UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ending December 31, 2012

 

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the transition period from ________    to ________.

 

Commission file number: 000-52954

 

Tongli Pharmaceuticals (USA), Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		84-1090791
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification number)
116 Village Blvd Suite 200, Princeton NJ		08540
(Address of Principal Executive Offices)		(Zip Code)

 

212-842-8837

(Registrant’s Telephone Number, Including Area Code)

 

n/a

(Former name, former address and former fiscal year, if changed since last report)

 

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 x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Yes ¨  No  ¨

  

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ¨ No x

 

As of February 10, 2013, there were 14,848,122 shares of company’s common stock issued and outstanding.

 

 

TABLE OF CONTENTS

 

Cautionary Note on Forward Looking Statements		3
PART I – FINANCIAL INFORMATION		5
Item 1.	Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4(T).	Controls and Procedures	21
PART II – OTHER INFORMATION		22
Item 1.	Legal Proceedings	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Mine Safety Disclosures	22
Item 5.	Other Information	22
Item 6.	Exhibits	22
SIGNATURES		23

 

Unless otherwise provided in this Quarterly Report on Form 10-Q, references to “the Company,” “the Registrant,” “Tongli,” “we,” “us,” and “our” refer to Tongli Pharmaceuticals (USA), Inc. together with its wholly-owned subsidiaries.

  

 

CAUTIONARY NOTE ON FORWARD LOOKING STATEMENTS

 

In addition to historical information, this Quarterly Report on Form 10-Q contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements.  We cannot give any guarantee that the plans, intentions or expectations described in the forward looking statements will be achieved.  All forward-looking statements involve significant risks and uncertainties, and actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those factors described in the “Risk Factors” section of our Annual Report for the fiscal year ended March 31, 2012 (the “2012 10-K”).  Readers should carefully review such risk factors as well as factors described in other documents that we file from time to time with the Securities and Exchange Commission.

 

In some cases, you can identify forward-looking statements by terminology such as “guidance,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential,” “proposed,” “intended,” or “continue” or the negative of these terms or other comparable terminology.  You should read statements that contain these words carefully, because they discuss our expectations about our future operating results or our future financial condition or state other “forward-looking” information.  There may be events in the future that we are not able to accurately predict or control.  You should be aware that the occurrence of any of the events described in our risk factors and other disclosures could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, and levels of activity, performance or achievements.  Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include, without limitation:

 

·

our ability to obtain sufficient working capital to support our business plans;

 

our ability to recommence operations at our manufacturing facility;

 

·

our ability to expand our product offerings and maintain the quality of our products;

 

·

the availability of Chinese government granted rights to exclusively manufacture or co-manufacture our products;

 

·

the availability of Chinese national healthcare reimbursement of our products;

 

·

our ability to manage our expanding operations and continue to fill customers’ orders on time;

 

·

our ability to maintain adequate control of our expenses allowing us to realize anticipated revenue growth;

 

·

our ability to maintain or protect our intellectual property;

 

·

our ability to maintain our proprietary technology;

 

·

the impact of government regulation in China and elsewhere, including the support provided by the Chinese government to the Traditional Chinese Medicine and healthcare sectors in China;

 

·

our ability to implement product development, marketing, sales and acquisition strategies and adapt and modify them as needed;

 

·

our ability to integrate any future acquisitions;

 

·

our implementation of required financial, accounting and disclosure controls and procedures and related corporate governance policies; and

 

·

our ability to anticipate and adapt to changing conditions in the Traditional Chinese Medicine and healthcare industries resulting from changes in government regulations, mergers and acquisitions involving our competitors, technological developments and other significant competitive and market dynamics.

 

Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management’s opinions only as of the date thereof.  We undertake no obligation to revise or publicly release the results of any revision of our forward-looking statements, except as required by law.

 

 

PART I

 

ITEM 1.    FINANCIAL STATEMENTS

 

TONGLI PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		December 31, 2012				March 31,2012
		(Unaudited)
ASSETS
Current assets:
Cash		$	96,725			$	23,508
Accounts Receivable			2,473,443				4,166,178
Inventories			98,518				13,613
Advance to suppliers			277,423				1,016,294
Prepaid expense and other current assets			43,552				241,738
Deferred tax assets			95,051				399,081
Contract deposit-current portion			1,269,620				3,189,441
Due from related parties			-				87,538
Total current assets			4,354,332				9,137,391
Long-term assets:
Property and equipment, net			6,009,458				6,193,526
Intangible assets, net			5,252,333				4,041,032
Contract deposit-long term			6,022,758				469,726
Total long-term assets			17,284,549				10,704,284
Total assets		$	21,638,881			$	19,841,675
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilties:
Accounts payable		$	118,111			$	429,117
Taxes payables			684,858				879,386
Accrued expenses			192,489				192,340
Due to related parties			179,953				-
Total current liabilities			1,175,411				1,500,843
Stockholders' Equity
Preferred stock, $0.001 par value,authorized 1,000,000 shares; none issued and outstanding			-				-
Common stock, $0.001 par value,authorized 200,000,000 shares issued and outstanding 14,728,111 and 13,294,778 shares, as of December 31, 2012 and March 31, 2012 respectively			14,728				13,295
Additional paid-in-capital			9,056,266				8,842,699
Accumulated other comprehensive income			2,349,815				2,075,975
Retained earnings			9,042,661				7,408,863
Total Stockholders' equity			20,463,470				18,340,832
Total liablities and Stockholders' equity		$	21,638,881			$	19,841,675

 

The accompanying notes are an intergral part to the consolidated financial statements

 

 

TONGLI PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

(UNAUDITED)

 

		For the Three Months Ended December 31,								For the Nine Months Ended December 31,
		2012				2011				2012				2011
Revenue		$	3,752,983			$	4,127,532			$	7,083,973			$	13,583,418
Cost of sales			1,733,110				2,083,889				3,481,018				7,176,389
Gross Profit			2,019,873				2,043,643				3,602,955				6,407,029
Operating expenses:
General and administrative expenses			130,494				181,906				764,209				1,324,849
Depreciation and amortization expenses			88,229				75,344				270,527				243,442
Selling expenses			7,504				53,451				240,422				159,880
Total operating expenses			226,227				310,701				1,275,158				1,728,171
Operating income			1,793,646				1,732,942				2,327,797				4,678,858
Other income(expenses):
Interest income(expense)			551				-				814				(27,881	)
Other income			15,860				-				15,860				-
Other expense			(26,433	)			-				(26,433	)			-
Total other income(expenses)			(10,022	)			-				(9,759	)			(27,881	)
Income before income taxes			1,783,624				1,732,942				2,318,038				4,650,977
Income tax expense(credit)			468,508				468,896				684,240				1,449,260
Net Income			1,315,116				1,264,046				1,633,798				3,201,717
Other Comprehensive income
Foreign Currency Translation adjustment			70,917				110,191				273,841				588,692
Comprehensive income		$	1,386,033			$	1,374,237			$	1,907,639			$	3,790,409
Basic and diluted income per share		$	0.09			$	0.10			$	0.12			$	0.26
Basic and diluted weighted average shares outstanding			14,728,111				13,252,321				13,891,384				12,325,741

