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EX-32.2 - CERTIFICATION - TIANYIN PHARMACEUTICAL CO., INC.ex32two.htm
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EX-32.1 - CERTIFICATION - TIANYIN PHARMACEUTICAL CO., INC.ex32one.htm
 
 


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-K

|X| ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 2010

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OF 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER:

TIANYIN PHARMACEUTICAL CO., INC.
(formerly VISCORP, INC.)
 (Exact name of registrant as specified in its charter)

Delaware
   
(State or other jurisdiction of  incorporation)
 
(I.R.S. Employer Identification or
Organization No.)

23rd Floor, Unionsun Yangkuo PlazaNo.2, Block 3, Renmin Road South, Chengdu,
610041 P. R. China
0086-028-86154737
(Address and telephone number of principal executive offices
and principal place of business)

Securities registered under Section 12 (b) of the Exchange Act: NONE

Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK WITH $.001 PAR VALUE
(Title of Class)

Indicate by check mark if the Registrant is a well known seasoned issuer as defined in Rule 405 of the securities Act.  Yes |_| No |X|

Indicate by check mark if Registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.  Yes |_| No |X|

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  |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.

Large accelerated filer |_|
Accelerated Filer |_|
Non-accelerated filer |_|
Smaller reporting company | X|

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of December 31, 2009 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $50,899,039.

As of September 28, 2010, the Registrant  has 27,986,026  shares of common stock outstanding and 1,360,250 shares of Series A Preferred Stock outstanding.



 

 

 
 

 

 


TIANYIN PHARMACEUTICAL CO., INC
FORM 10-K INDEX



 
PART I
 
   
Page
Item 1
Description of Business
3
     
Item 1A
Risk Factors
13
     
Item 2
Description of Property
25
     
Item 3
Legal Proceedings
25
     
Item 4
Removed and Reserved
25
 
PART II
 
     
Item 5
Market for Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Security
25
     
Item 6
Selected Financial Data
  28
     
Item 7
Management’s Discussion and Analysis of Financial Conditions and Results of Operations
28
     
Item 7A
  Quantitative and Qualitative Disclosure about Market Risk
  38
     
Item 8
Financial Statements and Supplementary Data
38
     
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
54
     
Item 9A
Controls and Procedures
54
     
Item 9B
Other Information
  55
     
 
PART III
 
     
Item 10
Directors,  Executive Officers and Corporate Gonvernance
56
     
Item 11
Executive Compensation
60
     
Item 12
Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters
61
     
Item 13
Certain Relationships and Related Transactions and Director Independence
64
     
Item 14
Principal Accountant Fees and Services
65
 
PART IV
 
     
Item 15
Exhibits, Financial Statements Schedules and Reports
66
     
 
Signatures
67







 
 
 
2

 


 

PART I


ITEM 1.                      DESCRIPTION OF BUSINESS

GENERAL OVERVIEW

Tianyin Pharmaceutical Co., Inc (“Company” or “the Company”, together with its subsidiaries, herein referred to as “we” “us” and “our”) is a pharmaceutical company.  Through our indirect wholly-owned subsidiary Chengdu Tianyin Pharmaceutical Co., Ltd. (“Chengdu Tianyin”), a corporation organized and existing under the laws of the People’s Republic of China (PRC), we are engaged primarily in the development, manufacturing, marketing and sales of patented biopharmaceutical medicines, branded generics, modernized traditional Chinese medicines and other pharmaceuticals in China. We currently manufacture a comprehensive portfolio of 56 products, 23 of which are listed in the highly selective National Medical Reimbursement List (NMRL) and 7 are listed in the Essential Drug List (EDL) of China. Our late stage pipeline consists of 10 product candidates pending the approval by State Food and Drug Administration (SFDA) in China.

Tianyin Pharmaceutical Co., Inc, previously called Viscorp, Inc., was originally formed as a limited liability company under the laws of the State of Delaware on August 20, 2002. In March 2006, Viscorp changed its status from an LLC to a corporation registered in the State of Delaware. Prior to the Share Exchange transaction described below, Viscorp operated as a developer and retailer of software for optometrists.  However, Viscorp did not generate any significant revenue and determined to pursue an acquisition strategy, whereby it sought to acquire a business with a history of operating revenues in markets that provide room for growth. Immediately prior to the Share Exchange under which we acquired Chengdu Tianyin, Viscorp sold all of its assets (consisting solely of the software it had developed) to Charles Driscoll for $100.00The common stock of Tianyin currently trades on the NYSE Amex under the symbol “TPI.”

CHENGDU TIANYIN

Chengdu Tianyin, located at Chengdu, Sichuan Province of China, was established in 1994 and acquired by the current management of the Company in 2003. Chengdu Tianyin delivered total revenue of $63.9 million with net income of $12.0 million for the fiscal year ended June 30, 2010, up 49.1% from revenue of $42.9 million and up 52.4% from net income of $7.9 million respectively for the fiscal year ended June 30, 2009.

