Attached files
Table of Contents
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 ended March 31, 2011
¨ | 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 001-35038
Tibet Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
British Virgin Islands | Not Applicable | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification number) |
Tibet Pharmaceuticals, Inc.
Room 1701, 17/F
90 Jaffe Rd.
Wanchai, Hong Kong
(Address of principal executive offices and zip code)
(852) 9798 5569
(Registrants telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class |
Name of each exchange on which registered | |
Common shares, $0.001 par value per share | NASDAQ Global Market |
Securities registered under Section 12(g) of the Exchange Act:
None.
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.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | 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
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
The Company is authorized to issue 50,000,000 Shares. As of the date of this report, the Company has issued and outstanding 14,845,834 Shares.
Table of Contents
FORM 10-Q
INDEX
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS | ii | |||||||
PART I. FINANCIAL INFORMATION | ||||||||
Item 1. | Financial Statements | 1 | ||||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 1 | ||||||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 6 | ||||||
Item 4. | Controls and Procedures | 6 | ||||||
PART II. OTHER INFORMATION | ||||||||
Item 1. | Legal Proceedings | 6 | ||||||
Item 1A. | Risk Factors | 6 | ||||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 6 | ||||||
Item 3. | Defaults upon Senior Securities | 7 | ||||||
Item 4. | Submission of Matters to a Vote of Security Holders | 7 | ||||||
Item 5. | Other Information | 7 | ||||||
Item 6. | Exhibits | 7 | ||||||
FINANCIAL STATEMENTS | F-1 |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in this quarterly report that constitute forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as anticipate, estimate, plan, project, continuing, ongoing, expect, we believe, we intend, may, should, could and similar expressions. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.
Examples of forward-looking statements include:
| projections of revenue, earnings, capital structure and other financial items; |
| statements of our plans and objectives; |
| statements regarding the capabilities and capacities of our business operations; |
| statements of expected future economic performance; and |
| assumptions underlying statements regarding us or our business. |
The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. Many factors could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Consequently, you should not place undue reliance on these forward-looking statements.
The forward-looking statements speak only as of the date on which they are made, and, except as required by law; we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update this forward-looking information. Nonetheless, the Company reserves the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this Report. No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.
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Item 1. | Financial Statements |
See the financial statements following the signature page of this report, which are incorporated herein by reference.
Item 2. | Managements Discussion and Analysis of Financial Conditions and Results of Operations |
The following discussion and analysis of our companys financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report. In this report, the terms we, the Company, TBET, our company, and our refer to Tibet Pharmaceuticals, Inc., a British Virgin Islands company. CTP refers to China Tibetan Pharmaceuticals Limited (Hong Kong) Limited, our wholly-owned subsidiary (Hong Kong). WFOE refers to CTPs wholly-owned subsidiary Yibo Information Consulting (Shenzhen) Company Ltd. (Peoples Republic of China), and YSTP refers to Yunnan Shangri-La Tibetan Pharmaceutical Group Limited, our operating subsidiary in the Peoples Republic of China.
The following discussion and analysis of the Companys financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10K for the fiscal year ended December 31, 2010, as well as the condensed unaudited consolidated financial statements for the three-month period ending March 31, 2011 and accompanying notes contained elsewhere in this document. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors.
Overview
The Company focuses on the research, development, manufacturing, marketing and selling of modernized traditional Tibetan medicines in China. All of the Companys current products are offered and derived from Tibetan-based traditional medicines and are manufactured by YSTP using plant based natural materials, particularly the herbs and minerals found in the high-latitude and low-temperature environment of Qinghai-Tibet Plateau. As of March 31, 2011, the Company sold 5 prescription and over-the-counter Tibetan medicine products. Each has been approved by Chinas SFDA as having medicinal purpose and having demonstrated safety and efficacy for the treatment of one or more therapeutic indications.
In the last two years, YSTPs business has grown rapidly as a result of Chinas strengthening economy, the strong demand in China for traditional Chinese and Tibetan medicines, the governments efforts to improve health care in China, and the increase in the number of elderly people in China.
For the three-month periods ended March 31, 2011 and March 31, 2010, the Companys total revenues amounted to approximately $8.2 million and $7.0 million, respectively. Net income attributable to TBET was $2.6 million and $2.8 million, respectively.
Critical Accounting Policies
Revenue Recognition
The Companys revenue recognition policies are in compliance with the Revenue Recognition Topic of the FASB Accounting Standards Codification (ASC 605) and the Securities and Exchange Commissions Staff Accounting Bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured.
Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
The Company has distributor arrangements with certain parties for sale of its pharmaceutical products. The distributor agreements do not provide chargeback, price protection, or stock rotation rights. Accordingly, revenue is recognized when products are delivered to and received by the distributors.
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If the products sold have quality issues, the Company is responsible because of the product warranty included in each sale. However, the customers cannot return merchandise without permission of the Company. The return is recorded on the date the return is authorized. A quality warranty reserve provision has been made for the anticipated cost to replace items. The quality reserve accruals, in amounts of $1,480,843 and $831,144 as of March 31, 2011 and March 31, 2010, respectively, were included in the accrued expenses and other payables on the consolidated balance sheets.
Revenues are recorded net of value-added taxes.
Prepaid Expenses
Advertising expenses consist primarily of costs of promotion for corporate image and product marketing and costs of direct advertising; the figure does not include the costs of developing and supporting our distribution network or the costs of direct marketing to actual and prospective customers. The Company records payments made to advertising companies for the purpose of reserving prime-time advertising space as prepaid expenses in the consolidated balance sheet. The Company expenses the prepaid advertising amount when the advertisement is published or aired. All other advertising costs are expensed as incurred. For the three-month periods ended March 31, 2011 and March 31, 2010, prepaid advertising costs were $95,889 and $92,296, respectively.
Prepaid expenses also include expenses associated with obtaining Good Manufacturing Practices (GMP) certification, which expenses are being amortized during the period of the certificate of authentication. GMP is a certification program of the Chinese government available to Chinese pharmaceutical producers.
Research and development costs
Research and development costs are incurred in the development of the new products and processes, including significant improvements and refinements to existing products. All research and development costs are expensed as incurred. Expenses recorded for the three-month periods ended March 31, 2011 and March 31, 2010 were approximately $146,864 and $148,068, respectively.
