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U. S. Securities and Exchange Commission
Washington, D. C. 20549

FORM 10-Q

 
[X]     QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
             For the quarterly period ended September 30, 2012

 
[   ]    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____

Commission File No. 0-53254
 
JINZANGHUANG TIBET PHARMACEUTICALS, INC.
(Name of Registrant in its Charter)
 
Delaware
26-2443288
(State of Other Jurisdiction of incorporation or organization)
(I.R.S.) Employer I.D. No.)
 
Leling Economic Development Zone, Kaiyuan East Blvd., Dezhou,
 Shandong Province, P.R. China 253600
(Address of Principal Executive Offices)

Issuer's Telephone Number: 86-534-2111-962

Indicate  by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 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 [X]    No [    ]
 
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 by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)  
 
Large accelerated filer                 Accelerated filer               Non-accelerated filer             Smaller reporting company [X]
 
APPLICABLE ONLY TO CORPORATE ISSUERS:  Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date:
 
November 13, 2012
Common Voting Stock: 50,665,063
 
 
 
 

 

JINZANGHUANG TIBET PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2012
 
TABLE OF CONTENTS
   
Page No
Part I
Financial Information
 
Item 1.
Financial Statements (unaudited):
 
 
Condensed Consolidated Balance Sheets – September 30, 2012 and June 30, 2012
2
 
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended September 30, 2012 and 2011
3
 
Condensed Consolidated Statements of Cash Flows – for the Three Months Ended September 30, 2012 and 2011
4
 
Notes to Condensed Consolidated Financial Statements
5
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 13
     
Item 3
Quantitative and Qualitative Disclosures about Market Risk
16
     
Item 4.
Controls and Procedures
16
     
Part II
Other Information
 
     
Item 1.
Legal Proceedings
17
     
Items 1A.
Risk Factors
17
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
17
     
Item 3.
Defaults upon Senior Securities
17
     
Item 4.
Mine Safety Disclosures
17
     
Item 5.
Other Information
17
     
Item 6.
Exhibits
17
 
 
 
1

 

 
JINZANGHUANG TIBET PHARMACEUTICALS, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
             
ASSETS
 
   
 
September 30,
 
June 30,
 
 
2012
 
2012
 
CURRENT ASSETS:
       
     Cash
  $ 11,305,105     $ 8,584,928  
     Accounts receivable
    1,220,943       899,957  
     Prepaid expenses and other current assets
    39,943       3,997  
     Deferred tax assets
    10,974       10,974  
TOTAL CURRENT ASSETS
    12,576,965       9,499,856  
                 
Property and equipment, net of accumulated depreciation
    397,631       403,477  
Intangible assets, net of accumulated amortization
    187,132       188,612  
                 
TOTAL  ASSETS
  $ 13,161,728     $ 10,091,945  
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
                 
CURRENT LIABILITIES:
               
     Due to related party
  $ 36,843     $ 36,630  
     Accrued expenses and other current liabilities
    761,647       595,669  
                 
TOTAL CURRENT LIABILITIES AND TOTAL LIABILITIES
    798,490       632,299  
                 
STOCKHOLDERS' EQUITY:
               
     Common stock, $0.001 par value, 300,000,000 shares authorized, 50,665,063 and 40,665,063 shares issued and outstanding at September 30, 2012 and June 30, 2012, respectively
    50,665       40,665  
     Additional paid-in capital
    2,254,427       1,264,427  
     Retained earnings
    9,326,972       7,493,615  
     Accumulated other comprehensive income
    164,949       189,704  
                 
TOTAL STOCKHOLDERS' EQUITY OF THE COMPANY
    11,797,013       8,988,411  
                 
Non-controlling interests
    566,225       471,235  
                 
TOTAL STOCKHOLDERS' EQUITY
    12,363,238       9,459,646  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 13,161,728     $ 10,091,945  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
2

 
 
JINZANGHUANG TIBET PHARMACEUTICALS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 
(Unaudited)
 
             
   
Three months Ended September 30,
 
   
2012
   
2011
 
             
REVENUE
    3,334,334       2,564,583  
                 
COST OF REVENUE
               
    Cost
    513,708       233,832  
    Business and sales related tax
    186,960       129,312  
      700,668       363,144  
                 
