be read in conjunction with such financial statements and
related notes included in this report. Those statements in the following
discussion that are not historical in nature should be considered to be forward
looking statements that are inherently uncertain. Actual results and the timing
of the events may differ materially from those contained in these forward
looking statements due to a number of factors, including those discussed in the
“Cautionary Note on Forward Looking Statements” set forth above.
COMPANY
OVERVIEW
Tongli
Pharmaceuticals (USA), Inc. (the “Company”), formally known as Aim Smart
Corporation (“Aim Smart”), was originally formed in the State of Colorado in
April 1998 and reorganized as a Delaware corporation in September
2007.
On July
29, 2008, Aim Smart acquired all of the outstanding capital stock of American
Tony Pharmaceutical, Inc., a Delaware corporation (“American Tony”), by issuing
9,700,000 shares of its common stock, representing 96.7% of the outstanding
shares of Aim Smart, to the shareholders of American Tony. American Tony paid
$525,000 for its controlling interest in Aim Smart and this interest was
acquired solely to effectuate the reverse merger and was paid for with $276,000
of the Company’s own funds and a $249,000 loan from its Chairman.
The
acquisition has been accounted for as a reverse merger under the purchase method
of accounting since there was a change of control. Accordingly, American Tony is
treated as the continuing entity for accounting purposes, whereas the entity
formally known as Aim Smart is the legal surviving entity.
Subsequent
to the reverse merger, Aim Smart changed its name to American Tony
Pharmaceuticals, Inc. on September 23, 2008, and then changed its name to Tongli
Pharmaceuticals (USA), Inc. on October 30, 2008.
American
Tony is a holding company incorporated in the State of Delaware. In February
2007, American Tony acquired, through a wholly owned subsidiary, Heilongjiang
Tongli Technology Co., Ltd. (“TT”), all of the registered capital of Harbin
Tianmu Pharmaceuticals Co., Ltd. (“HTP”), a corporation organized under the laws
of the PRC on November 26, 1999. HTP is engaged in developing, manufacturing and
marketing pharmaceutical and health care products that incorporate elements of
Chinese Traditional Medicine with elements of western medicine.
In 2005,
HTP obtained the GMP certificate (Good Manufacturing Practices for
Pharmaceutical Products). The Company currently maintains Drug Register License
and Drug Production Certificate from the SFDA for its eight products. The
Company’s major products include Yufang Anti-Bacterial Mouth Wash, Calcium
Gluconate Oral Liquid, and Antihyperlipidemics. These products are sold through
distributors or directly to customers; no service is required of the Company
after sales are made. The Company’s primary customers are drug stores and
hospitals located in China.
8
GOING
CONCERN
The
report of our independent registered public accounting firm on the financial
statements for the year ended March 31, 2009 includes an explanatory paragraph
indicating substantial doubt as to the our ability to continue as a going
concern. We have taken certain actions and continue to implement changes
designed to improve our financial results and operating cash flows. The actions
include certain cost-saving initiatives and continuous development of new and
existing clients. We believe that these actions will enable us to move towards
profitability and improve cash flows in our continuing operations through the
coming year. As of December 31, 2009, our working capital has improved to
$1,279,903.
DEVELOPMENT
AND STRATEGY
For the
three months ended December 31, 2009, we continued the execution of our product
channel expansion strategy that resulted in increased market penetration of our
products and an increase in our revenue from the quarter ended September 30,
2009 and in the corresponding quarter of 2008. In August 2009, we
entered into an agreement with a third party Harbin Sanmu Pharmaceuticals Inc.
(“Sanmu”) and purchased the exclusive rights to manufacture and sell a new
product called Yan Li Xiao Capsule nationwide in China for the next seven
years. We paid Sanmu RMB 1, 200,000 (equivalent to USD 175,710) for the
exclusive rights in October 2009 and started to sell the new product during
the quarter ended December 31, 2009. We believe that this new product has great
market potentials and will generate additional revenue for us.