Advertising Expense
The Company expenses its advertising costs when the expense is incurred. Advertising expense for the three-month periods ended March 31, 2011 and March 31, 2010 were approximately $31,869 and $30,763, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. As of March 31, 2011 and December 31, 2010, cash and cash equivalents totals were $24,815,733 and $7,579,283, respectively. The March 31, 2011 total reflects in part the receipt of proceeds of the Companys January 24, 2011 initial public offering (IPO) of three million shares of its common stock at an offering price of $5.50.
Comprehensive Income
The Company follows the Comprehensive Income Topic of the FASB Accounting Standards Codification (ASC 220). Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP). The Companys functional currency is the Chinese Renminbi; however, the accompanying consolidated financial statements have been translated and presented in United States Dollars. These financial statements are prepared on a historical pro forma basis. The consolidated financial statements include the accounts of the Company, its subsidiary and variable interest entity (VIE) for which the Company is the primary beneficiary. All inter-company accounts and transactions have been eliminated in the consolidation. Please also refer to Note 1 for the discussion on accounting for the reorganization and acquisition. These financial statements have been prepared on a historical pro-forma basis.
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Translation Adjustment
As of March 31, 2011 and March 31, 2010, respectively, the accounts of the Company were maintained, and its financial statements were expressed, in Chinese Yuan Renminbi (CNY). Such financial statements were translated into U.S. Dollars (USD) in accordance with the Foreign Currency Matters Topic of the FASB Accounting Standards Codification (ASC 830), with the CNY as the functional currency. According to ASC 830, all assets and liabilities were translated at the current exchange rate, stockholders equity is translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with the Comprehensive Income Topic of the FASB Accounting Standards Codification (ASC 220), as a component of shareholders equity. Transaction gains and losses are reflected in the income statement.
Impairment of Long-lived Assets
The Company adopted the Property, Plant and Equipment in accordance with FASB Accounting Standard Codification (ASC 360), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations for a Disposal of a Segment of a Business. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets 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. Based on its review, the Company believes that, as of March 31, 2011 and March 31, 2010, there were no impairments of its long-lived assets.
Factors Affecting Results of Operations Generally
The Company believes the most significant factors that directly or indirectly affect sales revenues and net income are:
| global economic conditions; |
| the changes in Chinas macro-economic environment and healthcare-related government strategies and policies; |
| the increase in number of elderly people and their perception and acceptance of traditional Tibetan medicine as effective, having fewer side effects, and being a safe alternative to western medicines; |
| the Companys ability to attract and retain distributors, key customers and direct sales force; |
| the Companys ability to selectively pursue strategic acquisitions and licensing opportunities; |
| new product introductions by the Company and its competitors; and |
| the Companys ability to price its products at levels that provide favorable margins. |
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Results of Operations
Comparison of the Three Months Ended March 31, 2011 and 2010:
For the Three-Month Periods Ended March 31, | ||||||||||||||||||||||||
2011 | 2010 | Change | ||||||||||||||||||||||
Amount ($) |
% of Total Revenue |
Amount ($) |
% of Total Revenue |
Amount ($) |
% | |||||||||||||||||||
Revenue |
8,236,560 | | 7,019,484 | | 1,217,076 | 17.1 | % | |||||||||||||||||
Cost of goods sold |
(4,761,811 | ) | 58 | % | (3,475,844 | ) | 50 | % | (1,285,967 | ) | 37.0 | % | ||||||||||||
Gross profit |
3,474,749 | 42 | % | 3,543,640 | 50 | % | (68,891 | ) | (2.0 | )% | ||||||||||||||
Total operating expenses |
(921,869 | ) | 11 | % | (653,140 | ) | 9 | % | (268,729 | ) | 41.1 | % | ||||||||||||
Operating income |
2,552,880 | 31 | % | 2,890,500 | 41 | % | (337,620 | ) | (11.7 | )% | ||||||||||||||
Total revenue was approximately $8.2 million for the three months ended March 31, 2011 as compared to approximately $7.0 million for the three months ended March 31, 2010. This represents an increase of approximately $1.2 million, or 17.1%, growth that was primarily due to continuous growth in sales of the Companys existing five commercialized products. The Companys sales volume for the three months ended March 31, 2011 increased 15.1% compared to the same period in 2010. As of March 31, 2011, revenues generated from sales of YSTPs 25 Ingredients Mandrake Pill, its largest revenue producer, increased 21.9% from $3,2 million in the three months ended March 31, 2010 to $3.9 million in the first three months of 2011. Expansion of YSTPs existing distributor network also contributed to increases in the Companys revenue during the three months ended March 31, 2011.
YSTPs gross profit margin decreased from 50% in the three months ended March 31, 2010 to 43% in the same period of 2011. The decrease was due in large part to the rising price of raw materials used on the Companys products. Raw material prices increased somewhat beginning in the latter part of 2010. We believe such increases have been experienced across the Tibetan medicine and TCM sectors. To respond to this increase, the Company increased product prices somewhat beginning in May 2011.
Selling expenses increased by $84,239, or 29.6%, from $284,916 in the three months ended March 31, 2010, to $369,155 in the same period of 2011.The increase resulted from increased payroll, accrual for quality, warranty and samples expenses.
Research and development costs decreased by $1,204, or 0.8%, from $148,068 in the three months ended March 31, 2010 to $146,864 in the same period of 2011. The Company plans to spend about the same dollar amount on its research and development activities in 2011.
Other general and administrative expenses increased by $185,694, or 84.3%, from $220,156 in the three months ended March 31, 2010, to $405,850 in the same period of 2011, primarily as a result of business expansion and the issuance of stock to the Companys investor relations/public relations firm, Trilogy Capital Partners, Inc.
Net interest expense was $0 in the three months ended March 31, 2011, compared to net interest expense of $45,163 in the same period of 2010.
The Companys net income for the three months ended March 31, 2011 and 2010 were $2,565,512 and $2,847,881, respectively. The decrease in net income is primarily a result of rising price of raw materials.
Liquidity and Capital Resources
As highlighted in the consolidated statements of cash flows, the Companys liquidity and available capital resources are impacted by four key components: (i) cash and cash equivalents, (ii) operating activities, (iii) financing activities, and (iv) investing activities.