 

The accompanying notes are an integral part to the consolidated financial statements

 

 

TONGLI PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

		For the Nine Months Ended December 31,
		2012				2011
Cash flows from operating activities
Net income		$	1,633,798			$	3,201,717
Adjustments to reconcile net income to net cash provided by(used in) operating activities:
Depreciation and amortization			460,420				419,622
Accrued interest- related party			-				27,881
Stock issued for services			215,000				813,821
Deferred tax assets			308,081				(2,143	)
Changes in operating assets and liabilities:
Accounts receivable			1,748,166				(1,623,358	)
Inventory			(84,677	)			(2,445,052	)
Advances from supplies			752,175				-
Prepaid expenses and other current assets			200,992				(36,947	)
Accounts payable			(316,626	)			(649,891	)
Accrued expenses and tax payables			(206,375	)			(131,040	)
Net cash provided by (used in) operating activities			4,710,954				(425,390	)
Cash flows from investing activities
Acquistion of property and equipment			-				(857	)
Purchase of intangible asset and payment of contract deposit			(7,149,541	)			-
Refund of contract deposit			2,220,354				1,095,681
Net cash provided by (used in) investing activities			(4,929,187	)			1,094,824
Cash flows from financing activities
Proceeds from related party loans			276,645				-
Repayement of related party loans			-				(1,169,990	)
Net cash provided by (used in) financing activities			276,645				(1,169,990	)
Effect of exchange rate changes on cash			14,805				(15,809	)
Net increase (decrease) in cash			73,217				(516,365	)
Cash, beginning of the period			23,508				592,671
Cash , end of the period		$	96,725			$	76,306
Supplemental disclosure of cash flow information
Cash paid for income taxes		$	-			$	1,555,613
Supplemental disclosure of Non-cash transaction:
Intingable asset transferred from contract deposits		$	217,278			$	-

 

The accompanying notes are an integral part to the cosolidated financial statements

 

 

1.

ORGANIZATION AND BASIS OF PRESENTATION

 

Tongli Pharmaceuticals (USA), Inc.(the “Company”), through an indirect wholly-owned subsidiary, Harbin Tianmu Pharmaceuticals Co., Ltd. (“Tianmu Pharmaceuticals”), develops, produces and sells a wide variety of pharmaceuticals and healthcare products in the People’s Republic of China (“PRC” or “China”) that are based on traditional Chinese medicine (“TCM”).  In August 2011, the Company formed Harbing Lvnong Plant Ltd. (“Lvnong”) to plant and sell herbs in China. Lvnong is 100% owned by the Company’s indirect wholly-owned subsidiary, Heilongjiang Tongli Technology Co., Ltd. (“Tongli Technology”).

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial  information and pursuant to the requirements for reporting on Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year or any other periods. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

 

The balance sheet as of March 31, 2012 has been derived from the audited financial statements of the Company as of that date, but does not include all of the information and footnotes required by U.S. GAAP for the complete financial statements.

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of consolidation

 

The consolidated financial statements include the accounts of: (i) the Company (ii) the Company’s wholly owned subsidiary American Tony Pharmaceuticals, Inc., a Delaware corporation (“American Tony”), (iii) American Tony’s wholly owned subsidiary Tongli Technology, and (iv) Tongli Technology’s wholly owned subsidiaries, Tianmu Pharmaceuticals and Lvnong, each PRC companies.  All significant inter-company accounts and transactions have been eliminated upon consolidation.

 

Uses of estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period.  Actual results could differ from those estimates.

 

Fair Value of Financial Instruments

 

The Company adopted 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.

 

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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

 

Inventory

 

Inventory is stated at the lower of cost, determined using the weighted average cost method, and net realizable value.  Costs include materials, labor and manufacturing overhead.  Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose.  Management periodically compares the cost of inventory with the market value and an allowance is made for writing down the inventory to its market value, if lower than cost. No allowance for inventory markdown is considered necessary for nine months ended December 31, 2012 and 2011.

 

Harvested Chinese herbs inventories are stated at lower of cost or market. Cost of growing herbs includes director labor and material costs accumulated through the balance sheet date.

 

Impairment of Long Lived Assets

 

Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the assets.

 

The Company accounts for the impairment of long-lived assets in accordance with the guidance of FASB ASC 360-10-20. Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable.  For assets that are to be held and used, impairment is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value.  If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value.  Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable.  Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value. Based on its review, the Company believes that, as of December 31, 2012, there were no impairment of its long-lived assets.

 

Deferred income taxes

 

The Company accounts for income taxes in accordance with FASB ASC 740 “Income Taxes” which requires that deferred tax assets and liabilities be recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  In addition, ASC 740 requires recognition of future tax benefits, such as carry-forwards, to the extent that realization of such benefits is more likely than not and that a valuation allowance be provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Management reviews this valuation allowance periodically and makes adjustments as warranted.

 

Foreign currency translation

 

Since the Company operates primarily in the PRC, the Company’s functional currency is the Chinese Renminbi (“RMB”).  For financial reporting purposes, RMB has been translated into United States dollars (“USD”) as the reporting currency.  Equity accounts are translated at historical rates. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as “Accumulated other comprehensive income”. Gains and losses resulting from foreign currency translations are included in accumulated other comprehensive income.

 

 

Revenue Recognition

 

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, and no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers. The Company sells primarily to distributors who subsequently sell the merchandise. The agreements with distributors do not provide for the right of return.  Return from distributors has historically been immaterial and accordingly no reserve is deemed necessary as of December 31, 2012 and 2011.

 

3.

INVENTORY

 

As of December 31, 2012 and March 31, 2012, inventory consists the following:

 

		December 31, 2012				March 31, 2012
Raw materials		$	78,503			$	13,553
Finished goods			20,015				60
Total		$	98,518			$	13,613

 

4.