GROSS PROFIT
    2,633,666       2,201,439  
                 
COSTS AND EXPENSES
               
    General and administrative expenses
    70,659       114,639  
                 
OPERATING INCOME
    2,563,007       2,086,800  
                 
OTHER INCOME
    8,597       1,054  
                 
INCOME BEFORE INCOME TAX
    2,571,604       2,087,854  
                 
INCOME TAX
    641,954       475,566  
                 
NET INCOME
    1,929,650       1,612,288  
                 
LESS: NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS
    96,293       82,676  
                 
NET INCOME ATTRIBUTABLE TO THE COMPANY
    1,833,357       1,529,612  
                 
OTHER COMPREHENSIVE INCOME
               
    Foreign currency translation gain, net of tax
    (26,058 )     71,619  
                 
COMPREHENSIVE INCOME
    1,807,299       1,601,231  
                 
LESS: OTHER COMPREHENSIVE INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS
    (1,303 )     4,693  
                 
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE COMPANY
  $ 1,808,602     $ 1,596,538  
                 
Basic and diluted earnings per common share
  $ 0.04     $ 0.04  
                 
Weighted average number of shares outstanding
    47,295,498       40,665,063  

 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
3

 
 
JINZANGHUANG TIBET PHARMACEUTICALS, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOW
 
(Unaudited)
 
             
             
   
THREE MONTHS ENDED SEPTEMBER 30,
 
   
2012
   
2011
 
OPERATING ACTIVITIES:
           
Net income attributable to the Company
 
$
             1,833,357
   
$
             1,529,612
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
     Net income attributable to non-controlling interests
   
                  96,293
     
                  82,676
 
     Depreciation and amortization
   
                    5,828
     
                    5,740
 
Changes in operating assets and liabilities:
               
     Accounts receivable
   
              (323,271)
     
               (339,584)
 
     Prepaid expense
   
                (35,956)
     
                          -
 
     Accrued expenses and other current liabilities
   
                167,696
     
                  94,167
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
           1,743,947
     
           1,372,611
 
                 
FINANCING  ACTIVITIES:
               
     Shares Issued
   
             1,000,000
     
                          -
 
     Proceeds from related party, loan
   
                          -
     
                  29,460
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
           1,000,000
     
                 29,460
 
                 
EFFECT OF EXCHANGE RATE ON CASH
   
               (23,770)
     
                 53,558
 
                 
INCREASE IN CASH
   
           2,720,177
     
           1,455,629
 
                 
CASH - BEGINNING OF PERIOD
   
           8,584,928
     
           2,176,655
 
                 
CASH - END OF PERIOD
 
$
        11,305,105
   
$
           3,632,284
 
                 
Supplemental disclosures of cash flow information:
               
   Cash paid for income tax
 
$
                492,662
   
$
                440,282
 

The accompanying notes are an integral part of these condensed consolidated financial statements.


 
4

 


JINZANGHUANG TIBET PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)
 

1              BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES

Business description

Jinzanghuang Tibet Pharmaceuticals, Inc. (“the Company”) is engaged in providing consulting services to facilitate the distribution of Tibetan pharmaceutical and nutraceutical products in the People’s Republic of China (“PRC”).  The Company’s operations are carried out through Beijing Taibodekang Consulting Co., Ltd. (“BTC”) and Leling Jinzanghuang Biotech Co., Ltd. (Leling JZH).
 
On January 12, 2009 the Company  acquired all of the outstanding capital stock of Tibet Medicine, Inc. (“TMI”), a Delaware corporation, in exchange for 36,401,462 shares of its common stock issued to the shareholders of TMI, representing 89.6% of the issued and outstanding shares of the Company. TMI was organized under the laws of Delaware on September 4, 2008 and is the 100% owner of the registered capital of BTC. BTC is a Wholly Foreign Owned Entity that was organized under the laws of the People’s Republic of China on December 5, 2008. For accounting purposes, the above transaction was accounted for as a reverse merger. TMI became the surviving entity for accounting purposes, whereas the Company is recognized as the surviving entity for legal purposes.