Management
plans to continue the emphasis on expanded and enhanced marketing and sales in
the fiscal year 2010 and beyond. Part of this strategy involves increasing and
improving marketing and sales activities to enhance the market position of our
key products and to increase the sales of other products by expanding our sales
force, solidifying our distribution network and expanding market segment
coverage, and increasing marketing and promotional activities. Management also
plans to selectively pursue strategic acquisition opportunities to further
consolidate our resources and expand our market coverage. We believe that such
initiatives will provide effective means to broaden our product lines, expand
our market coverage and complement our research and development capabilities. As
of the date of this report the company is not negotiating with anyone regarding
the potential acquisition.
Management
believes that our emphasis on further commercializing and broadening our product
lines, and enhanced sales and marketing efforts will yield increases in revenue
for the remainder of this fiscal year and beyond.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
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, the actual results could differ from those
estimates. Some of accounting policies require a higher degree of judgment than
others in their application.
9
When
reviewing the financial statements, you should consider (1) the 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 unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and pursuant to the requirements for reporting on Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of the management, all adjustments (consisting only
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months and nine months ended
December 31, 2009 and 2008 are not necessarily indicative of the results to be
obtained for a full year. The information included in this Form 10-Q should be
read in conjunction with Management’s Discussion and Analysis of Financial
Condition and Results of Operations and the financial statements and notes
thereto included in the Company’s Annual Report on Form 10-K for the fiscal year
ended March 31, 2009.
The
balance sheet as of March 31, 2009 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by GAAP for the complete financial statements.
Principles
of consolidation
The
consolidated financial statements include the accounts of the Tongli, American
Tony, TT and HTP. All significant inter-company accounts and
transactions have been eliminated.
Revenue
Recognition
We
recognize revenue at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, and no
other significant obligations by us exist and collectability is reasonably
assured. Payments received before all of the relevant criteria for revenue
recognition are satisfied are recorded as advances from customers.
DISCUSSION
OF OPERATING RESULTS
The
results of our operation for the three and nine months ended December 31, 2009
compared to the prior comparative periods are as follows:
Three
Months Ended December 31, 2009 compared to Three Months Ended December 31,
2008
The
results of our operation for the three months ended December 31, 2009 compared
to the three months ended December 31, 2008 are as
follows:
10
|
For
the three months ended
|
||||||||
|
December 31, 2009
|
December 31, 2008
|
|||||||
|
Revenues
|
$ | 2,928,562 | $ | 1,754,581 | ||||
|
Cost
of Sales
|
1,650,817 | 923,525 | ||||||
|
Gross
Profit
|
1,277,745 | 831,056 | ||||||
|
Selling,
general & administrative expeses
|
165,508 | 321,695 | ||||||
|
Other
income (expenses)
|
(23,857 | ) | 25,843 | |||||
|
Provision
of income taxes
|
302,555 | - | ||||||
|
Net
income (loss)
|
785,825 | 535,204 | ||||||
|
Foreign
currency translation adjustments
|
(768 | ) | 943 | |||||
|
Comprehensive
income (loss)
|
$ | 785,057 | $ | 536,147 | ||||
Revenues,
cost of sales and gross profit
Revenues
increased 66.91% to approximately $2.93 million for the three months ended
December 31, 2009 as compared to approximately $1.75 million for the same period
ended December 31, 2008. The $1.18 million increase was mainly attributable to
the overall increase in sales of our several major products such as Yufang
Anti-Bacterial Mouth Wash, Calcium Gluconate Oral Liquid, and
Antihyperlipidemics, supported by our marketing efforts, increasing brand
recognition and effective pricing strategy and our distribution to previously
unaddressed market. Part of our revenue was also generated by our recently
purchased new product Yan Li Xiao Capsule which broadened our
product offerings and helped to increase our sales. We have the exclusive
right to use this new product’s trademark, and manufacture and sell this product
nationwide in China for the next seven years.