CONTRACT DEPOSIT

 

Contract deposit represents payments under material contracts by which the Company intends to purchase drug formula to be used in the manufacturing and increasing its product lines.

 

As of December 31, 2012 and March 31, 2012, contract deposit consists of the following:

 

		December 31, 2012				March 31, 2012
Contract deposit-Tonghua (1)		$	1,269,620			$	3,444,658
Contract deposit-Xinyu(2)			-				214,509
Contract deposit-Yangsenwubao (3)			1,126,787				-
Contract deposit-Qiangshu(4)			2,301,186				-
Contract deposit-Yinge(5)			2,594,785				-
			7,292,378				3,659,167
Less: current portion			(1,269,620	)			(3,189,441	)
Total		$	6,022,758			$	469,726

 

(1)

On March 21, 2010, the Company entered into a New Drug Assignment Agreement (the “Tonghua Agreement”) with TonghuaYisheng Pharmaceuticals Company Limited (“Tonghua”) pursuant to which the Company agreed to purchase a new drug candidate, called Nafarelin, from Tonghua for a purchase price of RMB33,000,000 (approximately $4.85 million). The total purchase price is payable in three installments: 33% of the total purchase price (approximately $1.6 million) was paid upon execution of the Tonghua Agreement in March 2010; another 33% (approximately $1.6 million) was paid in March 2011 (although it is required to be paid upon conclusion of third clinical trial for the product pursuant to the terms of the Tonghua Agreement) and the balance is payable upon conclusion of the transfer.

 

Nafarelin is a proposed treatment for endometriosis and prostate cancer. At a minimum, completion of the third phase clinical trail is a pre-condition to receipt of the New Drug Approval Certificate from the SFDA. The SFDA new drug approval procedure is separate and distinct from the patent prosecution procedure. To date, neither Tonghua nor the Company has applied or intend to apply for patent protection for Nafarelin or the formula or process related to Nafarelin. Once Tonghua is granted the New Drug Approval Certificate for Nafarelin, according to pharmaceutical laws of PRC, the Company, as the assignee of the New Drug Approved Certificate, shall receive 4 years of exclusive protection.  As described below, the Company regards such protection period as the appropriate amortization period. The patent protection is irrelevant for purposes of amortization in determining the life of the drug as the Company will not apply for patent protection for Nafarelin.

 

 

The Company is not be responsible for conducting or paying for any clinical trial and/or research and development in connection with the new drug application for Nafarelin. Pursuant to the Tonghua Agreement, Tonghua shall continue the research, development and clinical trial work for Nafarelin until the SFDA grants the New Drug Approval Certificate and the product is ready to be marketed. Tonghua is listed as the applicant for the SFDA new drug approval process for this product. Once SFDA approval is obtained, the Company will be able to consummate the assignment and enjoy the protection afforded by the New Drug Approval Certificate. In addition, the Company’s ability to commercialize this new product also requires assistance and cooperation from Tonghua, which Tonghua is obligated to provide to us under the Tonghua Agreement.

 

Under PRC law, the SFDA’s New Drug Approval Certificate grants certain exclusive protections to approved new drugs, meaning that the subject formula may not be manufactured by other parties in China. The exclusive protection periods for the new drugs vary from 4 to 12 years depending on the category of the new drug. Because the Company shall be the beneficiary of the exclusive protection during the applicable period (the so-called “new drug approval period”), upon consummation of the transaction contemplated by the Tonghua Agreement, the Company will regard the protection period as the appropriate amortization period. Based on ASC 805-50-30 “Initial Measurement on Acquisition of Assets Rather Than a Business” and ASC350-30 ”General Intangibles Other Than Goodwill”, the total payment pursuant to the Tonghua Agreement will be recorded as an intangible asset once the Company obtains the SFDA New Drug Approval Certificate and will be amortized over the term of the new drug protection period.

 

Based on a written mutual understanding between the Company and Tonghua, any payments the Company made to Tonghua under the Tonghua Agreement will be refunded if SFDA approval is not obtained for Nafarelin. Such mutual understanding, although the Company believes to be binding, was not explicitly stipulated in the Tonghua Agreement or otherwise memorialized. As such, the first two installment under the Tonghua Agreement was accounted as a deposit and the remaining last installment payment will be also accounted as deposits until the New Drug Approval Certificate is obtained, at which point the total payment will be recorded as intangible asset and amortized over the term of the new drug protection period.The Tonghua Agreement also provides that the Company and Tonghua will compensate one another for all losses incurred by the other party if the purchase is not concluded due to reasons attributable to the offending party.

 

On June 6, 2012, the Company entered into a Termination Agreement with Tonghua pursuant to which the Tonghua Agreement was terminated. Pursuant to the Termination Agreement, Tonghua will refund prepayment of RMB 22,000,000 (approximate to $3.5 million) in four installments. The first installment of RMB5, 000,000 (approximately $794,000) will be refunded prior to August 30, 2012, the second installment of RM6, 000,000 (approximately $950,000) will be refunded prior to November 30, 2012, the third installment of RMB8,000,000 (approximately $1.3 million) will be refunded prior to February 28, 2013 and the last installment of RMB3,000,000 (approximately $476,000) will be refunded prior to May 30, 2013. During nine months ended December 31, 2012, the Company received refund payment of RMB14,000,000 (approximately $2.22 million).

 

(2)

On April 30, 2012, the Company entered into Xinyu Breath Spray purchase agreement with Harbin Junde Healthcare Product Company. Pursuant to the agreement, the total purchase price is RMB8,500,000 (approximately $1.33 million). The Company will pay 50% of the purchase price after commencement of the Xinyu Breath Spray purchase agreement and pay the rest of the purchase price after the Company manufactured three batches of Xinyu Breath Spray that meet the quality standards of the product.  The Company paid RMB1,370,000 (approximately $215,000) on March 29, 2012, RMB3,630,000 (approximately $568,000) on May 30, 2012 and paid the balance due of RMB3,500,000 (approximately $554,000) in August 2012. Based on ASC 805-50-30 “Initial Measurement on Acquisition of Assets Rather Than a Business” and ASC350-30 ”General Intangibles Other Than Goodwill”, the total payment pursuant to the agreement with Harbin Junde Healthcare Product Company is recorded as an intangible asset and will be amortized over the estimated useful life of this product. (See note 5)

 

 

(3)