On January 4, 2009, BTC entered into four ten-year agreements (the “Entrusted Management Agreements”) with Leling JZH, which was incorporated under the laws of PRC as a limited liability company on November 20, 2008, and with the registered equity holders of Leling JZH.  Three of the agreements were amended as of July 24, 2009.  The purpose of these agreements is to transfer to BTC full responsibility for the management of Leling JZH, as well as 95% of the financial benefits that arise from the business of Leling JZH. As a result, BTC now has control over the business of Leling JZH and is considered a variable interest entity.  For that reason, the results of operations of Leling JZH have been included with the Company’s condensed consolidated financial statements.
 
Basis of presentation
 
The unaudited consolidated financial statements presented herein include the accounts of Jinzanghuang Tibet Pharmaceuticals, Inc., its wholly owned subsidiary (BTC) and variable interest entity (Leling JZH).  All inter-company transactions and balances among the Company and its subsidiaries are eliminated upon consolidation.  In the opinion of management, all adjustments and normal recurring accruals considered necessary for a fair statement of the results for the period have been included.

The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) and are presented in U.S. Dollars.

Uses of estimates in the preparation of financial statements

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 revenue and expenses during each reporting period.  Actual results could differ from those estimates.
 
 
 
5

 
 
JINZANGHUANG TIBET PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)
 


1              BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Variable Interest Entity

Effective January 1, 2009, the Consolidation Topic ASC 810-10-45-16 revised the accounting treatment for non-controlling minority interests of partially-owned subsidiaries.  Non-controlling minority interests represent the allocation of earnings to the VIE owners who are not at risk for the majority of losses of the VIE, which have been accounted for by using the consolidation method of accounting.

The accounts of Leling JZH have been consolidated with the accounts of the Company because Leling JZH is a variable interest entity with respect to Beijing Taibodekang, which is a wholly-owned subsidiary of the Company.  Beijing Taibodekang has a contractual obligation to provide management services to Leling JZH, and the management of the operations of Leling JZH is carried out by Company personnel in fulfillment of that obligation.  Beijing Taibodekang also has a contractual obligation to reimburse Leling JZH for any losses incurred as a result of the operations of Leling JZG, and the Company’s principal shareholders caused funds to be contributed to Leling JZG during the years ended June 30, 2010 and 2009 in satisfaction of that obligation.  The carrying amount and classification of Leling JZH’s assets and liabilities included in the Condensed Consolidated Balance Sheets are as follows:

   
September 30,
2012
   
June 30,
2012
 
Total current assets
 
$
13,077,095
   
$
9,418,343
 
Total assets
   
12,492,331
     
10,010,432
 
Total current liabilities
   
1,756,402
     
589,677
 
Total liabilities
   
1,756,402
     
589,677
 

The amounts shown in the above table as of September 30, 2012 include $1,000,000 of intercompany payables  that have been eliminated in consolidating Leling JZH with the Company.

The Consulting Agreement between Leling Jinzanghuang and Beijing Taibodekang requires that, in payment for the consulting services provided by Beijing Taibodekang, Leling Jinzanghuang will pay fees to Beijing Taibodekang equal to:
 
 
·
10,000 RMB per month, plus
 
·
95% of the annual gross profit of Leling Jinzanghuang.
 
The Consulting Agreement also provides, however, that Beijing Taibodekang will reimburse Leling Jinzanghuang for the amount of any net loss incurred by Leling Jinzanghuang during the period when it is managed by Beijing Taibodekang.

Revenue recognition

The Company recognizes revenue from provision of services to sauna stores based on units of the sauna store’s product usage, which is the contractual method of determining the right to revenue. The revenue is recognized at 35% or 40% of sauna stores’ revenue from sale of Shandong JZH products. The percentage is depending on the location of the sauna store.  Payments are made to the Company directly from the sauna stores a month after the end of the month in which the sales occurred.

Cash

The Company maintains cash with financial institutions in the People’s Republic of China (“PRC”) which are not insured or otherwise protected.  Should any of these institutions holding the Company’s cash become insolvent, or if the Company is unable to withdraw funds for any reason, the Company could lose the cash on deposit with that institution.
 
 
 
6

 
 
JINZANGHUANG TIBET PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)
 

1              BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Accounts Receivable

Accounts receivable represent receivables from customers. Reserves for bad debts are based on a combination of current sales, historical charge-offs and specific accounts identified as high risk. Uncollectible accounts receivable are charged against the allowance for doubtful accounts when all reasonable efforts to collect the amounts due have been exhausted. Such allowances, if any, would be recorded in the period the impairment is identified. There is no bad debt expense recorded during the three months ended September 30, 2012 or the year ended June 30, 2012. The balance of allowance for bad debts was $0 and $0 ended September 30, 2012 and June 30, 2012, respectively. The accounts receivable balance as of September 30, 2012 is in compliance with the Company’s credit terms.