Management
expects that our emphasis on broadening our product pipeline coupled with our
continued sales channel expansions, along with our enhanced sales and marketing
efforts will continue to yield increases in revenue for fiscal year 2010 and
beyond.
Cost of
sales was approximately $1.65 million for the three months ended December 31,
2009 as compared to $0.92 million for the same period ended December 31,
2008. Cost of sales as a percentage of revenue increased from 52.63%
to 56.36% as compared to the prior comparative period. The $727,292 increase in
cost of sales was mainly attributable to the increased sales of our products in
the three months ended December 31, 2009.
Gross
profit was $1,277,745 for the three months ended December 31, 2009, as compared
to $831,056 for the three months ended December 31, 2008, an increase of $0.44
million due to increased sales in the quarter ended December 31, 2009. The gross
profit as a percent of revenues for the three months ended December 31, 2009
decreased to 43.63% compared to 47.36% in the same period in 2008. The decrease
in our gross profit as a percentage of revenue was attributable to the increased
cost of sales. We expect our gross profit margin will remain in its
current level with slight growth in the future.
11
Operating
expenses
Total
operating expenses decreased to $165,508 for the three months ended December 31,
2009 from $321,695 for the three months ended December 31, 2008. As a percentage
of revenues, operating expenses decreased to 5.65% for the three months ended
December 31, 2009 compared to 18.33% for the three months ended December 31,
2008. The decrease in total operating expenses was attributed to management’s
better control of general administration expenses at all levels within our
Company, as well as our cut-off of the advertising expense and other selling
expenses during the three months period ended December 31, 2009. The changes in
operating expenses are summarized below.
|
For
the three months ended
|
||||||||
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
General
& administrative expenses
|
$ | 105,538 | $ | 148,536 | ||||
|
Research
& development
|
- | 16,978 | ||||||
|
Depreciation
and amortization expenses
|
45,579 | 49,896 | ||||||
|
Selling
expenses
|
14,391 | 106,285 | ||||||
|
Total
Operating expenses
|
$ | 165,508 | $ | 321,695 | ||||
Interest
expense
Net
interest expense (net of interest income) was $23,857 for the three months ended
December 31, 2009 compared to $44,079 for the three months ended December 31,
2008. The decrease of $20,222 in net interest expense for the three months ended
December 31, 2009 as compared to the same period in 2008 was due to the
repayment of all the bank loans as of March 31, 2009. The only interest expense
relates to the loans from related parties.
Income
taxes
The
majority of our net income for the three months ended December 31, 2009 was from
HTP, which conducts substantially all of our operation in the PRC. Our Chinese
subsidiaries are governed by the Income Tax Law of the PRC concerning the
private-run enterprises, which are generally subject to tax at a statutory rate
of 25% on income reported in the statutory financial statements after
appropriate tax adjustments.
The
income tax expense of $302,555 for the three months ended December 31, 2009 was
attributed to the income primarily derived from HTP. No provision for income
taxes is required as a result of the utilization of net operating loss
carry-forwards for the three months ended December 31,
2008.
We have
not recorded a provision for U.S federal income tax for the three months ended
December 31 2009 and 2008 due to the net operating loss carry forward in the
United States which we have set up a 100% valuation allowance.
Net
income
As a
result of the above factors, we reported a net income of $785,824 for the three
months ended December 31, 2009, an increase of $250,620, as compared to a net
income of $535,204 for the three months ended December 31, 2008. The increase in
our net income was primarily due to our increased sales revenues and decreased
operating expenses for the quarter ended December 31, 2009.
12
Other
comprehensive income
We
operate primarily in the PRC and the functional currency of our operating
subsidiary is the Chinese Renminbi (“RMB”). RMB is not freely
convertible into foreign currency and all foreign exchange transactions must
take place through authorized institutions. No representation is intended to
imply that the RMB amounts could have been, or could be, converted, realized or
settled into USD at the rate on December 31, 2009 or at any other
rate.