On August 10, 2012, the Company entered into Yangshen Wubao purchase agreement with Harbin Junde Healthcare Product Company. Pursuant to the agreement, the Company will acquire the exclusive right to manufacture Yangshen Wubao at the total purchase price of RMB13,000,000 (approximately $2.06 million). The Company paid RMB3,000,000 (approximately $475,000) as the deposit at the closing of Yangsheng Wubao purchase agreement. The balance of the purchase price will be paid in installments according to the payment schedule. During nine months ended December 31 2012, the Company paid RMB7,100,000 (approximately $1.1 million). The outstanding balance of RMB5,900,000 (approximately $936,344) will be paid in March 2013.The Company manufactured samples of this product using a subcontractor in the United States in November 2012 in order to provide samples to potential customers. Based on ASC 805-50-30 “Initial Measurement on Acquisition of Assets Rather Than a Business” and ASC350-30 ”General Intangibles Other Than Goodwill”, the total payment pursuant to the agreement will be recorded as an intangible asset once the Company finishes the acquisition process and is being amortized over the life of this product.

 

(4)

On November 1, 2012, the Company entered into Qiangshu purchase agreement with Harbin Junde Healthcare Product Company. Pursuant to the agreement, the Company will acquire the exclusive right to manufacture the product Qiangshu at the total purchase price of RMB18,500,000 (approximately $2.94 million). The Company paid RMB14,500,000 (approximately $2.30 million) as the deposit at the closing of Qiangshu purchase agreement in October 2012. The balance of the purchase price will be paid in installments according to the progress of performance under the contract.

 

(5)

On December 18, 2012, the Company entered into Yinge purchase agreement with Harbin Junde Healthcare Product Company. Pursuant to the agreement, the Company will acquire the exclusive right to manufacture the product Yinge at the total purchase price of RMB18,500,000 (approximately $2.94 million). The Company paid RMB16,350,000 (approximately $2.60 million) as the deposit at the closing of Yinge purchase agreement in October and November 2012. The balance of the purchase price will be paid in installments according to the progress of performance under the contract.

 

5.

INTANGIBLE ASSETS

 

As of December 31, 2012 and March 31, 2012, intangible assets consist of the following: 

 

		December 31, 2012				March 31, 2012
Land use rights		$	4,475,409			$	4,415,426
Formulas			1,348,971				-
		$	5,824,380			$	4,415,426
Less: Accumulated amortization			(572,047	)			(374,394	)
		$	5,252,333			$	4,041,032

 

The executive offices and manufacturing facilities of the Company’s subsidiary Tianmu Pharmaceuticals are located in the Limin Pharmaceutical Technology Park in the City of Harbin, which is the capital of Heilongjiang Province in The People’s Republic of China.  In 2008, Tianmu Pharmaceuticals paid RMB 2.7 million (approximate to $400,000) to local government to obtain a land use right of 50,000 square meters for 50 years for manufacturing purposes. The Company amortizes this land use right on a straight-line basis over 50 years.

 

On December 20, 2010, the Company entered into a contract with a non-affiliated individual to acquire rights to use a parcel of land and fixtures thereon for twenty years (from December 20, 2010 to December 30, 2030) for RMB20 million (approximately $3 million). RMB12 million (equivalent to $1,817,541) was paid upon execution of the contract in December 2010. The balance was required to be paid within 20 days after the conveyance of a list of land and fixtures. Due to the nature of the subject parcel of land, there is no PRC government approval or recording required for the transfer of land use right. The Company paid the outstanding balance under the contract on February 21, 2011 and the transfer was concluded in March 2011. As such, the total contract price was recorded as long-term assets and is amortized over the twenty years use right period.

 

  

In March 2011, the Company entered into a supplemental contract with the same third-party to acquire a nearby fish pond for twenty years with total contract price of RMB 5.5 million (approximate to $0.85 million). The Company will use this fish pond to provide water supply to the planted traditional Chinese medicine. Total amount of this contract is being amortized on a straight-line basis over twenty years.

 

On April 30, 2012, the Company entered into Xinyu Breath Spray purchase agreement with Harbin Healthcare Product Company (See note 4). Total amount of the purchase price of RMB8,500,000 (approximately $1,345,150) is being amortized on a straight-line basis over 10 years.

 

The amortization expense for the nine months ended December 31, 2012 and 2011 was $197,633 and $158,148, respectively.

 

6.

DUE TO (FROM) RELATED PARTIES

 

Due to/(from) related parties consist of the following:

 

		December 31, 2012				March 31, 2012
Due from Harbin Tianmu Real Estate Development Co. Ltd (a)		$	(399,391	)		$	(599,151	)
Due to Yao, Mingli, Chairman of the Company			128,616				570,324
Due to(from) US Hua Sky International Investment LLC (b)			(24,130	)			27,727
Due from Tianmu Investment Co. Ltd (c)			(4,761	)			(7,829	)
Due from Yao, Yuan, a shareholder of the Company (d)			479,619				(78,609	)
Total		$	179,953			$	(87,538	)

 

(a) Harbin Tianmu Real Estate Development Co., Ltd. is an entity owned by our Chairman, Mr. Mingli Yao.

(b) US Hua Sky International Investment LLC is an entity owned by our Chairman, Mr. Mingli Yao

(c)Tianmu Investment Co., Ltd. is an entity partially owned by our Chairman, Mr. Mingli Yao.

(d) Ms. Yuan Yao is the daughter of Mr. Mingli Yao.

 

Mr. Mingli Yao and Ms.Yuan Yao have personally guaranteed the loan receivable from Harbin Tianmu Real Estate Development Co. Ltd and Tianmu Investment Co. Ltd. If the loan has not been repaid in the year ended March 31, 2013, Mr. Yao and Ms.Yao has agreed to offset the balance due to them referenced above.

 

7.	STOCKHOLDERS’ EQUITY

 

On May 10, 2012, the Company issued 133,333 common shares to its legal counsel Ellenoff Grossman & Schole LLP for services rendered. The Company recorded the fair value of $20,000 for these issued shares.

 

On September 20, 2012, the Company issued 1,300,000 shares of common stock to a consultant for services performed and three salesmen for sales commission. The Company recorded the fair value of $195,000 for these issued shares.

 

8.

TAXES

 

(a)	Corporation income tax (“CIT”)

 

The Company’s Chinese subsidiaries are subject to the Income Tax Law of the People’s Republic of Chinawhich provides a general income tax rate of 25% with certain exception. As of December 31, 2012, the Company’s PRC entity, Lvnong, remains open for statutory examination by PRC tax authorities.