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Statement of Consolidated Cash Flows Ended March 31, 2011 and 2010
For the three months ended March 31, 2011 ($) |
For the three months ended March 31, 2010 ($) |
Change ($) |
||||||||||
Net cash provided by operating activities |
2,788,636 | 2,888,856 | (100,221 | ) | ||||||||
Net cash used in investing activities |
0 | 0 | 0 | |||||||||
Net cash used in financing activities |
14,420,401 | (2,346,945 | ) | 16,767,346 | ||||||||
Effects of exchange rate |
27,415 | 62,179 | (34,764 | ) | ||||||||
Cash, beginning of period |
7,579,281 | 4,081,752 | 3,497,529 | |||||||||
Increase (decrease) in cash |
17,236,450 | 604,090 | 16,632,360 | |||||||||
Cash, end of period |
24,815,733 | 4,685,842 | 20,129,891 |
Cash Flows and Working Capital
As of March 31, 2011, the Company had working capital of $33,738,076, including cash of $24,815,733. The Companys cash includes cash-in-hand and bank savings.
Cash Provided by Operating Activities
Net cash provided by operating activities was $2,788,636 in the three months ended March 31, 2011, compared to $2,888,856 provided in the same period of 2010. The $100,221 decrease in cash from operating activities in the three months ended March 31, 2011 was due to a decrease in net income of $282,369, an increase in accounts receivable of $1,018,674, a decrease in inventories of $632,325, and a decrease in trade deposit paid of $98,754. These cash decreases were offset by an increase in tax payable of $164,160, an increase in accrued expenses and other payables of $53,755, an increase in prepaid expenses of $27,162, and an increase in accounts payable of $1,623,961. Non-cash transactions comprised of the followings: (i) $185,801 in depreciation and (ii) $86,445 in amortization.
Cash Used in Investing Activities
Net cash used for investing activities was $0 in the three months ended March 31, 2011 and $0 in the same period of 2010.
Cash Used in Financing Activities
The cash generated from financing activities was $14,420,401 in the three months ended March 31, 2011, compared to $2,346,945 used in the same period of 2010. The March 31, 2011 total is attributable to net proceeds received from the Companys January 24, 2011 IPO. The IPO consisted of an offering of 3,000,000 of the Companys common shares at $5.50 per share. The gross proceeds of the offering were $16,500,000, associated financing costs were $2,079,599, and the net proceeds received by the Company totaled $14,420,401.
Effect of change in exchange rate
Net cash loss due to currency exchange was $27,413 in the three months ended March 31, 2011, compared to a gain of $62,177 in the same period of 2010.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to its investors.
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Contractual Obligations
The Company does not have any new contractual obligations as of March 31, 2011.
Item 3 | Quantitative and Qualitative Disclosures about Market Risk |
Not applicable.
Item 4 | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our Company maintains a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition.
As of March 31, 2011, our company carried out an evaluation, under the supervision of and with the participation of management, including our companys chief executive officer and chief financial officer, of the effectiveness of the design and operation of our companys disclosure controls and procedures. Based on the foregoing, the chief executive officer and chief financial officer concluded that our companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective in timely alerting them to information required to be included in our companys periodic Securities and Exchange Commission filings.
Changes in Internal Control over Financial Reporting
There were no changes in our companys internal controls over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the three months ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our companys internal control over financial reporting.
Item 1. | Legal Proceedings |
None.
Item 1A. | Risk Factors |
Not applicable, as the Registrant is a smaller reporting company.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) None.
(b) The Section entitled Use of Proceeds appearing in the registration statement filed with the Commission on May 14, 2010, as amended (file no. 333-166854) (the Registration Statement) and the prospectus filed pursuant to Rule 424(b)(3) of the Securities Act of 1933 (the Securities Act) on January 11, 2011 (the IPO Prospectus) is incorporated by reference. The effective date of the Registration Statement was December 28, 2010. The Registration Statement registered the offering of up to 3,000,000 common shares (the Offering). As of March 31, 2011, the Company had received the proceeds of the offering, had not yet applied it to any use, and is holding the proceeds in a bank account pending their use.
(c) None.
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Item 3. | Defaults upon Senior Securities |
None.
Item 4. | Submission of Matters to a Vote of Security Holders |
Not applicable.
Item 5. | Other Information |
None.
Item 6. | Exhibits |
The following documents are filed herewith:
Exhibit Number |
Document | |
3(i).1 |
Articles of Association of the Registrant (1) | |
3(i).2 |
Amended and Restated Articles of Association of the Registrant (1) | |
3(i).3 |
Articles of Association of Registrant reflecting name change (1) | |
3(ii).1 |
Memorandum of Association of the Registrant (1) | |
3(ii).2 |
Amended and Restated Memorandum of Association of Registrant (1) | |
3(ii).3 |
Memorandum of Association of Registrant reflecting name change (1) | |
4.1 |
Specimen Share Certificate (1) | |
10.1 |
Translation of Entrusted Management Agreement for YSTP (1) | |
10.2 |
Translation of Shareholder Voting Proxy Agreement for WFOE (1) | |
10.3 |
Translation of Pledge of Equity Interest Agreement for WFOE (1) | |
10.4 |
Translation of Exclusive Option Agreement for YSTP (1) | |
10.5 |
Form of Lock-Up Agreement (1) | |
10.6 |
Translation of Medicinal Materials Procurement Contract (Ba Sang) (1) | |
10.7 |
Translation of Medicinal Materials Procurement Contract (Chun Sheng) (1) | |
10.8 |
Translation of Medicinal Materials Procurement Contract (Cili Peichu) (1) | |
10.9 |
Translation of Medicinal Materials Procurement Contract (Kunming Morningstar Printing Co.) (1) | |
10.10 |
Translation of Medicinal Materials Procurement Contract (Xiong Ba) (1) | |
10.11 |
Translation of Sales Contract (Hangzhou Hesheng Medicine Co. Ltd) (1) | |
10.12 |
Translation of Sales Contract (Kunming Shangri-La Medicine Co. Ltd.) (1) | |
10.13 |
Translation of Agreement on Prescription and Industrialization Development of Tibetan Medicine (Kunming Institute of Botany of Chinese Academy Of Sciences) (1) | |
10.14 |
Translation of Agreement on Research into Tibetan Medicine Pharmacology and Effect (Second Military Medical University of Chinese Peoples Liberation Army) (1) | |
10.15 |
Retainer Contract (Taylor Z. Guo) (1) | |
10.16 |
Retainer Contract (Sabrina Ren) (1) | |
10.17 |
Retainer Contract (Hong Yu) (1) | |
21.1 |
Subsidiaries of the Registrant (1) |
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31.1 |
Certifications pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) | |
31.2 |
Certifications pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) | |
32.1 |
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2) | |
32.2 |
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2) | |
99.1 |
Code of Business Conduct and Ethics (1) | |
99.2 |
Audit Committee Charter (3) |
(1) | Incorporated by reference from registration statement filed with the Commission on May 14, 2010, as amended (file no. 333-166854). |
(2) | Filed herewith. |
(3) | Incorporated by reference from the registrants annual report on Form 10-K, File no. 001-35038 , filed on March 30, 2011. |
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, in Shangri-La County, Diqing, Yunnan Province, China, on May 16, 2011.