ACQUISITION OF OUR OPERATING BUSINESS

On January 16, 2008, we entered into and consummated the transactions (the “Share Exchange”) contemplated under a Securities Exchange Agreement (the “Share Exchange Agreement”) by and among us, Raygere Limited (“Raygere”), a company organized under the laws of the British Virgin Islands (“BVI”) and Time Poly Management Limited (“Time Poly”), Happyvale Limited (“Happyvale”) and Fartop Management Limited (“Fartop”), each a BVI company, and Cmark Holding Co., Ltd.( “Cmark”), an exempted company organized under the laws of the Cayman Islands.  At the time of the Share Exchange, Time Poly, Happyvale, Fartop and Cmark owed collectively 100% of the capital stock of Raygere.  Under the terms of the Share Exchange Agreement, the Raygere stockholders transferred to the Company all the shares of Raygere and Raygere became a wholly-owned subsidiary of the Company.  As part of the Share Exchange, the shareholders of Raygere were issued 12,790,800 shares of the Company’s common stock, which represented 87.68% of the 14,587,200 issued and outstanding shares of the Company’s Common Stock immediately following the Share Exchange.
 
Raygere was incorporated in the BVI on January 26, 2007 and formed a Hong Kong subsidiary, Grandway Group Holdings Ltd. (“Grandway”) in May 2007.  On October 30, 2007, Grandway acquired 100% of the equity interests of Chengdu Tianyin   Pharmaceutical Co., Ltd., our indirect wholly owned subsidiary located in Chengdu, Sichuan Province of the People’s Republic of China that operates our current business, pursuant to a sales and purchase agreement with three of the existing shareholders (“Original Shareholders”) of Chengdu Tianyin, pursuant to which Grandway purchased 100% of the equity interest in Chengdu Tianyin. This transfer was approved by the Bureau of Foreign Trade and Economic Cooperation of Chengdu Economic Technology Development Administration Committee on October 30, 2007, and the registration with the Chengdu Administration of Industry and Commerce was completed on November 5, 2007.     As a result of this transfer, Grandway acquired 100% of the equity of Chengdu Tianyin.
 
 
 
 
3

 

 
As a result of the Company’s acquisition of Raygere, Chengdu Tianyin became our indirect wholly-owned subsidiary. Substantially, all of our operations are conducted in China through Chengdu Tianyin. The transaction was regarded as a reverse merger whereby Raygere was considered to be the accounting acquirer of the Company after the exchange.  Although the Company is the legal parent company, Raygere is the continuing entity for financial reporting purposes. In addition, the Company ceased being a shell corporation as that term is defined in Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act.
 
In accordance with the terms of the Share Exchange Agreement, Charles Driscoll resigned as the Company’s Chief Executive Officer, Chief Financial Officer and President, and also tendered his resignation as our sole director, which became effective on February 15, 2008. Dr. Guoqing Jiang was appointed to serve as the Chairman of our board and our Chief Executive Officer, effective as of the close of the Share Exchange, and nominated Mr. Stewart Lor to serve as one of our directors with such appointment to be effective on February 15, 2008.  As of February 29, 2008, our board was expanded by three persons to include Professor Zunjian Zhang, Ph.D., Professor Jianping Hou, Ph.D. and Mr. James T. McCubbin.


POST-ACQUISTIION

On January 14, 2008, a majority of our shareholders approved, via written consent, the following actions, as set forth in our Information Statement on Schedule 14C, which was filed on February 11, 2008:
 
1.
To change our corporate name to TIANYIN PHARMACEUTICAL CO., INC.
 
2.
To authorize 25,000,000 shares of preferred stock with a par value of $0.001.

We filed a certificate of amendment to our articles of incorporation with Delaware’s Secretary of State to effect these actions, which became effective on March 11, 2008, and as of such date, our corporate name changed to Tianyin Pharmaceutical Co., Inc. and our authorized capital increased by 25,000,000 shares of preferred stock.  Pursuant to the financings we closed in January 2008 and the authority vested in our Board of Directors, we also filed a certificate of designation with Delaware’s Secretary of State to designate 10,000,000 of the 25,000,000 shares of preferred stock as Series A preferred stock. Our current authorized capital now consists of 50,000,000 shares of common stock, 15,000,000 shares of preferred stock, whose terms shall be determined by the board of directors at the time of issuance, and 10,000,000 shares of Series A preferred stock. In connection with our name change, we received a new trading symbol and cusip number. Effective March 11, 2008, we were trading on the Over the Counter Bulletin Board under the symbol “TYNP”; our new cusip number is 88630M104. In September 2008, we applied to trade on the American Stock Exchange. On September 24, 2008 we received notice that our common shares were approved for listing on the American Stock Exchange (the "AMEX"); accordingly, such shares began trading on the AMEX on October 3, 2008 under the ticker symbol “TPI.”  Since our common shares have been trading on the AMEX, we have enjoyed all of the same privileges and have been subject to all of the same regulations every other company whose shares are listed on the AMEX.
 