Property and equipment

Property and equipment are recorded at cost. Depreciation is provided in amounts sufficient to amortize the cost of the related assets over their useful lives using the straight line method.

Long-Lived Assets and Other Acquired Intangible Assets
 
The Company reviews property and equipment and certain identifiable intangibles for impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property and equipment and certain identifiable intangibles are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value. The Company did not record any impairments during the three months ended September 30, 2012

Income tax

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires the Company to use the assets and liability method of accounting for income taxes. Under the assets and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forward. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized.

ASC 740-10, Accounting for Uncertainty in Income Taxes, defines uncertainty in income taxes, and the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.

Enterprise income tax

Under the Provisional Regulations of PRC Concerning Income Tax on Enterprises promulgated by the PRC, income tax is payable by enterprises at a rate of 25% of their taxable income.
 
 
 
7

 
 
JINZANGHUANG TIBET PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)

1              BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Business Taxes and Sales-related Taxes

Pursuant to the tax law and regulations of PRC, Leling JZH is obligated to pay 5% of revenue for business taxes, and 7% and 4% (5% effective in May, 2011) of the annual business taxes paid as tax on maintaining and building cities and education additional fee, both of which belong to sales-related taxes. Sales-related taxes are recorded when revenue is recognized. For the three months ended September 30, 2012 and 2011, business taxes and sales-related taxes were $186,960 and $129,312, respectively.
.
Stock-based compensation

The Company records stock-based compensation in accordance with the guidance in ASC Topic 718 which requires the Company to recognize expense related to the fair value of its share-based compensation. This eliminates accounting for share-based compensation transactions using the intrinsic value and requires instead that such transactions be accounted for using a fair-value-based method.

Currency translation

Since the Company operates primarily in the PRC, the Company’s functional currency is the Chinese Yuan (“RMB”).  The Company’s financial statements have been translated into the reporting currency, the United States Dollar (“USD”). Assets and liabilities of the Company are translated at the prevailing exchange rate at each reporting period end date. Contributed capital accounts are translated using the historical rate of exchange when capital is injected. Income and expense accounts are translated at the average rate of exchange during the reporting period. Translation adjustments resulting from translation of these condensed consolidated financial statements are reflected as accumulated other comprehensive income in stockholders’ equity.

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
 
Statement of Cash Flows
 
In accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the Company’s condensed consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the condensed consolidated balance sheet.

Fair value of financial instruments

The Company adopted the provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
 
 
8

 
 
JINZANGHUANG TIBET PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)


1              BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair value of financial instruments (Continued)

The carrying amounts reported in the consolidated balance sheets for cash, due to related party, and accrued expenses, approximate their fair market value based on the short-term maturity of these instruments. The Company did not identify any other assets or liabilities that are required to be presented in the consolidated balance sheets at fair value in accordance with ASC 820.

Earnings per share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share is computed similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.  There are no such additional common shares available for dilution purposes as of September 30, 2012 and June 30, 2012.
 
New Accounting Pronouncements

In December 2011, the FASB issued ASU No.2011-12, deferral of the effective date for Amendments to the presentation of reclassifications of items out of accumulated other comprehensive income in ASU 2011-05. ASU2 2011-12 defers the requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) in both net income and other comprehensive income (“OCI”) on the face of financial statements. All other requirements in ASU No. 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard has not had a material impact on the Company’s consolidated financial position and results of operations.

In July 2012, the FASB issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” This ASU simplifies how entities test indefinite-lived intangible assets for impairment, which improves consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of indefinite-lived intangible assets is less than their carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

2             RELATED PARTY TRANSACTIONS

As of September 30, 2012, the Company has an aggregate of $36,843 in “due to related party” for expenses paid by a related party on behalf of the Company.  This is unsecured, bears no interest and is due on demand.  
 