TIBET PHARMACEUTICALS, INC. |
/S/ TAYLOR Z. GUO |
Taylor Z. Guo |
Chief Executive Officer |
(Principal Executive Officer) |
Date: May 16, 2011 |
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CONSOLIDATED BALANCE SHEETS
March 31,
2011 (Unaudited) |
December 31,
2010 (Unaudited) |
|||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 24,815,733 | $ | 7,579,281 | ||||
Accounts receivable- related party |
3,338,828 | 3,170,048 | ||||||
Accounts receivable- non-related party |
9,765,703 | 9,076,045 | ||||||
Other receivables |
105,782 | 105,115 | ||||||
Inventories |
1,173,443 | 1,197,066 | ||||||
Total current assets |
39,199,489 | 21,127,555 | ||||||
Property, plant and equipment, net |
6,019,023 | 6,166,243 | ||||||
Intangible assets |
555,547 | 600,443 | ||||||
Prepaid expenses |
361,845 | 302,033 | ||||||
Total Assets |
$ | 46,135,904 | $ | 28,196,274 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts payable |
$ | 3,313,226 | $ | 2,877,745 | ||||
Accrued expenses and other payables |
2,143,466 | 1,836,840 | ||||||
Value-added tax payable |
4,721 | 0 | ||||||
Total current liabilities |
5,461,413 | 4,714,585 | ||||||
Stockholders Equity: |
||||||||
Common stock, $0.001 par value, 50,000,000 shares authorized, 14,829,167 and 11,812,500 issued and outstanding as of March 31, 2011 and December 31, 2010 respectively |
14,829 | 11,812 | ||||||
Additional paid in capital |
22,992,317 | 8,495,765 | ||||||
Retained earnings |
12,059,480 | 9,493,968 | ||||||
Accumulated Other Comprehensive Income |
1,466,962 | 1,339,241 | ||||||
Statutory reserve |
4,140,903 | 4,140,903 | ||||||
Total stockholders equity |
40,674,491 | 23,481,689 | ||||||
Total Liabilities and Stockholders Equity |
$ | 46,135,904 | $ | 28,196,274 | ||||
The accompanying notes are an integral part of these financial statements.
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TIBET PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2011
2011 | 2010 | |||||||
(Unaudited) | (Unaudited) | |||||||
Sales |
$ | 8,236,560 | $ | 7,019,484 | ||||
Cost of sales |
(4,761,811 | ) | (3,475,844 | ) | ||||
Gross profit |
3,474,749 | 3,543,640 | ||||||
Selling, general and administrative expense |
(921,869 | ) | (653,140 | ) | ||||
Income from operations |
2,552,880 | 2,890,500 | ||||||
Interest income |
14,227 | 3,704 | ||||||
Interest expenses and bank charges |
(1,595 | ) | (46,323 | ) | ||||
Total Other Income (Expense) |
12,632 | (42,619 | ) | |||||
Net income |
$ | 2,565,512 | $ | 2,847,881 | ||||
Other comprehensive income |
127,721 | 1,478 | ||||||
Comprehensive income |
2,693,233 | 2,849,359 | ||||||
Weighted average shares |
13,985,833 | 11,797,500 | ||||||
Basic and diluted |
0.18 | 0.24 |
The accompanying notes are an integral part of these financial statements.
F-2
Table of Contents
TIBET PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
2011 (Unaudited) |
2010 (Unaudited) |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 2,565,512 | $ | 2,847,881 | ||||
Adjustments to reconcile net income to net cash provided by |
||||||||
Operating activities: |
||||||||
Depreciation |
185,802 | 175,810 | ||||||
Amortization |
86,445 | 112,741 | ||||||
Stock based compensation |
79,168 | 0 | ||||||
Changes in assets and liabilities provided/(used) cash |
||||||||
Accounts receivable |
(780,732 | ) | 237,942 | |||||
Trade deposit paid |
0 | 98,754 | ||||||
Inventories |
31,219 | 663,544 | ||||||
Prepaid expenses |
(95,889 | ) | (123,051 | ) | ||||
Accounts payable |
417,221 | (1,206,740 | ) | |||||
Accrued expenses and other payables |
145,528 | 91,773 | ||||||
Value-added tax payable |
154,362 | (9,798 | ) | |||||
Net cash provided by operating activities |
2,788,636 | 2,888,856 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
IPO Proceeds |
14,420,401 | | ||||||
Due from shareholder |
| (2,346,945 | ) | |||||
Net cash provided (used) in financing activities |
14,420,401 | (2,346,945 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
27,415 | 62,179 | ||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
17,236,452 | 604,090 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
7,579,281 | 4,081,752 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 24,815,733 | $ | 4,685,842 | ||||
Supplemental Disclosures: |
||||||||
Interest paid |
$ | 0 | $ | 45,163 | ||||
The accompanying notes are an integral part of these financial statements.