THE FINANCINGS

2008 FINANCING

On January 16, 2008 and January 25, 2008, we completed private financings totaling $15,225,000, with 27 accredited investors (the “2008 Financing”).  The net proceeds from the 2008 Financing were approximately $13,697,000. Consummation of the 2008 Financing was a condition to the completion of the Share Exchange transaction with Raygere and the Raygere Stockholders under the Share Exchange.  The securities offered in the 2008 Financing were sold pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) by and among the Company, Raygere, the Raygere stockholders, Grandway and the investors named in the Purchase Agreement (collectively, the “Investors”). In accordance with the Purchase Agreement, we issued a total of 152.25 Units of securities consisting of: 1) An aggregate of $15,225,000 principal amount of our 10% convertible exchangeable notes due on or before June 30, 2009 (the “Notes”); 2) Five (5) year warrants to purchase 4,757,814 shares of our Common Stock, $0.001 par value per share at an initial exercise price of $2.50 per share (the “Class A Warrants”); 3) Seven (7) year warrants to purchase 4,757,814 shares of our Common Stock at an initial exercise price of $3.00 per share (the “Class B Warrants”).
 
 
 
 
4

 

 
Pursuant to the terms of the Purchase Agreement, the $15,225,000 of Notes automatically converted into an aggregate of 9,515,625 shares of our Series A convertible preferred stock, par value 0.001 per share (the “Series A Preferred Stock”) on March 11, 2008, the effective date of the authorization and designation of such class.  As issued, the Series A Preferred Stock: 1) Pays an annual 10% dividend, payable at our option either in cash or (if such shares have been registered for resale under the Securities Act of 1933, as amended) in additional shares of the Company’s common stock valued at $1.60 per share; 2) Has a stated or liquidation value of $1.60 per share, or $15,225,000 as to all 9,515,625 shares of Series A Preferred Stock; 3) Each outstanding share of Series A Preferred Stock is convertible at any time at the option of the holder into one (1) full share of the Company’s common stock.

In connection with the 2008 Financing, we granted warrants to purchase 1,522,500 shares of Common Stock with an exercise price of US$1.60, $2.50 and $3.00 per share to TriPoint Global Equities, LLC, the placement agent in the Financing. These warrants have the same terms as the Warrants issued to Investors and included in the Units.

In connection with the 2008 Financing, we also entered into a Registration Rights Agreement with the Investors (the “Investor RRA”) under which we have registered for resale the 21,308,753 shares of common stock being offered for resale by the selling stockholders.

As a result of the Share Exchange and the 2008 Financing described above, on a fully-diluted basis (giving effect to the conversion of all outstanding convertible notes and preferred stock and the exercise of all outstanding warrants and options) we would have 35,140,953 shares of Common Stock issued and outstanding.  Of that amount, the Raygere stockholders owned 36.40% of the outstanding shares, existing stockholders of our company prior to the Share Exchange owned 5.11% of the outstanding shares, and the 58.49% balance of our fully-diluted Common Stock was held by investors and placement agents in the 2008 Financing.


2009 FINANCING

On October 27, 2009, the Company completed a private equity financing of $4,987,500, with eight accredited investors (the “2009 Financing”). Net proceeds from the offering are approximately $4,490,000. Pursuant to the financing, we issued, for $4,987,500, a total of 1,534,570 units of our securities at $3.25 per unit. Each unit consists of: 1) one share of the Company's common stock, par value $0.001 per share (the "Common Stock"); 2) a Class C Warrant (the "Class C Warrant", together with Class A Warrant and Class B Warrant, are referred sometimes herein below as “Warrants” or “Warrant”), with each Class C Warrant exercisable at $4.50 to purchase one-fifth of a share of Common Stock, such that the total amount of warrants issued to each investor as shall be equal to twenty percent (20%) of the number of units purchased by each purchaser. Each of the warrants has a term of three (3) years.

In connection with this financing, the Company paid cash compensation to the placement agent, Tripoint Global Equities, in the amount of $495,250. In connection with this financing, the Company granted warrants to purchase 122,766 shares of common stock at $3.25 and 24,553 shares at $4.50 to the placement agent or its designees. These warrants have the same terms as the warrants issued to investors and are included in the units.
 
Our Products

We currently manufacture and market a comprehensive portfolio of 56 products comprised of patented biopharmaceutical product, branded generics, modernized Chinese medicines and other pharmaceuticals, more than 40% of our products are reimbursed by the government medical reimbursement program. As of June 30, 2010, we had 56 products approved by the SFDA, among which our flagship patented product Ginkgo Mihuan Oral Liquid (GMOL, patent number: 20061007800225, which expires on April 30, 2026) contributed approximately 36% of the revenue. As of June 30, 2010, we had 10 drug candidates pending the SFDA’s approval. Our products are listed as follows:
 
NO.
PRODUCT
CATEGORY
SFDA NO.
INDICATIONS
1
Ginkgo Mihuan Oral Liquid
Internal Medicine
H20013079
Coronary heart diseases, myocardiac infarction stroke
2
Benorylate Granules
Internal Medicine
H10970068
Rheumatoid arthritis
3
Xuelian Chongcao Oral Solution
Internal Medicine
B20020680
Boost of body energy, immunity enhancer
4
Fukangbao Oral Liquid
Gynecology
Z10983056
Anemia, irregular menstrual cycle
 