Translation
adjustments resulting from this process amounted to a translation loss of $768
and a gain of $943 for the three months ended December 31, 2009 and 2008,
respectively. The balance sheet amounts with the exception of equity
at December 31, 2009 were translated at 6.82702 RMB to 1.00 USD as compared to
6.8225 RMB to 1.00 USD at December 31, 2008. The equity accounts were stated at
their historical rate. The average translation rates applied to the income
statements accounts for the three months ended December 31, 2009 and 2008 were
6.8274 RMB to 1.00 USD and 6.8394 RMB to 1.00 USD, respectively.
Nine
Months Ended December 31 , 2009 compared to Nine Months
Ended December 31, 2008
The
results of our operation for the nine months ended December 31, 2009 compared to
the nine months ended December 31 , 2008 as
follows:
|
For
the nine months ended
|
||||||||
|
December 31, 2009
|
December 31, 2008
|
|||||||
|
Revenues
|
$ | 5,821,937 | $ | 5,065,291 | ||||
|
Cost
of Sales
|
3,241,589 | 2,820,484 | ||||||
|
Gross
Profit
|
2,580,349 | 2,244,807 | ||||||
|
Selling,
general & administrative expeses
|
528,809 | 757,809 | ||||||
|
Other
income (expenses)
|
(65,643 | ) | 40,226 | |||||
|
Provision
of income taxes
|
576,993 | - | ||||||
|
Net
income
|
1,408,903 | 1,527,224 | ||||||
|
Foreign
currency translation adjustments
|
9,982 | 154,824 | ||||||
|
Comprehensive
income
|
$ | 1,418,773 | $ | 1,682,048 | ||||
Revenues,
cost of sales and gross profit
Revenues
increased 14.93% to approximately $5.82 million for the nine months ended
December 31, 2009 as compared to approximately $5.06 million for the same period
ended December 31, 2008. The $756,646 increase was mainly attributable to the
overall increase in sales of our several major products such as Yufang
Anti-Bacterial Mouth Wash, Calcium Gluconate Oral Liquid and
Antihyperlipidemics, supported by our marketing efforts, increasing brand
recognition and effective pricing strategy and our distribution to previously
unaddressed market. Part of our revenue was generated by our recently
purchased new product Yan Li Xiao Capsule which broadened our product
offerings and helped to increase our sales. We have the exclusive right to use
this new product’s trademark, manufacture and sell this product nationwide in
China for the next seven years. Management expects that our emphasis on
broadening our product pipeline coupled with our continued sales channel
expansions, along with our enhanced sales and marketing efforts, will yield
increases in our revenue for fiscal year 2010 and beyond.
13
Cost of
sales was approximately $3.24 million for the nine months ended December 31,
2009 as compared to $2.82 million for the same period ended December 31,
2008. The $421,105 increase in cost of sales was mainly attributable
to the increased sales of our products in the nine months ended December 31,
2009.
Gross
profit was approximately $2.58 million for the nine months ended December 31,
2009, as compared to $2.24 million for the nine months ended December 31, 2008,
an increase of $0.33 million due to increased sales of our products and
management’s better control of production costs during the nine months ended
December 31, 2009. The gross profit as a percent of revenues for the nine months
ended December 31, 2009 remained constantly at approximately at 44.32% as
compared to the same period in 2008.
Operating
expenses
Total
operating expenses decreased to $528,809 for the nine months ended December 31,
2009 from $757,809 for the nine months ended December 31, 2008. As a percentage
of revenues, operating expenses decreased to 9.08% for the nine months ended
December 31, 2009 compared to 14.96% for the nine months ended December 31,
2008. The decrease in total operating expenses was attributable to management’s
better control of general administration expenses at all levels within our
Company, as well as our cut-off of the advertising expense and other selling
expenses during the nine months period ended December 31, 2009. The changes in
operating expenses are summarized below.