F-3
Table of Contents
TIBET PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Shares of Common Stock Outstanding |
Common Stock |
Additional Paid-in Capital |
Accumulated Retained Earnings |
Statutory Reserve |
Accumulated Other Comprehensive Income/(Loss) |
Total | Due from stockholder |
Total Stockholders Equity |
||||||||||||||||||||||||||||
Balance, January 1, 2010 |
11,782,500 | 11,782 | 8,375,795 | 193,793 | 2,811,323 | 694,588 | 12,087,281 | (1,550,085 | ) | 10,537,196 | ||||||||||||||||||||||||||
Stock based compensation |
30,000 | 30 | 119,970 | 120,000 | 120,000 | |||||||||||||||||||||||||||||||
Net income |
13,142,085 | 13,142,085 | 13,142,085 | |||||||||||||||||||||||||||||||||
Distribution |
(2,512,330 | )) | (2,512,330 | ) | (2,512,330 | ) | ||||||||||||||||||||||||||||||
Transfer to statutory reserve |
(1,329,580 | )) | 1,329,580 | |||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
644,653 | 644,653 | 644,653 | |||||||||||||||||||||||||||||||||
Change in due from stockholder |
1,550,085 | 1,550,085 | ||||||||||||||||||||||||||||||||||
Balance, December 31, 2010 |
11,812,500 | $ | 11,812 | $ | 8,495,765 | $ | 9,493,968 | $ | 4,140,903 | $ | 1,339,241 | $ | 23,481,689 | $ | | $ | 23,481,689 | |||||||||||||||||||
Stock issuance |
3,000,000 | 3,000 | 14,417,401 | 14,420,401 | 14,420,401 | |||||||||||||||||||||||||||||||
Stock based compensation |
16,667 | 17 | 79,151 | 79,168 | 79,168 | |||||||||||||||||||||||||||||||
Net income |
2,565,512 | 2,565,512 | 2,565,512 | |||||||||||||||||||||||||||||||||
Foreign currency translation |
127,721 | 127,721 | 127,721 | |||||||||||||||||||||||||||||||||
Change in due from stockholder |
||||||||||||||||||||||||||||||||||||
Balance, March 31, 2011 |
14,829,167 | $ | 14,829 | $ | 22,992,317 | $ | 12,059,480 | $ | 4,140,903 | $ | 1,466,962 | $ | 40,674,491 | $ | | $ | 40,674,491 | |||||||||||||||||||
The accompanying notes are an integral part of these financial statements
F-4
Table of Contents
TIBET PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
Note 1 ORGANIZATION AND NATURE OF OPERATIONS
Tibet Pharmaceuticals Inc. (the Company or TBET, formerly known as Shangri-La Tibetan Pharmaceuticals, Inc.), was incorporated on December 22, 2009 under the laws of British Virgin Islands. In July 2010, the Company changed its name to Tibet Pharmaceuticals, Inc. China Tibetan Pharmaceuticals Limited (CTP), the Companys 100% owned subsidiary, was established in Hong Kong on January 6, 2010 as a limited liability company. Other than the equity interest in CTP, the Company does not own any assets or conduct any operations. CTP holds all of the outstanding equity interest in Yibo Information Consulting (Shenzhen) Company Ltd., a company established on March 18, 2010 in the PRC as a wholly foreign owned enterprise (WFOE). Other than the equity interest in WFOE, CTP does not own any assets or conduct any operations. Yunnan Diqing Shangri-La Tibetan Medicine Co., Ltd was incorporated on April 19, 2000 as a domestic Chinese corporation. On December 24, 2002, it changed its name to Yunnan Shangri-La Tibetan Pharmaceutical Group Limited (YSTP). YSTP is engaged in manufacturing, marketing, selling, researching and developing modernized traditional Tibetan medicines in China.
WFOE conducts its business through YSTP via a series of contractual arrangements. YSTP is consolidated as a variable interest entity (VIE). The Company does not conduct any substantive operations of its own, but conducts its primary business operations through WFOEs VIE. The Company holds its interest in the VIE through WFOE.
Effective control over the VIE was transferred to the Company through the series of contractual arrangements without transferring legal ownership in the VIE (reorganization). As a result of these contractual arrangements, the Company maintained the ability to approve decisions made by the VIE and was entitled to substantially all of the economic benefits of the VIE, and therefore the Company consolidates the VIE. Immediately before and after the reorganization, the ultimate shareholder controlled the VIE; therefore, the reorganization is accounted for as a transaction between entities under common control. Accordingly, the accompanying consolidated financial statements have been prepared as if the current corporate structure had been in existence throughout the periods presented.
Chinese laws and regulations currently do not prohibit or restrict foreign ownership in pharmaceutical manufacturing businesses. However, Chinese laws and regulations do prevent direct foreign investment in certain industries. On March 26, 2010, to protect the Companys shareholders from possible future foreign ownership restrictions, YSTP and all of the shareholders of YSTP entered into an entrusted management agreement with WFOE, which provides that WFOE will be entitled to the full guarantee for the performance of such contracts, agreements or transactions entered into by YSTP. WFOE is also entitled to receive the residual return of YSTP. As a result of the agreement, WFOE will absorb 100% of the expected losses and gains of YSTP, which results in WFOE being the primary beneficiary of YSTP.
WFOE also entered into a pledge of equity agreement with the principal shareholders, who pledged all their equity interest in these entities to WFOE. The pledge of equity agreement, which was entered into by each principal shareholder, pledged each of the principal shareholders equity interest in WFOE as a guarantee for the entrustment payment under the Entrusted Management Agreement. The provincial Administration for Industry and Commerce approved and registered such pledge of equity by which WFOE owns the right of pledge legally.
In addition, WFOE entered into an option agreement to acquire the principal shareholders equity interest in these entities at such times as it may wish to do so.
F-5
Table of Contents
TIBET PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
Note 1 ORGANIZATION AND NATURE OF OPERATIONS (Continued)
The followings are brief description of contracts entered between WFOE and YSTP:
(1) Entrusted Management Agreement. The domestic companies, YSTP and WFOE, have entered into an Entrusted Management Agreement, which provides that WFOE will be fully and exclusively responsible for the management of YSTP. As consideration for such services, YSTP has agreed to pay WFOE a management fee during the term of this agreement and the management fee shall equal to YSTPs estimated earnings before tax. Also, WFOE will assume all operating risks related to this entrusted management service to YSTP and bear all losses of YSTP. The term of this agreement will be from the effective date thereof to the earlier of the following: (1) the winding up of YSTP, or (2) the termination date of this Agreement to be determined by the parties hereto, or (3) the date on which WFOE completes the acquisition of YSTP.