 
 
9

 

JINZANGHUANG TIBET PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)
 


3             PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consists of the following:

   
September 30,
2012
   
June 30,
2012
 
Buildings
  $ 430,689     $ 431,785  
Office equipment
    17,836       17,881  
 
    448,525       449,666  
 
 
 
   
 
 
Less: accumulated depreciation
    50,894       46,189  
 
 
 
         
Property, plant and equipment, net
  $ 397,631     $ 403,477  

Depreciation expense charged to operations was $4,827 and $4,549 for the three months ended September 30, 2012 and 2011, respectively.

4              INTANGIBLE ASSETS, NET

Intangible assets, net, consists of the following:

   
September 30,
2012
   
June 30,
2012
 
             
Land use right
 
$
200,126
   
$
200,636
 
Software
   
2,996
     
3,004
 
     
203,122
     
203,640
 
                 
Less: accumulated amortization
   
15,990
     
15,028
 
                 
Intangible assets, net
 
$
187,132
   
$
188,612
 

Amortization expense charged to operations was $1,002 and $1,359 for the three months ended September 30, 2012 and 2011, respectively.

The future minimum amortization expense charged to operations for the coming years is as follows:
 
Years ending June 30:
     
2013
   
3,002
 
2014
   
4,003
 
2015
   
4,003
 
2016
   
4,003
 
2017
   
4,003
 
Remaining operating lease payments
   
168,126
 
Total future minimum operating lease payments
 
$
187,140
 
 
 
10

 

JINZANGHUANG TIBET PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)


5             ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

   
September 30,
2012
   
June 30,
2012
 
             
Accrued payroll
 
$
17,860
   
$
16,445
 
Taxes payable
   
 714,787
     
 550,028
 
Accrued expenses
   
26,964
     
24,905
 
Other payables
   
 2,306
     
 4,292
 
                 
Accrued expenses and other current liabilities
 
$
761,647
   
$
595,669
 

6              INCOME TAX

Taxes payable consisted of the following:
 
   
September 30,
2012
   
June 30,
2012
 
Income tax payable
  $ 640,766     $ 493,394  
Property and land taxes payable
    7,518       7,538  
Business taxes payable
    62,230       45,946  
City and supplement taxes
    4,273       3,150  
 
    714,787       550,028  
 
The provision for income taxes is summarized as follows:

   
Three months ended
September 30,
2012
   
The year ended
June 30,
2012
 
Current provision
  $ 641,954     $ 1,866,502  
Deferred provision
    -       80,203  
Total
  $ 641,954     $ 1,946,705  
 
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate:

   
Three months ended
   
The year ended
 
   
September 30,
2012
   
June 30,
2012
 
U.S. statutory rates
    35 %     35 %
Foreign income not recognized in the U.S.
    -35 %     -35 %
PRC statutory rates
    25 %     25 %
 
 
 
11

 
 
JINZANGHUANG TIBET PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)
 

7              COMMITMENTS AND CONTINGENCIES

(a)        Operating lease commitment
 
The Company leases buildings under non-cancelable operating lease agreements. Based on the current rental lease agreements, the future minimum rental payments required for the coming years are as follows:
 
Years ending June 30:
     
2013
   
378
 
         
Remaining operating lease payments
   
-
 
Total future minimum operating lease payments
 
$
378
 

(b)        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 twenty 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 PRCs 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 business is transacted in RMB, which is not freely convertible.  The Peoples Bank of China or other banks are authorized to buy and sell foreign currencies at the exchange rates quoted by the Peoples Bank of China.  Approval of foreign currency payments by the Peoples 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 operations in the PRC, all 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.


 
12

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements: No Assurances Intended

In addition to historical information, this Quarterly Report contains forward-looking statements, which are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans to,” “estimates,” “projects,” or similar expressions. These forward-looking statements represent Management’s belief as to the future of Jinzanghuang Tibet Pharmaceuticals, Inc.  Whether those beliefs become reality will depend on many factors that are not under Management’s control.  Many risks and uncertainties exist that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section 1A, entitled “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2012.   Readers are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.