 
 
 
 
5

 
 
5
Xiaoyanlidan Tablets
Hepatology
Z20093681
Acute cholangtis and cholecystitis
6
Qijudihuang Mixture
Internal Medicine
Z20023391
Improve liver function
7
Yupingfeng Oral Liquid
Internal Medicine
Z20023352
Immune system enhancement
8
Sanqi Tablets
Internal Medicine
Z20093512
Anti-inflammatory, stop bleeding
9
Qianggan Syrup
Hepatology
Z20054224
Hepatitis, cirrhosis, fatty liver disease
10
Kangjunxiaoyan capsule
Gynecology
Z20090855
Menstrual cramps, vaginal bleeding
11
Yinqiaojiedu Tablets
Internal Medicine
Z20093555
Anti-inflammation, fever, cold symptoms
12
Duyiwei Dispersible Tablets
Internal Medicine
Z20090239
Pain management, stop bleeding,  fracture
13
Baotailing Tablets
Gynecology
Z20093087
Recurrent spontaneous miscarriage
14
Yiqing Capsules
Internal Medicine
Z20093084
Pharyngitis and tonsillitis
15
Xiaoer Qingre Zhike Oral Liquid
Internal Medicine
Z20093060
Anti-cough, anti-asthma in children
16
Tongqiaobiyan Tablets
Otolaryngology
Z20093063
Chronic and allergic rhinitis, sinusitis
17
Hugan tablet
Hepatology
Z20063054
Chronic hepatitis, early liver cirrhosis
18
Compound Dantong Capsules
Internal Medicine
Z20093012
Acute and chronic cholecystitis, cholangitis and concurrent infection of Biliary Calculi
19
Fukezhidai Tablets
Gynecology
Z20083375
Chronic cervicitis, blennometritis
20
Yanyan Tablets
Otolaryngology
Z20064406
Relieve symptoms of chronic pharyngitis
21
Danqi Tablets
Gynecology
Z20064032
Relieve menstrual cramps and other symptoms
22
Yanlixiao Capsules
Internal Medicine
Z20064158
Anti-inflammatory, bacterial infectious diseases
23
Kudancao Tablets
Otolaryngology
Z20064050
Relieve inflammatory symptoms of laryngopharyngitis
24
Weikangling Capsules
Gastroenterology
Z20064060
Gastric and duodenal ulcer, acute and chronic gastritis
25
Baoxinning Capsules
Internal Medicine
Z20063957
Angina, coronary heart diseases, arrhythmia
26
Jiangtangning Capsules
Internal Medicine
Z20063813
Relieve symptoms of diabetes
27
Yankening Tablets
Internal Medicine
Z20063847
Acute tonsillitis, bacterial pneumonia, urinary tract infections
28
Ganoderma Lucidum Capsules
Neurology
Z20063833
Insomnia, neurasthenia, amnesia
29
Qianbobiyan Tablets
Otolaryngology
Z20063837
Inflammation, chronic and acute rhinitis
30
Yishengling Granules
Internal Medicine
Z20063841
Improvement of kidney function and sperm counts, impotence
 
 
 
 
6

 
 
31
Xiaoyanlidan Tablets I
Hepatology
Z20063864
Relieve symptoms of acute cholangtis and cholecystitis.
32
Kanggu Zengsheng Tablets
Orthopedics
Z20063875
Bone hyperplasia, neck pain, ankylosing spondylitis
33
Tianqitongjing Capsules
Gynecology
Z20063645
Relieve symptoms of menstrual cramps
34
Yinhuang Capsules
Otolaryngology
Z20063462
Upper respiratory tract infection, tonsillitis, pharyngitis
35
Chuanxinlian Capsules
Internal Medicine
Z20063437
Anti-inflammation, fever, cough, diarrhea, mouth ulcers
36
Qianlieshule Capsules
Urology
Z20060030
Relieve symptoms of chronic prostatitis
37
Huangbo Capsules
Internal Medicine
Z20063156
Anti-inflammatory, diarrhea, jaundice, nocturnal emission
38
Qianglipipa Oral Liquid
Otolaryngology
Z20063046
Suppress cough, mucus clearance, bronchitis
39
Dabaidu Capsules
Urology
Z20055092
Inflammatory symptoms of sexually transmitted diseases, e.g. syphilis
40
Huganning Tablets
Hepatology
Z20054697
Chronic and acute hepatitis
41
Tongbianling Capsule
Internal Medicine
Z20083424
Bedridden constipation and elderly chronic constipation
42
Laoniankechuan Tablets
Internal Medicine
Z20083360
Improve immune function, chronic bronchitis in elders
43
Shushenling Capsules
Neurology
Z20063557
Neurasthenia, menopause syndrome
44
Qijudihuang Oral Liquid
Internal Medicine
Z20003098
Liver function improvement
45
Qingrejiedu Oral Liquid
Internal Medicine
Z51020066
Fever, cold, upper respiratory infection
46
Yupingfeng Oral Liquid
Internal Medicine
Z20003099
Immune system enhancement
47
Yinqiao Shangfeng Capsules
Internal Medicine
Z20003100
Relieve inflammatory symptoms of laryngopharyngitis and fever
48
Radix Sophorae Flavescentis Vaginal
Effervescent Tablets
Gynecology
Z20050176
Cervical erosion
49
Levofloxacin Hydrochloride  Tablets
Internal Medicine
H20066521
Anti bacterial infection
50
Azithromycin Dispersible  Tablets
Internal Medicine
H20074143
Upper and lower respiratory tract infections and other bacterial infections in skins and reproductive system
51
Azithromycin Dispersible  Tablets
Internal Medicine
H20074145
Upper and lower respiratory tract infections and other bacterial infections in skins and reproductive system
52
Simvastatin Tablets
Internal Medicine
H20083478
Hypercholesterolemia, Coronary Heart Disease.
53
Mycophenolate Mofetil Capsules
Internal Medicine
H20080819
Suppress graft rejection after transplantations
54
Fleroxacin Tablets
Internal Medicine
H20094057
Acute and chronic bronchitis, pneumonia, urogenital, respiratory, gastrointestinal infections
55
Ofloxacin Tablets
Urology
H20094038
Infections in urogenital, respiratory, gastrointestinal systems
 