 

 

The Company is incorporated in the United States.  It had net operating loss carry forwards for United States income tax purposes approximately $2.3 million as of December 31, which may be available to reduce future years' taxable income in the United States. These carry forwards will expire between 2028 and 2032. Management doesn't expect to remit any of its net income back to the United States in the foreseeable future.  Accordingly, the Company recorded a full valuation allowance as of December 31, 2012 and March 31, 2012.

 

The reconciliation of income tax expense at the U.S. statutory rate at 35% for the nine months ended December 31, 2012 and 2011, to the Company’s effective tax is as follows:

 

		December 31, 2012				December 31, 2011
U.S. Statutory income tax rate		$	811,673			$	1,631,646
Taxable difference between U.S. and China			(270,513	)			(570,114	)
Expenses not deductable for tax purpose in China			-				10,080
Change in valuation allowance			143,080				377,648
Effective income tax		$	684,240			$	1,449,260

 

The provisions for income taxes for the nine months ended December 31, 2012 and 2011 are summarized as follows:

 

		December 31, 2012				December 31, 2011
Current		$	376,159			$	1,451,960
Deferred - United States			(135,124	)			-
Deferred - China			300,125				(2,700	)
Change in Valuation Allowance			143,080				-
Total		$	684,240			$	1,449,260

 

The components of income (loss) before income taxes from China and U.S. for the nine months ended December 31, 2012 and 2011 were as follows:

 

 

		For the Nine Months Ended December 31,
		2012				2011
China		$	2,498,393			$	5,041,773
United States			(180,355	)			(390,796	)
Income before income tax		$	2,318,038			$	4,650,977

 

(b)	Value added tax (“VAT”)

 

Enterprises or individuals who sell commodities, engage in repair and maintenance or import or export goods in the PRC are subject to a value added tax in accordance with the PRC laws. The value added tax standard rate is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on the sales of the finished products.

 

(c)	Other taxes

 

The Company is also subject to 5% of business tax, 7% of City Construction Tax and 5% of Education Fees based on VAT.

 

 

9.	COMMITMENTS AND CONTINGENCIES

 

On June 28, 2012, the Company signed the lease agreement for the Company’s office which will have a rental arrangement of $1,749 per month. Pursuant to the lease agreement, the term of the lease is from August 2012 to July 2013. Four months rental were waived. In June 2012, the Company paid $3,498 as security deposit. As of December 31, 2012, the Company was obligated to pay $10,494 under the lease agreement.

 

10.           CONCENTRATION OF CREDIT RISKS

 

For the three months ended December 31, 2012, Radix Polygoni Capsule and Xinyu Breath Spray represented 62% and 36% of the total sales, as compared to four products manufactured by the Company, including Panax and Radix Polygoni Capsule, Antihyperlipidemics, Calcium Gluconate Oral Liquid, and Anti-bacterial Mouthwash, represented 44.14%, 18.23%, 16.3%, and 14.38% respectively of the total sales for the three months ended December 31, 2011.

 

For the nine months ended December 31, 2012, Radix Polygoni Capsule and Xinyu Breath Spray represented 79% and 20% of the total sales, as compared four products manufactured by the Company, including Panax and Radix Polygoni Capsule, Antihyperlipidemics, Calcium Gluconate Oral Liquid, and Anti-bacterial Mouthwash, represented 45.10%, 20.25%, 14.68% , and 14.66% respectively of the total sales for the nine months ended December 31, 2011.

 

During the three months ended December 31, 2012, 50% of sales were generated from two major customers During the three months ended December 31, 2011, 15% of sales were generated from one major distributor.

 

During the nine months ended December 31, 2012, 59% of sales were generated from two major customers. During the nine months ended December 31, 2011, no major distributors accounted for more than 10% of the Company’s total sales.

 

11.	VULNERABILITY DUE TO OPERATIONS IN PRC

 

The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than thirty years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

 

Substantially all of the Company’s businesses are transacted in RMB, which is not freely convertible. The 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 primary operations in the PRC, the majority of its revenues will be settled in RMB, not U.S. Dollars. Due to certain restrictions on currency exchanges that exist in the PRC, the Company’s ability to use revenue generated in RMB to pay any dividend payments to its shareholders outside of China may be limited.

 

The Company’s business depends on maintaining licenses of its current products from SFDA. Obtaining licenses for additional products can be expensive and is usually time consuming. Failure to obtain the required licenses can cause the Company’s business plan to be delayed. If the delays prevent the Company from generating positive cash flows or introducing a significant number of products, there will be a material adverse effect on the Company.

 

12.	SUBSEQUENT EVENTS

 

The Company has evaluated events after the date of these financial statements through the date that these financial statements were issued and no subsequent event is required to be disclosed.

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Conditions of Operations.

 

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of Tongli Pharmaceuticals (USA) Inc. for the nine months ended December 31, 2012 and 2011, and should be read in conjunction with such financial statements and related notes included in this report. Those statements in the following discussion that are not historical in nature should be considered to be forward looking statements that are inherently uncertain. Actual results and the timing of the events may differ materially from those contained in these forward looking statements due to a number of factors, including those discussed in the “Cautionary Note on Forward Looking Statements” set forth above.

 

Company Overview

 

Tongli Pharmaceuticals (USA), Inc. (the “Company”), owns all of the outstanding capital stock of American Tony Pharmaceutical, Inc., a Delaware corporation (“American Tony”).

 

American Tony is a holding company.  In February 2007, American Tony acquired, through its wholly owned subsidiary, Heilongjiang Tongli Technology Co., Ltd., a PRC company (“Tongli Technology”), all of the registered capital of Harbin Tianmu Pharmaceuticals Co., Ltd. (“Tianmu Pharmaceuticals”), a corporation organized under the laws of the PRC on November 26, 1999.  Tianmu Pharmaceuticals is our principal operating subsidiary and is engaged in developing, manufacturing and marketing pharmaceutical and health care products that incorporate elements of Chinese Traditional Medicine with elements of western medicine.  Our research and development activities have been carried out at relatively low cost because they have been carried out by our in house research and development team and, in the past, in concert with a number of research institutes and universities, including the Jilin Research Institute of Chinese Traditional Medicine, the Sichuan Research Institute of Chinese Medicine, the Heilongjiang Institute of Chinese Traditional Medicine, the Chemistry Department of Tsinghua University, and the R&D Center of Harbin Medical University.