 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Accounting for Variable Interest
 
Jinzanghuang Tibet Pharmaceuticals, Inc. is a holding company whose only asset is an indirect 100% ownership interest in Beijing Taibodekang Management Consulting Co., Ltd. (“Beijing Taibodekang”), a Wholly Foreign Owned Entity organized under the laws of the People’s Republic of China on December 5, 2008.  On January 4, 2009, Beijing Taibodekang entered into four agreements with Leling Jinzanghuang Biotech Co. Ltd. (“Leling Jinzanghuang”) and with the equity owners in Leling Jinzanghuang.  Three of the agreements were amended as of July 24, 2009.  Collectively, the agreements provide Beijing Taibodekang exclusive control over the business of Leling Jinzanghuang.  The relationship is one that is generally identified as “entrusted management.”
 
The accounting effect of the Entrusted Management Agreements between Beijing Taibodekang and Leling Jinzanghuang is to cause the balance sheets and financial results of Leling Jinzanghuang to be consolidated with those of Beijing Taibodekang, with respect to which Leling Jinzanghuang is now a variable interest entity.  Since the parties to the Entrusted Management Agreements were both controlled by Xue Bangyi, who is CEO of both Beijing Taibodekang and Leling Jinzanghuang, the financial statements included in this report reflect the consolidation of the results of operations and cash flows of Leling Jinzanghuang since its inception.
 
Outline of Our Business

Since its formation, Leling Jinzanghuang has been involved in the distribution of Tibetan pharmaceutical and nutraceutical products manufactured by Shandong Jinzanghuang, the primary equity owner of which is Xue Bangyi.   Leling Jinzanghuang served as a distributor of those products until October 2010, when it suspended its distribution operations.  Since October 2010 Leling Jinzanghuang has been exclusively engaged in providing advisory services to sauna stores that purchase sauna care products from Shandong Jinzanghuang.

On October 8, 2010, Leling Jinzanghuang entered into an agency agreement with Shenyang Jintao Technology Co., Ltd. (“Jintao”), pursuant to which Jintao has introduced 158 sauna stores to Leling Jinzanghuang. Shandong Jinzanghuang sells its Tibetan medicine products to the sauna stores and Leling Jinzanghuang provides training service to each store to coach the store’s employees in methods of integrating the Shandong Jinzanghuang products into the sauna service. Leling Jinzanghuang has paid Jintao a fee, ranging from RMB 8,000 ($1,269) to RMB 8,800 ($1,396) for each store Jintao has introduced.

The contract among Leling Jinzanghuang, Shandong Jinzanghuang and the sauna store provides that the store will purchase products, as needed, directly from Shandong Jinzanghuang.  In compensation for Leling Jinzanghuang’s advisory services, the sauna store pays Leling Jinzanghuang a fee equal to a percentage of the resale price charged by the sauna store to its customers for the Shandong Jinzanghuang products. The fee is either 35% or 40% of the resale price, depending on the location of the sauna store. At each month end, each store sends a usage record to Leling Jinzanghuang. Leling Jinzanghuang also makes a physical inventory count quarterly to compare remaining inventory with the quantity delivered by Shandong Jinzanghuang.

 
13

 
 
This new business model provides Leling Jinzanghuang with a revenue stream for which it incurs very little direct cost, as the product manufacture and distribution is entirely the responsibility of Shandong Jinzanghuang. In addition, entry into this new market has not forced us to incur significant start-up costs, as we have used the same employees and same facilities for the sauna market as carried on our prior product distribution activities.

Results of Operations

The following tables present certain consolidated statements of operations information. Financial information is presented for the three months ended September 30, 2012 and 2011, respectively.
 
   
For the three months ended September 30
   
Change
 
   
2012
   
2011
   
Amount
   
%
 
Revenue
  $ 3,334,334     $ 2,564,583       769,751       30 %
Cost of goods sold
    700,668       363,144       337,524       93 %
Gross profit
    2,633,666       2,201,439       432,227       20 %
Operating expenses
    70,659       114,639       (43,980 )     (38 %)
Operating income/(loss)
    2,563,007       2,086,800       476,207       23 %
Net profit/(loss)
    1,929,650       1,612,288       317,362       20 %

Revenues

Our sauna store program began in October 2010 with a trial group of 50 sauna stores.  By June 30, 2011, the end of our 2011 fiscal year, the program had grown to 150 stores.  Revenue growth increased from quarter to quarter, roughly in proportion to the growth in number of stores, except that the third quarter in 2011 was particularly profitable.  This occurred because the Chinese Spring Festival, which occurs during that quarter, affords most Chinese workers from one to two weeks of vacation, during which time the sauna stores experienced a sharp increase in business.