 
 
 
7

 
 
56
Clindamycin Hydrochloride Capsules
Internal Medicine
H20103200
Various bacterial infections
         
 
(Source: www.sfda.gov.cn or www.tianyinpharma.com)
 
 
CHINA HEALTHCARE INDUSTRY AND MARKET

The development of China’s healthcare market continues to be driven by the country’s strong per capita GDP growth, government-backed healthcare reimbursement system, countryside urbanization, the growing aging population, and the increasing healthcare spending. In 2009, Chinese government earmarked $124 billion government funding for the next three years to be dedicated for the further improvement in healthcare coverage in China ( data source: http: //www.moh.gov.cn,  which is set up by Ministry of Health, China. ).  

National Medical Insurance Program
 
The National Medical Insurance Program (the “Program”), introduced in 1999, provides the guidance on which prescription and over-the-counter (OTC) medicines are included in the program and to what extent the purchases of these medicines are reimbursable. The implementation of the Program is delegated to the provincial governments, with each of which establishing their own medicine catalog. For purchases of provincial catalog medicines to be reimbursable under the program, these medicines must be purchased from hospitals or retail pharmacies authorized under the Program. The inclusion of a medicine in a provincial reimbursement list can enhance its sale by improving the affordability of the medicine. Moreover, the inclusion endorses the safety and the reliability of the medicine based on the stringent tests required during the application.

As stated above, we have 23 products currently included in the national medicine catalog of the Program.
 
Prescription Medicine and Hospitals
Most people in China seek healthcare services at state-owned hospitals, where doctors may only prescribe medicines that are listed on the hospital’s formulary. Hospital administrators decide to include a particular medicine in their formulary based on factors such as efficacy, affordability and the hospital’s budget. Unlike in the US, where patients typically fill their prescriptions at pharmacies unaffiliated with hospitals, out-patients in China typically fill their prescriptions at hospital pharmacies.

Hospitals in China are classified under the Ministry of Health-administered hospital classification system into three classes based upon a number of factors, including reputation, the number of doctors and nurses, total number of in-patient beds, equipment and expertise. The best and largest hospitals are designated as “Class 3” hospitals, and the second and third tiers as “Class 2” and “Class 1”. In 2005, 946 and 5,156 out of 18,703 total Chinese hospitals were designated as “Class 3” and “Class 2” hospitals, respectively (China Ministry of Health statistics).
 
OTC Medicines and Retail Pharmacies
While out-patients in China generally fill their prescriptions at hospital pharmacies, they primarily purchase OTC medicines from retail pharmacies.  To the extent that a medical condition can be treated with an OTC medicine, many Chinese people prefer to purchase an OTC medicine from the hospital. The retail pharmacy sector in China is highly fragmented.  Retail pharmacies in China include pharmacy chain stores, individual stores, retail chain stores with OTC counters, and OTC counters in supermarkets.  While they are expanding quickly, neither pharmacy chain stores nor retail chain stores with OTC counters have developed a nationwide presence in China. As a result, retail pharmacies tend to have less bargaining power than hospitals in procuring medicines from pharmaceutical companies. A portion of retail pharmacies in China are authorized under the National Medical Insurance Program. A program participant may be reimbursed for the cost of a medicine included in the provincial medicine catalog only if he or she purchases that medicine from an authorized retail pharmacy. In 2004, the Chinese government authorities began to enforce the regulation prohibiting advertisement of prescription medicines through mass media.  However, OTC medicine can be advertised in the mass media. Chinese consumers normally purchase OTC medicines based upon brand name recognition and price.  Consumers gain familiarity with an OTC medicine through advertising, word-of-mouth and recommendations by pharmacy sales people.