 

In August 2011, we formed HarbingLvnong Plant Ltd. (“Lvnong”) to plant and sell herbs in China. Lvnong is 100% owned by Tongli Technology. During the third quarter of fiscal year 2012, all the traditional Chinese medicines we planted were destroyed by typhoon. The Company entered a sublease agreement with a third party, an unrelated party, to sublease the land out. Pursuant to the agreement, the lease term is five years from October 2012 to November 2017.The Company will resume planting traditional Chinese medicines after the lease agreement is over.

 

Tianmu Pharmaceuticals obtained the GMP certificate (Good Manufacturing Practices for Pharmaceutical Products), and Drug Register License and Drug Production Certificate from the SFDA for its 10 products. The Company’s main products include cholesterol reduction pill, mouthwash, anti-inflammatory tablet and calcium supplement. These products are sold through distributors or directly to customers; no service is required of the Company after sales are made.  The Company’s primary customers are drug stores and hospitals located in China.

 

Development and Strategy

 

We resumed production in the middle of July 2012, after six months of suspension of our production caused by the breakdown of a boiler and the related pipeline at our manufacturing facilities in January 2012. For the nine months ended December 31, 2012, we resumed the execution of our product channel expansion strategy that resulted in increased market penetration of our products and expanded revenue growth.

 

Panax and Radix Polygoni Capsule

 

In October, 2010, we began to manufacture and sell our new product Panax and Radix Polygoni Capsule. This new product has helped us to generate about 79% and 45.1% of our total sales for the nine months ended December 31, 2012 and 2011, respectively. We believe that this product has great market potential and will continue to generate sustainable income for our company in the foreseeable future.

 

 

Xinyu Breath Spray

 

On April 30, 2012, we entered into Xinyu Breath Spray purchase agreement with Harbin Junde Healthcare Product Company. Pursuant to this agreement, the total purchase price is RMB8,500,000 (approximately $1.33 million). We will pay 50% of the purchase price after commencement of the Xinyu Breath Spray purchase agreement and pay the rest of the purchase price after we manufactured three batches of Xinyu Breath Spray that meet the quality standards of the product.  We paid RMB 5,000,000 (approximately $793,000) to Harbin Junde Healthcare Product Company in May 2012 and paid the balance due of RMB3,500,000 in August 2012.   For the three months and nine months ended December 31, 2012, Xinyu Breath Spray accounted for 36% and 20% of the total sales, respectively. This is a new while more profitable product that the Company looks to increase its market share by aggressive marketing promotions such as more TV advertisements in the near future.

 

Yangshen Wubao

 

On August 10, 2012, we entered into Yangshen Wubao purchase agreement with Harbin Junde Healthcare Product Company. Pursuant to this agreement, we will acquire the exclusive right to manufacture the product Yangshen Wubao at the total purchase price of RMB13,000,000 (approximately $2.06 million). We paid RMB3,000,000 (approximately $475,000) as the deposit upon execution of Yangsheng Wubao purchase agreement. The rest of the purchase price will be paid in installments according to the payment schedule set forth in the agreement. During the three months ended December 31 2012, the Company paid RMB2,100,000 (approximately $333,275). The outstanding balance of payment of RMB7,900,000 (approximately 1.25 million) will be paid in March 2013. The Company manufactured samples of this product using a subcontractor in the United States in November 2012 in order to provide samples to potential customers.

 

Qiangshu

 

On November 1, 2012, the Company entered into Qiangshu purchase agreement with Harbin Junde Healthcare Product Company. Pursuant to the agreement, the Company will acquire the exclusive right to manufacture the product Qiangshu at the total purchase price of RMB18,500,000 (approximately $2.94 million). The Company paid RMB14,500,000 (approximately $2.62 million) as the deposit at the closing of Qiangshu purchase agreement. The rest of the purchase price will be paid in installments according to the progress of performance under the contract.

 

Yinge

 

On December 18, 2012, the Company entered into Yinge purchase agreement with Harbin Junde Healthcare Product Company. Pursuant to the agreement, the Company will acquire the exclusive right to manufacture the product Yinge at the total purchase price of RMB18,500,000 (approximately $2.94 million). The Company paid RMB16,350,000 (approximately $2.60 million) as the deposit at the closing of Yinge purchase agreement. The rest of the purchase price will be paid in installments according to the progress of performance under the contract.

 

The formulas and other related manufacturing know-how for the three products are all dietary supplements, purchased from Harbin Junde HealthCare Product Company. The Company looks to enter into dietary supplements market by manufacturing and marketing these products to the market. The products are all scientifically formulated and to be manufactured with advanced processing techniques and high quality standards.

 

Land Parcel

 

On December 20, 2010, we entered into a contract with third party to acquire the right to use a parcel of land for twenty years (from December 20, 2010 to December 30, 2030) with a total contract price of RMB 20 million (approximate to $3 million).  We started to use this parcel of land to plant the traditional Chinese medicine in 2011. We paid RMB 12 million (equivalent to $1,817,541) in December 2010 and RMB 8 million (equivalent to $1,211,694) in February 21, 2011. During the third quarter of fiscal year 2012, all the traditional Chinese medicines were destroyed by typhoon. Therefore, the Company subleased this land from October 2012 to November 2017.During the nine months ended December 31, 2012, the Company recorded rental income of RMB 100,000 (approximately $15,860). The Company will resume planting traditional Chinese medicines after the sublease is over.

 

 

Marketing and sales

 

Management plans to continue to emphasize on expanding and enhancing marketing and sales in the fiscal year 2013 and beyond.  Part of this strategy involves increasing and improving marketing and sales activities to enhance the market position of our key products and to increase the sales of other products by expanding our sales force, solidifying our distribution network and expanding market segment coverage, and increasing marketing and promotional activities. Management also plans to selectively pursue strategic acquisition opportunities to further consolidate our resources and expand our market coverage. We believe that such initiatives will provide effective means to broaden our product lines, expand our market coverage and complement our research and development capabilities. As of the date of this report, we are not engaged in any material discussions regarding any potential acquisition.

 

Management believes that our emphasis on further commercializing and broadening our product lines, enhanced sales and marketing efforts shall continue to yield increases in revenue in fiscal 2013 and beyond.