(2) Exclusive Option Agreement. All the shareholders of YSTP as well as YSTP has entered into an Exclusive Option Agreement with WFOE, which provides that WFOE will be entitled to acquire such shares form the current shareholders upon certain terms and conditions, meanwhile WFOE will be entitled an irrevocable exclusive purchase option to purchase all or part of the assets and business of YSTP, if such a purchase is or becomes allowable under PRC laws and regulations. The Exclusive Option Agreement also prohibits the current shareholders of YSTP as well as YSTP from transferring any portion of their equity interests, business or assets to anyone other than WFOE. WFOE has not yet taken any corporate action to exercise this right of purchase, and there is no guarantee that it will do so or will be permitted to do so by applicable law at such times as it may wish to do so.
(3) Shareholders Voting Proxy Agreement. All the shareholders of YSTP has executed a Shareholders Voting Proxy Agreement to irrevocably appoint the persons designated by WFOE with the exclusive right to exercise, on their behalf, all of their Voting Rights in accordance with the laws and YSTPs Articles of Association, including but not limited to the rights to sell or transfer all or any of their equity interests of YSTP, and to appoint and elect the directors and Chairman as the authorized legal representative of YSTP. This agreement will be only terminated prior to the completion of acquisition of all of the equity interests in, or all assets or business of YSTP.
(4) Pledge of Equity Agreement. WFOE and the shareholders of YSTP have entered into a Pledge of Equity Agreement, pursuant to which all shareholder pledges all of their shares (100%) of YSTP, as appropriate, to WFOE. If YSTP or any of its respective shareholders breaches its respective contractual obligations in the Entrusted Management Agreement, Exclusive Option Agreement and Shareholders Voting Proxy Agreement, WFOE as Pledge, will be entitled to certain rights to foreclose on the pledged equity interests. Such YSTP shareholders cannot dispose of the pledged equity interests or take any actions that would prejudice WFOEs interest
Except for the disclosed above, there are no arrangements that could require the Company to provide financial support to the variable interest entities, including events or circumstances that could expose the Company to a loss. As stated in the disclosure of various agreements between the Company and its VIE, the Company has rights to acquire any portion of the equity interests of the VIE. In addition, the Company may allocate its available funds to its VIE for business purposes. There are no fixed terms of such arrangements.
F-6
Table of Contents
TIBET PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP). The Companys functional currency is the Chinese Renminbi; however the accompanying consolidated financial statements have been translated and presented in United States Dollars. These financial statements are prepared on a historical pro forma basis. The consolidated financial statements include the accounts of the Company, its subsidiary and variable interest entity (VIE) for which the Company is the primary beneficiary. All inter-company accounts and transactions have been eliminated in the consolidation. Please also refer to Note 1 for the discussion on accounting for the reorganization and acquisition. These financial statements have been prepared on a historical pro-forma basis.
Principles of Consolidation
Pursuant to US GAAP, YSTP is the VIE of TBET and the TBET is the primary beneficiary of the VIE. Accordingly, the VIE has been consolidated in the TBETs financial statements.
TBET, CTP and WFOE were formed in 2009, 2010 and 2010, respectively, by YSTP and its shareholders as part of a plan by YSTPs shareholders to reorganize YSTPs corporate structure in preparation for listing in the U.S. In connection with the formation of TBET, CTP and WFOE, WFOE entered into several VIE agreements, or Control Agreements, with YSTP and its shareholders. These companies were formed, and the Control Agreements were executed, for the express purpose of restructuring YSTP as the controlled affiliate of a BVI company so that the resulting entity could become a publicly-traded company in the U.S. The shareholders having 100% of the voting rights in YSTP shares entered into a resolution dated December 10, 2009 that authorized this restructuring and the specific steps of forming a BVI company, a Hong Kong subsidiary of that company, the formation of Chinese wholly-foreign owned enterprise owned by the Hong Kong company, and entry into the Control Agreements. These resolutions require TBET to consolidate YSTPs financial statements with TBETs from its inception.
Through the VIE agreements, TBET effectively has complete management and ownership control over YSTP, the VIE, and is able to dictate its operations. The equity holders of YSTP became the controlling owners of TBET. By reason of the VIE agreements, TBET is also able to obtain the financial interests such as obtaining periodic income of the VIE through technical and consulting service arrangements and obtaining the net assets of VIE through purchase of their equities at essentially no cost basis (by virtue of TBETs ownership of CTP and CTPs ownership of WFOE). TBET therefore concluded that its interest in the VIE is not a noncontrolling interest and therefore it is not classified as such. The amount of noncontrolling interest of the original shareholders of YSTP holding shares of the VIE for TBET is zero. They exercise no controls over the VIE and no financial interests of ownership are due to them either for periodic income or the net assets. Indeed, they have ceded all such rights to WFOE (and, as a result, TBET) though the Control Agreements. Accordingly, the accompanying financial statements show the operations of TBET and its subsidiaries as well as YSTP as being operated under the common control of TBET.
Prior to these transactions, TBET, CTP, and WFOE were holding companies. Pursuant to ASC 805, the above transactions were accounted for as reorganization under common control. TBET presents the operation of YSTP since inception on a historical pro forma basis in the accompanying financial statements.
F-7
Table of Contents
TIBET PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Translation Adjustment
As of December 31, 2010, respectively, the accounts of the Company were maintained, and its financial statements were expressed, in Chinese Yuan Renminbi (CNY). Such financial statements were translated into U.S. Dollars (USD) in accordance with the Foreign Currency Matters Topic of the FASB Accounting Standards Codification (ASC 830), with the CNY as the functional currency. According to ASC 830, all assets and liabilities were translated at the current exchange rate, stockholders equity is translated at historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with the Comprehensive Income Topic of the FASB Accounting Standards Codification (ASC 220), as a component of shareholders equity. Transaction gains and losses are reflected in the income statement.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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. Actual results could differ from those estimates.
Comprehensive Income
The Company follows the Comprehensive Income Topic of the FASB Accounting Standards Codification (ASC 220). Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.
Risks and Uncertainties
The Companys operations are carried out in the PRC. Accordingly, the Companys business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRCs economy. The Companys business may be influenced by change 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.
The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Companys management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Companys legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
F-8
Table of Contents
TIBET PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Contingencies (Continued)
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Companys financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.
Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
There were no contingencies of this nature as of March 31, 2011.