SALES AND MARKETING

We sell our products via regional distributors as well as directly to the hospitals, clinics, and pharmacies in China.  We are expanding our sales force as well as our coverage with the regional distributors across China. We are dedicated to developing brand recognition through pharmaceutical trade fairs, scientific conferences and seminars, advertisements.
 
 
 
 
8

 

 
RAW MATERIALS

Our geographical location at Sichuan province facilitates an efficient access to high-grade raw ingredients for both chemical medicine raw material as well as Chinese medicines. The materials used in our products are widely available from a number of different suppliers. For greater purchasing power we utilize a limited number of suppliers for most of the pharmaceutical raw material. For the fiscal year ended June 30, 2010, three major vendors accounted for approximately 38.0% of our raw material sales, while in the fiscal year ended June 30, 2009, they accounted for approximately 46.0% of our raw materials sales. Total purchases from these vendors were $11,198,171 and $10,554,622] for the years ended June 30, 2010 and 2009, respectively.

CUSTOMERS
 
Five major customers accounted for 11% and 20% of the net revenue for the fiscal years ended June 30, 2010 and 2009. Total sales to these customers were $7,508,367 and $8,578,871, for the years ended June 30, 2010 and 2009, respectively.  The loss of any one major customer could have a material adverse effect on our business and operations.

INTELLECTUAL PROPERTY

We rely primarily on a combination of patent, trademark trade secrets and administrative protections, as well as employee and third-party confidentiality agreements to safeguard our intellectual property. Currently, we have a design patent granted and a formulation patent pending for our flagship product: Ginkgo Mihuan Oral Liquid (GMOL). The patent No. is 20061007800225 with a protection period of 20 years starting from April 30, 2006 and expiring on April 30, 2026.  Although our other products are not subject to patent protection, they are Good Manufacturing Practice (GMP) certified and approved by the SFDA, which is valid for a term of 5 years and renewable at the expiration thereof. The new SFDA product filing and registration policy provides, so long as no other company within our immediate pharmaceutical industry produces a product superior to ours in terms of current advances and major product breakthroughs, protection to formulas and production techniques of approved products, and prohibits producing and selling similar products without the SFDA’s approval. The type of major breakthroughs that the SFDA considers in determining whether another product, similar to one already approved can be produced would be significant improvements to existing products in the following areas: synthesis, extraction methods, physical and chemical nature and purity, dosage, prescription screening, preparation technology, testing methods, quality indicators, stability, pharmacology, toxicology, processing methods, active ingredients, route of administration, etc. As a result of this policy, the government encourages innovation in TCM R&D.  Other pharmaceutical companies cannot produce products similar to ours without the SFDA’s approval, unless they have achieved such major breakthroughs and received approval from the SFDA. As of June 30, 2010, we had 56 products protected by the SFDA, including patent protected Ginkgo Mihuan Oral Liquid; and 10 product candidates pending SFDA approval. Additionally, we have 6 trademarks granted and 16 trademarks pending approval.
 
In addition, elements of our pharmaceutical composition, formulation and manufacturing processes involve proprietary technologies, technical know-how or un-patentable data, for which we rely on administrative protection, trade secret and confidentiality agreements rather than patents to sustain our competitive advantages. We have also secured our rights in the intellectual properties with confidentiality, non-competition and proprietary information agreements signed by our research and development (R&D) personnel.

COMPETITION

The TCM industry in China is highly fragmented and intensely competitive.  We believe that traditional Chinese medicine manufacturers primarily compete on the basis of brand name and reputation, price, perceived efficacy, side effects, marketing ability, economics of scale, customer service and customer support capabilities, customer base and customer loyalty. We face competition from domestic TCM manufacturers, as well as domestic and foreign pharmaceuticals with similar therapeutic effects.

We believe we are strongly positioned to become one of the leading companies in the TCM industry in China by leveraging our competitive strengths,, because: 1)  We are an emerging market leader with 56 products; 2)   We have 23 products listed in the National Medical Program which ensures government reimbursement and easy access to the users; 3)   We are the sole supplier of several proprietary products with substantial upside market potential; 4)     We have a proven cooperative partnership research and development model that is cost effective, highly efficient with relatively shorter development cycles; 5)  We have an established national distribution network with a strong sales force highly focused on different market segments; 6)   We have a management team consisting of industral veterans with a proven track record.
 
 
 
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A new SFDA product filing and registration policy provides that so long as no other company produces a product superior to ours in terms of current advances and product breakthroughs,  an infinite period of administrative protection shall be given to our SFDA approved products; the new policy also prohibits knock-offs of products already on the market.  As far as our SFDA products are concerned, this policy strengthens our competitive advantage.

GOVERNMENT REGULATION

China’s pharmaceutical industry is highly regulated by the government. The primary regulatory authority is the SFDA, including its provincial and local branches, by which we are subject to regulation and oversight. China’s healthcare laws stipulate the production and sale of pharmaceuticals in China, covering the manufacturing, distributing, packaging, pricing and advertising of pharmaceutical products. We are also subject to other China’s laws and regulations that are applicable to business operators, manufacturers and distributors in general.