 

Discussion of Operating Results

 

Operating results for the three months and nine months ended December 31, 2012 and 2011

 

Revenues, cost of sales and gross profit

 

We generated revenue of $3,752,983 and $7,083,973 for the three months and nine months ended December 31, 2012, compared to $4,127,532 and $13,583,418 in the three months and nine months ended December 31, 2011 respectively, decreased by 9.1% for the three months period and 48% for the nine months period. The decrease in the three months ended December 31, 2012 was mainly because the Company stopped manufacturing two older, less profitable products-Antihyperlipidemics and Fukezhidai, and began to market a new product of Xinyu Breath Spray during August 2012. The Company believes Xinyu Breath Spray will generate sustainable income in the near future. The significant decrease in sales for the nine months period, in addition to the discussion above for the three months, was mainly due to the interruption caused by the breakdown of a boiler and related pipeline in January 2012. The manufacturing process was not functional until the mid of July 2012. 

 

We had distribution contracts with various distributors during the three months ended December 31, 2012 to sell its products in China.  We manufacture our products and ship the products to distributors based on the sales order from distributors each month.  Revenue is recognized at the time of the shipment.  No return is allowed, unless there is a quality problem.  During the three months ended December 31, 2012, there were no returns from distributors or customers.  Distributors normally make payments upon receiving the products; however, in some cases, we may extend credit to certain creditable distributors for certain period until the next shipment.

 

Our cost of sales was $1,733,110 and $3,481,018for the three months and nine months ended December 31, 2012, compared to $2,083,889 and $7,176,389 in the three months and nine months ended December 31, 2011 respectively, decreased by 16.8% for the three months period and 52% for the nine months period. As we didn’t generate any revenues in the first quarter of fiscal year 2012, we didn’t incur any cost of goods and gross profit in the first quarter of fiscal year 2012. The decrease in cost of sales was mainly related to the decrease in the sales in the same period.

 

Gross profit was $2,019,873 and $3,602,955 for the three months and nine months ended December 31 2012 compared to $2,043,643 and $6,407,029 in the three months and nine months ended December 31, 2011respectively, decrease by 1% for the three months period and 44% for the nine months period. The decrease in gross profit for nine month period was due to the reason we discussed above.

 

Gross profit margin was 53.8% and 50.9% for the three months and nine months ended December 31, 2012 compared to 49.6% and 47.1% in the three months and nine months ended December 31, 2011. Although the revenue for the three months and nine months ended December 31, 2012 decreased, compared to the same period in 2011, gross profit margin for three months and nine months ended December 31, 2012 increased, compare to the same period in 2011. The increase in gross profit margin was mainly due to (1) Panax and Radix Polygoni Capsule is the main product during the three and nine months ended December 31, 2012, It is more profitable compared to the other products; (2) The sales of Panax and Radix Polygoni Capsule represented 62% and 79% of the total sale in the three months and nine months ended December 31, 2012.

 

 

Operating expenses

 

Total operating expenses decreased by approximately $453,013 from $1,728,171 for the nine months ended December 31, 2011 to $1,275,158 for the nine months ended December 31, 2012, representing a 26.2% decrease. Total operating expenses decreased by approximately $84,476 from $310,701 for the three months ended December 31, 2011 to $226,225 for the three months ended December 31, 2012, representing a 27.2% decrease. 

 

The decrease in operating expenses for the three months ended December 31, 2012 was mainly due to the decrease in selling expenses. The decreases in our total operating expense for the nine months ended December 31, 2012 as compared to the prior comparative periods were primarily related to the breakdown of a boiler and related pipeline in January 2012 and the interruption of manufacturing process. Our manufacturing process was notfunctional until the mid of July 2012. Higher operating expenses in the nine months ended December 31, 2011were due to the costs related to the common shares issued to several officers, directors, employees and consultant for their services.

 

Interest income (expense)

 

Interest income was $550 for the three months ended December 31, 2012 compared to interest expense of $0 for the three months ended December 31, 2011. Interest income was $814 for the nine months ended December 31, 2012 compared to interest expense of $27,881 for the nine months ended December 31, 2011 representing a 97.1% decrease. Interest expense decreased because there was no principal outstanding in year 2012.

 

Other income (expense)

 

Other income was $15,860 for the three and nine months ended December 31 2012. During the third quarter of fiscal year 2012, all the traditional Chinese medicines we planted were destroyed by typhoon. The Company subleased the land out. During the three and nine months ended December 31, 2012, the Company recorded rental income of RMB 100,000 (approximately $15,860). The Company recorded the amortization expense of the land as other expense of $26,433 as the Company subleased the land out, not using the land for its planting and selling herbs business in China since October 2012.

 

Income tax expense

 

All of our net incomes for the three months and nine months ended December 31, 2012 and 2011 were from Tianmu Pharmaceuticals, which conducts substantially of our operation in the PRC. Our Chinese subsidiaries are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

 

We had income tax expenses of $468,508 and $684,240 for the three months and nine months ended December 31, 2012, compared to $468,896 and $1,449,260 for the comparative periods in the fiscal year 2011.

 

Net income

 

As a result of the above factors, we reported net income of $1,315,116 and 1,633,798 for the three and nine months ended December 31, 2012 respectively, as compared to the net income of $1,264,046 and 3,101,717 for the three and nine months ended December 31, 2011 respectively.

 

Other comprehensive income

 

We operate primarily in the PRC and the functional currency of our operating subsidiary is RMB. RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.  No representation is intended to imply that the RMB amounts could have been, or could be, converted, realized or settled into USD at the rate on December 31, 2012 or at any other rate.

 

 

The value of RMB against USD may fluctuate and is affected by changes in political and economic conditions. Our revenues, costs and financial assets are mostly dominated in RMB while our reporting currency is the U.S. dollar. Accordingly, this may result in gains or losses from currency translation on our financial statements.

 

Translation adjustments resulting from this process amounted to a gain of $273,841 and $588,692 for the nine months ended December 31, 2012 and 2011, respectively.  The balance sheet amounts with the exception of equity at December 31, 2012 were translated at 6.3011 RMB to 1.00 USD as compared to 6.5918 RMB to 1.00 USD at December 31, 2011. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for the nine months ended December 31, 2012 and 2011 were 6.3053 RMB and 6.7413 RMB, respectively.

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. We have financed our operation and capital expenditures through cash from operations as well as loans from shareholders and an entity owned by our Chairman. As of the date of this report, we do not have any outstanding bank loans.