Cash and Cash Equivalents
Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis. There were no allowances for doubtful accounts as of March 31, 2011 and December 31, 2010, respectively.
Inventories
Inventories are valued at the lower of cost (determined on a weighted average basis) or market. As of March 31, 2011 and December 31, 2010, respectively, inventories consist of the following:
March 31, 2011 |
December 31, 2010 |
|||||||
Raw materials |
$ | 674,932 | $ | 519,520 | ||||
Package materials |
268,239 | 96,298 | ||||||
Finished goods |
230,272 | 581,248 | ||||||
Total |
$ | 1,173,443 | $ | 1,197,066 | ||||
Property, Plant & Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:
Buildings |
20 years | |||
Machinery and equipment |
10 years | |||
Motor vehicles and others |
5 years |
F-9
Table of Contents
TIBET PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Plant & Equipment (Continued)
As of March 31, 2011 and December 31, 2010, respectively, Property, Plant & Equipment consist of the following:
March 31, 2011 |
December 31, 2010 |
|||||||
Buildings |
$ | 5,599,524 | $ | 5,564,217 | ||||
Machinery and equipments |
3,576,433 | 3,553,882 | ||||||
Motor vehicles and others |
733,473 | 728,848 | ||||||
Sub-total |
9,909,430 | 9,846,947 | ||||||
Less: Accumulated depreciation |
(3,890,407 | ) | (3,680,704 | ) | ||||
Property, plant and equipment, net |
$ | 6,019,023 | $ | 6,166,243 | ||||
Depreciation expenses for the three months ended March 31, 2011 and 2010 totaled $185,801 and $175,810, respectively.
Intangible Assets
Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from ten to fifty years. Management evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. No impairments of intangible assets have been identified during any of the periods presented. The land use right will expire in 2050. All of the Companys intangible assets are subject to amortization with estimated lives of:
Land use right |
50 years | |||
Proprietary technologies |
10 years |
F-10
Table of Contents
TIBET PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible Assets (Continued)
As of March 31, 2011 and December 31, 2010, respectively, the components of finite-lived intangible assets are as follows:
March 31, 2011 |
December 31, 2010 |
|||||||
Proprietary technologies |
$ | 1,826,456 | $ | 1,814,940 | ||||
Land use right |
304,409 | 302,490 | ||||||
2,130,865 | 2,117,430 | |||||||
Less: Accumulated amortization: |
(1,575,318 | ) | (1,516,987 | ) | ||||
$ | 555,547 | $ | 600,443 | |||||
Amortization expense for the three months ended March 31, 2011 and 2010 were $48,563 and $45,412, respectively.
The estimated future amortization expenses related to intangible asset as of December 31, 2011 are as follows:
Years ended December 31, |
||||
2011 |
$ | 194,251 | ||
2012 |
117,557 | |||
2013 |
6,070 | |||
2014 |
6,070 | |||
2015 |
6,070 | |||
Thereafter |
$ | 225,528 |
Long-Lived Assets
The Company adopted the Property, Plant and Equipment in accordance with FASB Accounting Standard Codification (ASC 360), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations for a Disposal of a Segment of a Business. The Company evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets 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. Based on its review, the Company believes that, as of March 31, 2011 and December 31, 2010, respectively, there were no impairments of its long-lived assets.
F-11
Table of Contents
TIBET PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Companys revenue recognition policies are in compliance with the Revenue Recognition Topic of the FASB Accounting Standards Codification (ASC 605) and the Securities and Exchange Commissions Staff Accounting Bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured.
Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
The Company has distributor arrangements with certain parties for sale of its pharmaceutical products. The distributor agreements do not provide chargeback, price protection, or stock rotation rights. Accordingly, revenue is recognized when products are delivered to and received by the distributors.
If the products sold have quality issues, the Company is responsible because of the product warranty included in each sale. However, the customers cannot return merchandise without permission of the Company. The return is recorded on the date the return is authorized. A quality warranty reserve provision has been made for the anticipated cost to replace items. The quality reserve accruals in amount of $1,480,843 and $831,145 as of March 31, 2011 and 2010, respectively, were included in the accrued expenses and other payables on the consolidated balance sheets, and amounts of $148,255 and $126,351 in the income statement as of March 31, 2011 and 2010, respectively.
Revenues are recorded net of value-added taxes.
Prepaid Expenses
Advertising expenses consist primarily of costs of promotion for corporate image and product marketing and costs of direct advertising. The Company records payments made to advertising companies for the purpose of reserving prime-time advertising space as prepaid expenses in the consolidated balance sheet. The Company expenses the prepaid advertising amount when the advertisement is published or aired. All other advertising costs are expensed as incurred. At March 31, 2011 and 2010, the prepaid advertising costs were $95,889 and $92,296 respectively.
Also, included in prepaid expenses is GMP authentication, which is being amortized during the period of the certificate of authentication.
Research and development costs
Research and development costs are incurred in the development of the new products and processes, including significant improvements and refinements to existing products. All research and development costs are expensed as incurred. Expenses recorded for the three months ended March 31, 2011 and 2010 were approximately $146,864 and $148,068, respectively.
Advertising Expense
The Company expenses its advertising costs when the expense is incurred. Advertising expense for the three months ended March 31, 2011 and 2010 were approximately $31,869 and $30,763 respectively.
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Table of Contents
TIBET PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company utilizes SFAS No. 109, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
There are no differences between the Companys tax bases of assets and liabilities and their financial reporting amounts, and therefore, there were no deferred tax assets or deferred tax liabilities at March 31, 2011 and 2010.
The Company is entitled to exemption from PRC income tax between 2008 and 2012. According to the tax preferential policy of Yunnan Diqing Tibet Autonomous State and the approval of the governmental tax agency, after approval of documents by the tax bureau of the Peoples Government Office of Yunnan Diqing Autonomous State, the tax bureau of the Yunnan Diqing Tibet Autonomous State agreed to exempt the Company from income tax for 5 years between 2008 and 2012. The dollar effect of this tax holiday is $641,378 and $711,970 for the three months ended March 31, 2011 and 2010, respectively. The pro-forma per share effect is $0.05 and $0.06 per share for the three months ended March 31, 2011 and 2010 respectively.