|
For
the nine months ended
|
||||||||
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
General
& administrative expenses
|
$ | 360,899 | $ | 453,132 | ||||
|
Research
& development
|
3,461 | 27,153 | ||||||
|
Depreciation
and amortization expenses
|
122,200 | 135,051 | ||||||
|
Selling
expenses
|
42,249 | 142,473 | ||||||
|
Total
Operating expenses
|
$ | 528,809 | $ | 757,809 | ||||
Interest
expense
Net
interest expense was $65,643 for the nine months ended December 31, 2009
compared to $130,996 for the nine months ended December 31, 2008. The decrease
of net interest expense for the nine months ended December 31, 2009 was due to
the repayment of all the bank loans as of March 31, 2009. The only interest
expense relates to the loans from related parties.
Income
taxes
The
majority of our net income for the nine months ended December 31, 2009 was from
HTP, which conducts substantially all of our operations in the PRC. Our Chinese
subsidiaries are governed by the Income Tax Law of the PRC concerning the
private-run enterprises, which are generally subject to tax at a statutory rate
of 25% on income reported in the statutory financial statements after
appropriate tax adjustments.
14
The
income tax expense of $576,993 for the nine months ended December 31, 2009 was
attributed to the income primarily derived from HTP. No provision for income
taxes is required as a result of the utilization of net operating loss
carry-forwards for the nine months ended December 31, 2008.
We have
not recorded a provision for U.S federal income tax for the nine months ended
December 31 2009 and 2008 due to the net operating loss carry-forward in the
United States which we have set up a 100% valuation allowance.
Net
income
As a
result of the above factors, we reported a net income of $1,408,902 for the nine
months ended December 31, 2009, a decrease of $118,322, as compared to a net
income of $1,527,224 for the nine months ended December 31, 2008. The decrease
in our net income was because we did not have rental income starting from March
31, 2009 and need to pay income tax starting from the quarter ended March 31,
2009. Tianmu Pharmaceuticals leased a portion of its facility to a
pharmaceutical college at a monthly rental of approximately $13,400 (RMB100,
000) from June 2007 through September 30, 2008 and $23,300 (RMB160, 000) from
October 1, 2008 through March 31, 2009. The lease terminated on March 31,
2009.
Other
comprehensive income
Translation
adjustments resulting from this process amounted to $9,870 and $154,824 as of
December 31, 2009 and 2008, respectively. The balance sheet amounts
with the exception of equity at December 31, 2009 were translated at 6.82702 RMB
to 1.00 USD as compared to 6.8225 RMB to 1.00 USD at December 31, 2008. The
equity accounts were stated at their historical rate. The average translation
rates applied to the income statements accounts for the periods ended December
31, 2009 and 2008 were 6.82945 RMB to 1.00 USD and 6.8778 RMB to 1.00 USD,
respectively.
Liquidity
and Capital Resources
Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing basis.
We usually finance our operations from funds generated by operating activities
and loans from the members of our management group and entities owned by our
Chairman.
The
report of our independent registered public accounting firm on the financial
statements for the year ended March 31, 2009 includes an explanatory paragraph
indicating substantial doubt as to the our ability to continue as a going
concern. We have taken certain actions and continue to implement changes
designed to improve our financial results and operating cash flows. The actions
include certain cost-saving initiatives and continuous development of new and
existing clients. We believe that these actions will enable us to move towards
profitability and improve cash flows in our operations through the coming year.
As of December 31, 2009, our working capital has improved to $1,279,903 and the
operating results for the nine months ended December 31, 2009 reflect
profitability.
15
Total
current assets increased to approximately $2.69 million as of December 31, 2009
from $1.45 million as of March 31, 2009. The primary changes in our current
assets during this period were in cash, accounts receivables, inventory and
advance to suppliers. The increase of cash and cash equivalent from $50,247 as
of March 31, 2009 to $222,937 as of December 31, 2009 was due to our increased
sales which generated more cash. The increase of accounts receivables from
$395,170 as of March 31, 2009 to $685,934 as of December 31, 2009 was due to our
extended credit to more distributors in support of their sales of our products.