A medicine must be registered and approved by the SFDA before it can be manufactured. The registration and approval process requires the manufacturer to submit to the SFDA a registration application containing detailed information concerning the efficacy and quality of the medicine and the manufacturing process and the production facilities the manufacturer expects to use.  This process generally takes at least several months or longer, depending on the nature of the medicine under review, the quality of the data provided and the workload of the SFDA. To obtain the SFDA registration and approval necessary for commencing production, the manufacturer is also required to conduct pre-clinical trials, apply to the SFDA for permission to conduct clinical trials. Upon the completion of the clinical trials, clinical dataset will be filed with the SFDA for approval. 

Clinical Trials Phases II, III and IV in China are comparable to the similar phases of clinical trials involved in obtaining marketing approval from the U.S. Under the Administrative Measures on the Registration of Pharmaceutical Products promulgated by the SFDA, the three phases refer to: “Phase II”: Evaluation of safety, dosing and efficacy; “Phase III”: Larger scale evaluation of safety and efficacy; and “Phase IV”: Post-approval supervision of safety and efficacy.

New Medicine.  When a medicine is approved by the SFDA as a new medicine, the SFDA will issue a new medicine certificate to the manufacturer and impose a monitoring period of as long as five years. The length of the monitoring period is specified in the new medicine certificate. During the monitoring period, the SFDA will monitor the safety of the new medicine, and will neither accept new medicine certificate applications for an identical medicine by another pharmaceutical company, nor approve the production or import of an identical medicine by other pharmaceutical companies. For new medicines approved prior to 2002, the monitoring period could be longer than five years. The holder of a new medicine certificate effectively has the exclusive right to manufacture the new medicine during the monitoring period.
 
Provisional National Production Standard.  In connection with the SFDA’s approval of a new medicine, the SFDA will normally direct the manufacturer to produce the medicine according to a provisional national production standard, or a provisional standard.  A provisional standard is valid for two years, during which the SFDA closely monitors the production process and quality consistency of the medicine to develop a national final production standard for the medicine, or a final standard. Three months before the expiration of the two-year period, the manufacturer is required to apply to the SFDA to convert the provisional standard to a final standard.  Upon approval, the SFDA will publish the final standard for the production of this medicine. There is no statutory timeline for the SFDA to complete its review and grant approval for the conversion. In practice, the approval for conversion to a final standard is time-consuming and could take a few years. However, during the SFDA’s review period, the manufacturer may continue to produce the medicine according to the provisional standard.  Although all of our current products have received the final production standard, any new products we produce will need to apply for the standard.  We do not anticipate any difficulty in obtaining these approvals from the SFDA, but no assurances can be given as to when or if the approval will be obtained.
 
 
 
 
 
 
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Transitional Period. Prior to the latter of (1) the expiration of a new medicine’s monitoring period or (2) the date when the SFDA grants a final standard for a new medicine after the expiration of the provisional standard, the SFDA will not accept applications for an identical medicine nor will it approve the production of an identical medicine by other pharmaceutical companies.  Accordingly, the manufacturer will continue to have an exclusive production right for the new medicine during this transitional period.

Continuing SFDA Regulation. Pharmaceutical manufacturers in China are subject to continuing regulation by the SFDA. If an approved medicine, its labeling or its manufacturing process is significantly modified, a new pre-market approval or pre-market approval supplement will be required by the SFDA.  A pharmaceutical manufacturer is subject to periodic inspection and safety monitoring by the SFDA to determine compliance with regulatory requirements.  The SFDA has a variety of enforcement actions available to enforce its regulations including fines and injunctions, product recalls, operating restrictions, partial suspension or complete shutdown of production and criminal prosecution.

Permits and Licenses for Pharmaceutical Manufacturers.  A pharmaceutical manufacturer must obtain a pharmaceutical manufacturing permit from the SFDA’s relevant provincial branch.  This permit is valid for five years and is renewable upon its expiration.

Good Manufacturing Practice.  A pharmaceutical manufacturer must meet the Good Manufacturing Practice standards, or GMP standards, for each of its production facilities in China in respect of each form of pharmaceutical products it produces.  GMP standards include staff qualifications, production premises and facilities, equipment, raw materials, environmental hygiene, production management, quality control and customer complaint administration.  If a manufacturer meets the GMP standards, the SFDA will issue to the manufacturer a Good Manufacturing Practice certificate, or a GMP certificate, with a five-year validity period. However, for a newly established pharmaceutical manufacturer that meets the GMP standards, the SFDA will issue a GMP certificate with only a one-year validity period.

We have received a GMP certificate for all of our production facilities in respect of every form of product that we produce.  All of our GMP certificates are valid for five years, and we do not anticipate any difficulty in renewing these certificates.