Since July 1, 2011 we have added only 46 more sauna stores - eight in the first quarter of fiscal 2012 and 38 in August 2012 and have retained the original 150. Nevertheless our revenue has grown consistently from quarter to quarter. The increase was primarily caused by a marked increase in per store revenue, which we attribute to growing awareness of our product line. As a result, during the three months ended September 30, 2012, our revenue from the sauna stores program was $3,334,334, an increase of $769,751 or 30% from $2,564,583 recorded during the three months ended September 30, 2011. The increase was due in part to the addition of 38 stores, although the stores joined the program only in August 2012. The primary reason for the increase in revenue was the increase in per store revenue from the first quarter of fiscal 2012 to the first quarter of fiscal 2013.

The following table shows the elements that have contributed to the growth in our revenue since we initiated the sauna store program in October 2010.

    Fiscal 2011     Fiscal 2012  
Fiscal 2013
      Q2       Q3       Q4       Q1       Q2       Q3       Q4   Q1
Service fees from sauna stores  
    554,543       1,419,313       1,715,454       2,564,583       2,659,182       2,712,438       2,716,812   3,334,334
Quantity of sauna stores
    50       100       150       158       158       158       158   196
Average revenue per store  
    11,091       14,193       11,436       16,232       16,830       17,167       17,195   17,012

 
14

 
 
We held our market steady at 158 stores throughout the last fiscal year and only recently expanded modestly because we recognize that the greatest danger to the success of our business plan would be careless growth. We selected sauna stores carefully after March 2011 and added 38 stores this past quarter. With a client base of 196 stores, we are able to analyze the effectiveness of our marketing program, our product offerings, our management controls, and our financial systems, and to rectify shortcomings in any of those areas. We have been careful to assure that demand for our products has never exceeded supply; that our clients can rely on the timely delivery of their orders. Our goal is to optimize the relationship we have with these 196 stores, then use these sauna stores as the foundation on which our business will grow.
 
Gross profit

The dedication of our business to the sauna store program has resulted in high gross margin.  Because we have no cost of goods sold, our cost of sales is primarily direct labor and business taxes. As a result, during the three months ended September 30, 2011, we realized a gross margin of 86%.  Our revenue during the three months ended September 30, 2012 yielded a gross margin of 79%. The primary reason for the quarter-to-quarter reduction in gross margin ratio was the expense related to bringing 38 new stores into the program.  
 
Operating expenses

The Company’s general and administrative expenses decreased from $114,639 for the three months ended September 30, 2011 to $70,659 for the three months ended September 30, 2012, a decrease of 38%. Most of our general and administrative are office expenses, including wages of our administrative personnel. The fact that we are able to increase revenue while reducing our general and administrative expenses reflects the low costs involved in the sauna service business, where Shandong JZH and our agent provide most of the marketing services.

After deducting the aforesaid operating expenses from our gross profit, the Company recorded $2,563,007 in operating income for the three months ended September 30, 2012. This represented an increase of $476,207, or 23%, compared with the three months ended September 30, 2011.
 
Net income

Our Chinese operating entity, Leling Jinzanghuang, is subject to tax in China at the statutory rate of 25% of income calculated in accordance with Chinese accounting principles. Accordingly, for the three months ended September 30, 2012 we accrued an income tax expense of $641,954.  After deducting that accrual, the Company reported net income of $1,929,650 for the three months ended September 30, 2012. For the three months ended September 30, 2011, we accrued an income tax expense of $475,566 and generated net income of $1,612,288.  This represented an increase in net income of $317,262 or 20%.

The entrusted management agreements assign to Beijing Taibodekang only 95% of the income generated from Leling Jinzanghuang.  For that reason, we deducted a “non-controlling interest” of $96,293 before recognizing net income attributable to the Company on our Consolidated Statements of Operations and Comprehensive Income.  After that deduction and taking into account the income and expenses incurred by the parent corporation, our net income attributable to the Company for the three months ended September 30, 2012 was $1,833,357, representing $0.04 per share. For the three months ended September 30, 2011, we deducted a “non-controlling interest” of $82,676 and the net income attributable to the Company was $1,529,612, representing $0.04 per share.
 