In July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for uncertainty in Income Taxes. FIN 48 clarifies the accounting for Income Taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition and clearly scopes income taxes out of SFAS 5, Accounting for Contingencies. FIN 48 is effective for fiscal years beginning after December 15, 2006. As a result of implementing FIN 48, there have been no adjustments to the Companys financial statements. SFAS No. 109 and FIN 48 were superseded by the Income Taxes Topic of the FASB Accounting Standards Codification (ASC 740) in September 2009. However, this portion of the codification has no application to the Company as stated above. The Company is not subject to corporate taxes until 2012.
Statement of Cash Flows
In accordance with the Statement of Cash Flows Topic of the FASB Accounting Standards Codification (ASC 230), cash flows from the Companys operations are based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets because of translation adjustments.
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Table of Contents
TIBET PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company has a diversified customer base, most of which are in China. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited. As of March 31, 2011 and December 31, 2010, there was no allowance for uncollectible accounts as previously discussed.
Segment Reporting
The Company operates and manages its business as a single segment that includes primarily the development, manufacture and sale of modernized traditional Chinese medicine.
Recent Accounting Pronouncements
There were no recent accounting pronouncements that will have a material impact on the Companys consolidated financial statements.
Reclassification
Certain prior year accounts were reclassified to conform to the manner of presentation in the current period.
Note 3 COMPENSATED ABSENCES
Regulation 45 of the local labor law of the Peoples Republic of China (PRC) entitles employees to `annual vacation leave after one year of service. In general, all leave must be utilized annually, with proper notification. Any unutilized leave is cancelled.
Note 4 RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Parties are also considered to be related if they are subject to common control or common significant influence. The Revenue derived from related party transactions for the three months ended March 31, 2011 and 2010 were $1,907,948 and $1,474,604, respectively. As of March 31, 2011 and December 31, 2010, the balances of accounts receivable from related party were approximately $3,338,828 and $3,170,048, respectively.
Note 5 STATUTORY RESERVE
In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprises income, after the payment of the PRC income taxes, shall be allocated to the statutory surplus reserves and statutory public welfare fund. Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent of the profit after tax to the surplus reserve fund and additional 5 to 10 percent to the public affair fund. The public welfare fund reserve was limited to 50 percent of the registered capital. Effective January 1, 2006, there is now only one fund requirement. The reserve is 10 percent of income after tax, not to exceed 50 percent of registered capital.
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Table of Contents
TIBET PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. The allocation to the reserves will be made at the end of the year. As of March 31, 2011 and December 31, 2010, the Company had allocated $4,140,903, to these non-distributable reserve funds.
Note 6 OTHER COMPREHENSIVE INCOME
Balances of related after-tax components comprising accumulated other comprehensive income, included in stockholders equity, as of March 31, 2011 and 2010, are as follows:
Note 7 OTHER COMPREHENSIVE INCOME (CONTINUED)
Foreign Currency Translation Adjustment |
Accumulated Other Comprehensive Income |
|||||||
Balance at December 31, 2010 |
$ | 1,339,241 | $ | 1,339,241 | ||||
Change for three months ended March 31, 2011 |
127,721 | 127,721 | ||||||
Balance at March 31, 2011 |
$ | 1,466,962 | $ | 1,466,962 | ||||
Note 8 CONCENTRATIONS
Two customers accounted for 35.8% and 33.7% of the Companys revenues for the three months ended March 31, 2011 and 2010, respectively.
Two customers represented 38.7% and 38.2% of the Companys accounts receivable balance at March 31, 2011 and December 31, 2010, respectively.
Three vendors accounted for 60.9% and 57.0% of the Companys accounts payable balance at March 31, 2011 and December 31, 2010, respectively.
Three vendors accounted for 57.9% and 51.7% of the Companys purchases for the three months ended March 31, 2011 and Mar 31, 2010, respectively.
Note 9 EQUITY
IPO Arrangement
On January 24, 2011, the Company completed its initial public offering (IPO) of 3,000,000 common shares at $5.50 per share. The gross proceeds were $16,500,000 with financing cost of $2,079,599, the net funds received by the company was $14,420,401.
Our Board of Directors and shareholders have approved a Share Incentive Plan for our employees and directors to be implemented following the completion of the IPO. This plan authorizes the issuance of up to 684,375 restricted common shares and options for redemption of restricted common shares. No options have been granted or shares issued under the Plan as of March 31, 2011.
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TIBET PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
Note 10 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share of common stock:
March 31 | ||||||||
2011 | 2010 | |||||||
Basic and diluted earnings per share: |
||||||||
Numerator: |
||||||||
Net income used in computing basic earnings per share |
$ | 2,565,512 | $ | 2,847,881 | ||||
Net income applicable to common shareholders |
$ | 2,565,512 | $ | 2,847,881 | ||||
Denominator: |
||||||||
Weighted average common shares outstanding |
13,985,833 | 11,797,500 | ||||||
Basic and diluted earnings per share |
$ | 0.18 | 0.24 | |||||
Note 11 COMMITMENTS
The Company has entered into three-year employment contracts with its chief executive officer, chief financial officer and chairman of the board for $61,500, $44,000 and $96,650, respectively. Although the agreements expire April 29, 2013, each carries a renewal option of two-years.
The Company has entered into five-year research and development agreements with two third parties expiring December 28, 2011 and December 31, 2011, respectively. Combined fees for these services amount to approximately $142,000 annually.
On October 12, 2010, the Company entered an agreement with an investor relations/public relations firm, Trilogy Capital Partners, Inc. (Trilogy). The agreement, as amended, provided that it would remain in force until six (6) months after the Company closed its Initial Public Offering (IPO). It provided that the Company would pay Fees for Trilogys services of $7,500 per month. As additional compensation, the Company agreed to issue the Firm 33,334 shares restricted common stock based on an estimated IPO per-share price. As of March 31, 2011, 16,667 shares were issued and $79,168 was recorded as stock based compensation expenses.
Note 12 SUBSEQUENT EVENTS
For the three months ended March 31, 2011, the Company has evaluated subsequent events for potential recognition and disclosure from April 1, 2011 through the date the financial statements were available to be issued. On April 26, 2011, the company issued the second set of 16,667 shares to Trilogy Capital Partners, Inc. due to it under the agreement with the Company dated October 12, 2010, as amended.
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