 

As of December 31, 2012 and March 31, 2012, due to (from) related parties consists the following:

 

		December 31, 2012				March 31, 2012
Due from Harbin Tianmu Real Estate Development Co. Ltd (a)		$	(399,391	)		$	(599,151	)
Due to Yao, Mingli, Chairman of the Company			128,616				570,324
Due to(from) US Hua Sky International Investment LLC (b)			(24,130	)			27,727
Due from Tianmu Investment Co. Ltd (c)			(4,761	)			(7,829	)
Due from Yao, Yuan, a shareholder of the Company (d)			479,619				(78,609	)
Total		$	179,953			$	(87,538	)

 

As of December 31, 2012, the balance of due from Harbin Tianmu Real Estate Development Co. Ltd. was $399,391. Harbin Tianmu Real Estate Development Co., Ltd. is an entity owned by our Chairman, Mr. Mingli Yao. Due from US Hua Sky International Investment LLC was $24,130. US Hua Sky International Investment LLC is an entity owned by our Chairman, Mr. Mingli Yao. Due from Tianmu Investment Co. Ltd was $4,761. Tianmu Investment Co., Ltd. is an entity partially owned by our Chairman, Mr. Mingli Yao.

 

Mr. Mingli Yao and his daughter, Ms. Yuan Yao have personally guaranteed the loan receivable from Harbin Tianmu Real Estate Development Co. Ltd and Tianmu Investment Co. Ltd. If the loan could not been repaid during the year ended March 31, 2013, Mr. Yao and Ms. Yao have agreed to offset the balance due to them referenced above.

 

We plan to fund operations and capital expenditures with cash from operations, as well as loans from major shareholders and management members and their affiliates.  We might also pursue sources additional financing in the form of debt, equity or convertible security offerings. There can be no assurance that we will be able to obtain such additional financing at acceptable terms to us, or at all.

 

Total current assets decreased to approximately $4.3 million as of December 31, 2012 as compared to $9.1 million at March 31, 2012.  The primary changes in our current assets during this period were from changes in accounts receivable, advance to suppliers and current portion of contract deposits.

  

Our current liabilities as of December 31, 2012 were approximately $1.2 million compared to $1.5 million as of March 31, 2012. The decrease in our current liabilities during this period was mainly from the decrease in tax payable and accounts payable. 

 

The growth of our company will require additional debt and/or equity financing.  Currently we have budgeted $3.5 million for capital improvements. We intend to pursue additional debt financing which could be secured by our property and equipment and approach international equity markets for additional debt and/or equity financing.  To date we have no commitment from any source for the funds we require.

 

 

Discussion of Cash Flow

 

Comparison of cash flows results for the three months ended December 31, 2012 and 2011 is summarized as follows:

 

		December 31, 2012				December 31, 2011
Net cash provided by (used in) operating activities		$	4,710,954			$	(425,390	)
Net cash provided by (used in) investing activities			(4,929,187	)			1,094,824
Net cash providedy by (used in) financing activities			276,645				(1,169,990	)
Effect of exchange rate changes on cash			14,805				(15,809	)
Net increase (decrease) in cash			73,217				(516,365	)
Cash, beginning of period			23,508				592,671
Cash, end of period		$	96,725			$	76,306

 

Operating activities

 

Cash flows provided by operating activities for the nine months ended December 31, 2012 amounted to $4,710,954, which consists of our net income of $1,633,798, adds back noncash adjustments of $983,501 including depreciation and amortization of $460,420, deferred tax assets of $308,081 and stock issued for services of $215,000 and offset by net changes in operating assets and liabilities, primarily including increase of prepaid expenses and other current assets and an decrease in accounts payable and accrued expenses and tax payable of $2,093,655.

 

Cash flows used in operating activities for the nine months ended December 31, 2011 amounted to $425,390, which consist of our net income of $3,201,717, adds back noncash adjustments of $1,259,181(including depreciation and amortization of $419,622, , accrued interest expense on related party loan of $27,881, stock issued for services of $813,821 and deferred tax asset of $2,143 and offset by net changes in operating assets and liabilities, primarily including increase of accounts receivable of $1,623,358 which represented the temporarily uncollected amount from our increased credit sales during the year, an increase in inventory of 2,445,052 to stock raw materials to avoid the potential raw material price increase in the near future.

 

Investing activities

 

Net cash used in investing activities for the nine months ended December 31, 2012 amounted to $4,929,187. $7,149,541 were paid to purchase formulas and to make contract deposits. The refund of $2,220,354 was received from Tonghua pursuant to the Termination Agreement.

 

Net cash provided by investing activities for the nine months ended December 31, 2011 amounted to $1,094,824 which consists of refunded deposit received from the Termination Agreement with Lanhai.

 

Financing activities

 

Cash flows provided by by financing activities amounted to $276,645 for the nine months ended December 31, 2012, which consists of proceeds from related party loans.

 

Cash flows used in by financing activities amounted to $1,169,990 for the nine months ended December 31, 2011, which consists of repayment of related party loan by the same amount.

 

Off-Balance Sheet Arrangements

 

As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

 

 

Inflation

 

Inflation has not had a material impact on our business and we do not expect inflation to have a material impact on our business in the near future.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4T.  CONTROLS AND PROCEDURES

 

We seek to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended ( the “Exchange Act”)  is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Evaluation of Disclosure Controls and Procedures.

 

As of December 31, 2012, the end of the fiscal quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not operating effectively as of December 31, 2012. Our disclosure controls and procedures were not effective because of certain “material weaknesses” described in the “Management’s Annual Report on Internal Control over Financial Reporting” section in Item 9A of our annual report for the fiscal year ended March 31, 2012. As of December 31, 2012, we had not completed the remediation of these material weaknesses.

 

Limitations on the Effectiveness of Disclosure Controls.  

 

Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error.  An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions.

   

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the three months ended December 31, 2012 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting, except as disclosed above

 

 

PART II - OTHER INFORMATION

 

Item 1.     Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. We are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm business.

 

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.     Defaults Upon Senior Securities

 

None.

 

Item 4.     Mine Safety Disclosures

 

Not applicable.

 

Item 5.     Other Information

 

None.

 

Item 6.     Exhibits

 

(a)  Exhibits

 

Exhibit No.		Description
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

 

* XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these section.

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	Tongli Pharmaceuticals (USA), Inc.
February 14, 2013	By:	/s/ Mingli Yao
		Mingli Yao
		Chief Executive Officer
		(Principal Executive Officer)
February 14, 2013	By:	/s/ Li Li
		Li Li
		Chief Financial Officer
		(Principal Financial and Accounting Officer)