Liquidity and Capital Resources

To date, our operations have been funded by contributions to capital by our founders and by the net cash provided by our operations.  As a result, at September 30, 2012 we had no bank debt and only a $36,843 obligation to a related party. At the same time, we had $11,305,105 in cash at September 30, 2012 as well as net working capital totaling $11,778,475, an increase of $2,910,918 since our last fiscal year ended on June 30, 2012.  We supplemented our cash reserves on July 31, 2012 by selling ten million shares of our common stock for a total of $1,000,000. So our capital resources are more than sufficient to fund our operations for the coming year as they are currently structured.
 
 
 
15

 
During the three months ended September 30, 2012, our operating activities provided $1,743,947 in net cash, compared to $1,372,611 in net cash during the three months ended September 30, 2011, an increase of $371,336 or 27%.  The net cash provided in the recent period was slightly lower than our net income for the three months ended September 30, 2012 due to the $320,986 increase in accounts receivable during the recent quarter. Net cash provided by operating activities in three months ended September 30, 2011 was slightly lower than our net income for the three months ended September 30, 2011 due to an increase in accounts receivable as well.

Over the long term, our expectation is that we will utilize our capital resources as well as any additional investments that we secure in order to expand our presence in the market for Tibetan medicine.  At the present time, however, we are able to operate profitably without significant additional investment.  Moreover, our observation of the equity markets indicates that we would be unlikely to obtain financing on favorable terms at this time.  Accordingly, our near term plan is to continue the program that we initiated during the past year, utilizing the resources available to us.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

ITEM 3              QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.             CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.  The term “disclosure controls and procedures” (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report (the “Evaluation Date”). That evaluation disclosed that the Company has material defects in its disclosure controls and procedures. Specifically they determined that there is a lack of expertise in U.S. GAAP among the Company’s management personnel. They also determined that the size of the Company’s accounting staff and low number of supervisory personnel prevented an appropriate segregation of accounting functions.  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were not effective.

Management will continue to monitor the performance of its disclosure controls and procedures.  At present, the nature of our operations minimizes the complexity of our accounting. For that reason, management has no present plan to implement a significant upgrade to its accounting staff. However, as our business grows and the complexity of our accounting operations increases, we will take appropriate action to assure that our disclosure controls and procedures are adequate.

Changes in Internal Controls.  The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter covered by this report, and they have concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
16

 
 
 PART II   -   OTHER INFORMATION

Item 1.                Legal Proceedings
 
None.
 
Item 1A              Risk Factors
 
There have been no material changes from the risk factors included in our Annual Report on Form 10-K for the year ended June 30, 2012.

Item 2.  Unregistered Sale of Securities and Use of Proceeds

(a) Unregistered sales of equity securities

On July 31, 2012 the Company sold 10,000,000 shares of common stock to seven unrelated individuals in a private offering.  The purchase price for the shares was $.10 per share, or a total of $1 million.  The shares were sold to individuals who are accredited investors and were purchasing for their own accounts.  The offering, therefore, was exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) and Section 4(5) of the Securities Act.

(c) Purchases of equity securities

The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Exchange Act during the 1st quarter of fiscal 2013.

 
Item 3.               Defaults Upon Senior Securities.
 
None.

Item 4.               Mine Safety Disclosures.
 
Not Applicable.

Item 5.               Other Information.
 
None.

Item 6.
Exhibits
31.1
Rule 13a-14(a) Certification – CEO
31.2
Rule 13a-14(a) Certification – CFO
32
Rule 13a-14(b) Certification
101 INS
XBRL Instance Document*
101 SCH
XBRL Schema Document*
101 CAL
XBRL Calculation Linkbase Document*
101 DEF
XBRL Definition Linkbase Document*
101 LAB
XBRL Labels Linkbase Document*
101 PRE
XBRL Presentation Linkbase Document*

*           The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

 
17

 
 
SIGNATURES

Pursuant to the requirements 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.
    
 
JINZANGHUANG TIBET PHARMACEUTICALS, INC.
 
 
Date: November 13, 2012
By: /s/ Xue Bangyi
 
   Xue Bangyi, Chief Executive Officer
   
 
By: /s/ Eva Deng
 
   Eva Deng, Chief Financial Officer, Chief Accounting Officer
 
 
 
 
 
18