The necessity to have raw materials available when needed causes us to advance
cash to suppliers in order to secure supplies of raw materials and increase
inventory stock for the nine months ended December 31, 2009. This drain on our
cash will remain unless we are able to secure a proprietary source for the
volatile herbs that constitute a large portion of our raw material purchases.
The increase of inventory from $19,016 as of March 31, 2009 to $317,478 as of
December 31, 2009 was due to the consideration of stocking raw materials to
avoid the potential material shortage in the near future, and stocking finished
goods in support of future sales. The increase of advance to suppliers from
$986,281 as of March 31, 2009 to $1,465,470 as of December 31, 2009 was
attributed to our financial support to strengthen the relationship with our raw
material suppliers when our sales increased accordingly.
Current
liabilities as of December 31, 2009 totaled $1.41 million as compared to $1.72
million at March 31, 2009. The decrease in current liabilities was primarily due
to decrease in related party borrowings because we repaid RMB 5 million
(equivalent to USD 796,178) back to one of our related companies owned by our
Chairman during the third quarter ended December 31, 2009. Balance sheet as of
December 31, 2009 reflects a balance due to related parties of $775,311 which
represented working capital advances made to us by the Chairman as well as
companies owned by the Chairman. These advances are interest bearing and are due
on demand. Our balance sheet as of December 31, 2009 also reflects an increase
in our accounts payable in the amount of $33,425 which is in line with our
increased purchase of raw materials to support our production and sales
activities.
The
growth of our company will require additional debt and/or equity financing.
Currently we have budgeted $3.5 million for capital improvements. We intend to
pursue additional debt financing which could be secured by our property and
equipments and approach international equity markets for additional debt and/or
equity financing. To date we have no commitment from any source for the funds we
require.
Discussion
of Cash Flow
Comparison
of cash flows results for the quarters ended December 31, 2009 and 2008,
respectively, are summarized as follows:
|
For
the nine months ended
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
flow from operating activities
|
$ | 701,642 | $ | 310,825 | ||||
|
Cash
flow from investing activities
|
$ | (175,710 | ) | $ | (896,532 | ) | ||
|
Cash
flow from financing activities
|
$ | (353,331 | ) | $ | 498,717 | |||
Operating
activities
Cash
provided by operating activities during the nine months ended December 31, 2009
amounted to $701,643, which consists of a net income of $1,408,902, adds back
noncash adjustments of $385,827 and offset by net changes in operating assets
and liabilities due to expanded operating activities, including increase in
accounts receivables in the amount of $290,278, increase in inventory of
$298,337, increase in prepaid expenses of $3,900 which represented prepaid rent
expenses for our New York office, increase in advance to suppliers in the amount
of $478,063 to stimulate sales and maintain good relationship with the
suppliers, as well as an decrease in accrued liabilities in the amount of
$55,808 primarily due to our reduced tax liabilities and accrued wages and
salaries as compared with the prior comparative period, offset by an increase in
accounts payable of $33,299 which represented short-term cash advances made to
us by our suppliers. Cash provided by operating activities in the nine months
ended December 31, 2008 amounted to $310,825, which consist of a net income of
$1,527,224 increased by noncash adjustments of $262,970 and net changes in
operating assets and liabilities, primarily including increase of advance of
$585,209 to suppliers to maintain good relationship with the suppliers, a
decrease in accounts payable in the amount of $855,181 and offset by increase in
other accrued liabilities in the amount of $171,116. Cash flows from operations
for the nine months ended December 31, 2009 increased by $390,818 or 125.7%
compared to the same period in 2008. The increase in cash as of December 31,
2009 was mainly attributable to our increased sales revenue and an increase in
accounts payable which increased our cash.
16
Investing
activities
Cash used
in investing activities amounted to $175,710 in the nine months ended December
31, 2009, which consists primarily of payment to acquire from another company
the sales right for a product that has great market potentials. Cash used in
investing activities amounted to $896,532 for the nine months ended December 31,
2008, which consists of a payment of $1,025,514 to acquire patent right
pertaining to a formula for a nutraceutical product, payment made on Aim Smart
acquisition in the amount of $276,000 and purchase of property and equipment of
$661, offset by proceeds from a refundable deposit related to a terminated
acquisition in the amount of $405,643. Cash used in investing activities for the
nine months ended December 31, 2009 decreased by $720,822 or 80.4% compared to
the same period in 2008.
Financing
activities
Cash used
in financing activities amounted to $353,331 for the nine months ended December
31, 2009, which represents the repayment made to reduce related party advances.
Cash provided by financing activities amounted to $498,717 for the nine months
ended December 31, 2008, which consists of proceeds from related party advances
in the amount of $966,470, offset by repayment of our bank loans of $7,899 and
repayment made to related parties. Cash used in financing activities decreased
by $852,048 or 170.8% compared to the same period in 2008.
Off-Balance
Sheet Arrangements
As of the
date of this report, 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 are
material to investors. We have not entered into any other financial guarantees
or other commitments to guarantee the payment obligations of any third parties.
We have not entered into any derivative contracts that are indexed to our shares
and classified as shareholder’s equity or that are not reflected in our
consolidated financial statements. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We do not
have any variable interest in any unconsolidated entity that provides financing,
liquidity, market risk or credit support to us or engages in leasing, hedging or
research and development services with us.
Inflation
Inflation
has not had a material impact on our business and we do not expect inflation to
have a material impact on our business in the near future.
17
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
ITEM
4T. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this report, the Company carried out, under the
supervision and with the participation of the Company’s management, including
its Chief Executive Officer and Chief Financial Officer, an evaluation of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) in ensuring that information required to be disclosed by
the Company in its reports is recorded, processed, summarized and reported
within the required time periods. In carrying out that evaluation,
management identified a material weakness (as defined in Public Company
Accounting Oversight Board Standard No. 2) in our internal control over
financial reporting regarding a lack of adequate segregation of
duties. Accordingly, based on their evaluation of our disclosure
controls and procedures as of December 31, 2009, the Company’s Chief Executive
Officer and its Chief Financial Officer have concluded that, as of that date,
the Company’s controls and procedures were not effective for the purposes
described above.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal controls over financial reporting identified in
connection with the evaluation that occurred during the three months ended
December 31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
18
PART
II
ITEM
1. LEGAL PROCEEDINGS
From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm business. We are currently not aware of
any such legal proceedings or claims that will have, individually or in the
aggregate, a material adverse affect on our business, financial condition or
operating results.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
|
Item
Number
|
Description
|
|
|
(31)
|
Section 302
Certification
|
|
|
31.1*
|
Certification
of Registrant’s Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934.
|
|
|
31.2*
|
Certification
of Registrant’s Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934.
|
|
|
(32)
|
Section 906
Certification
|
|
|
32.1*
|
Certification
of Registrant’s Chief Executive Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350.
|
|
|
32.2*
|
|
Certification
of Registrant’s Chief Financial Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350
|
* filed
herewith
19
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated:
February 22, 2010
|
/s/ Mingli Yao
|
|
|
Mingli
Yao
|
|
|
Chief
Executive Officer and Chairman
|
|
|
/s/ Li Li
|
|
|
Li
Li
|
|
|
Chief
Financial Officer
|
EXHIBIT
INDEX
EXHIBIT
NO.
|
31.1
|
Certification
of Chief Executive Officer, pursuant to Rule 13a-14 and 15d-14 of the
Securities Exchange Act of 1934.
|
|
|
31.2
|
Certification
of Chief Financial Officer, pursuant to Rule 13a-14 and 15d-14 of the
Securities Exchange Act of 1934
|
|
|
32.1
|
Certification
of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|