Pharmaceutical Distribution

A distributor of pharmaceutical products in China must obtain a pharmaceutical distribution permit from the relevant provincial or local SFDA branches. The distribution permit is granted if the relevant SFDA provincial branch receives satisfactory inspection results of the distributor’s facilities, warehouse, hygiene environment, quality control systems, personnel and equipment.  A pharmaceutical distribution permit is valid for five years. The SFDA applies Good Supply Practice standards, or GSP standards, to all pharmaceutical wholesale and retail distributors to ensure the quality of distribution in China. The currently applicable GSP standards require pharmaceutical distributors to implement controls on the distribution of medicine, including standards regarding staff qualifications, distribution premises, warehouses, inspection equipment and facilities, management and quality control. A certificate for GSP standards, or GSP certificate, is valid for five years, except for a newly established pharmaceutical distribution company, for which the GSP certificate is valid for only one year.
 
 
 
 
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Price Controls

The retail prices of prescription and OTC medicines that are included in the national medicine catalog are subject to price controls administered by the Price Control Office under the National Development and Reform Commission, or the NDRC, and provincial price control authorities, either in the form of fixed prices or price ceilings. The controls over the retail price of a medicine effectively set the limits for the wholesale price of that medicine. From time to time, the NDRC publishes and updates a national list of medicines that are subject to price control. Fixed prices and price ceilings on medicines are determined based on profit margins that the NDRC deems reasonable, the type and quality of the medicine, its production costs, the prices of substitute medicines and the extent of the manufacturer’s compliance with the applicable GMP standards. The NDRC directly regulates the price of some of the medicines on the list, and delegates the power to provincial price control authorities to regulate the remainder on the list. For those medicines under the authority of provincial price control authorities, each provincial price control authority regulates medicines manufactured by manufacturers registered in that province. Provincial price control authorities have the discretion to authorize price adjustments based on the local conditions and the level of local economic development.

Only the manufacturer of a medicine may apply for an increase in the retail price of the medicine and it must apply either to the NDRC, if the price of the medicine is nationally regulated, or to the provincial price control authorities in the province where it is registered, if the price of the medicine is provincially regulated. For a provincially regulated medicine, when provincial price control authorities approve an application, they will file the new approved price with the NDRC for confirmation and thereafter the newly approved price will become binding and enforceable across China.

Other Regulations

In addition to the regulations relating to pharmaceutical industry in China, our operating subsidiaries are also subject to the regulations applicable to a foreign invested enterprise in China.

Foreigen Currency Exchange

The functional currency of our operating PRC subsidiary, Chengdu Tianyin, is Renmibi (RMB). Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 1997 and various regulations issued by the SAFE, and other relevant PRC government authorities, the RMB is freely convertible only to the extent of current account items, such as trade-related receipts and payments, interests and dividends.  Capital account items, such as direct equity investments, loans and repatriation of investment, require the prior approval from the SAFE or its local counterpart for conversion of RMB into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC. Payments for transactions that take place within the PRC must be made in RMB. Unless otherwise approved, PRC companies other than the foreign invested enterprises, or the FIEs, must convert foreign currency payments they receive from abroad into RMB.  On the other hand, FIEs may retain foreign exchange in accounts with designated foreign exchange banks, subject to a cap set by the SAFE or its local counterpart.
 
Regulation on Overseas Listing

On August 8, 2006, six PRC regulatory agencies jointly adopted the New M&A Rule, which became effective on September 8, 2006.  This New M&A Rule requires offshore SPVs that are controlled by PRC companies or individuals and that have been formed for the purposes of seeking a public listing on a stock exchange outside China through acquisitions of PRC domestic companies to obtain the CSRC approval prior to publicly listing their securities on a stock exchange outside China. On September 21, 2006, the CSRC published a notice on its website specifying the documents and materials required to be submitted to the CSRC when seeking the CSRC approval for their listings outside of China. The interpretation and application of the New M&A Rule remain unclear, and we cannot assure you that the ownership of our securities by offshore entities and their shareholders does not require approval from the CSRC, and if it does, how long it will take us to obtain the approval. See “Risk Factors—Risks Related to Doing Business in China—The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with the foreign ownership of our securities under a recently adopted PRC regulation.”

Dividend Distribution

The principal regulations governing dividend distributions by wholly foreign-owned enterprises and Sino-foreign equity joint ventures include:

 
Wholly Foreign-Owned Enterprise Law (1986), as amended;
  
Wholly Foreign-Owned Enterprise Law Implementing Rules (1990), as amended;
  
Sino-foreign Equity Joint Venture Enterprise Law (1979), as amended; and
  
Sino-foreign Equity Joint Venture Enterprise Law Implementing Rules (1983), as amended.
 
 
 
 
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Under these regulations, wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, these foreign-invested enterprises are required to set aside certain amounts of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends.

RESEARCH AND DEVELOPMENT

We have a proven cooperative partnership model for the research and development (R&D) which is cost effective, efficient and value adding for our organic growth. We focused on innovative products indicated for high incidence diseases with substantial market potential, in addition to the improvement of marketed products. Our R&D partners include a number of most prestigious academic institutions in China, including China Pharmaceutical University, Sichuan University-affiliated West China Center of Medical Sciences, and Shaanxi University of Chinese Medicines.
 
EMPLOYEES

Prior to the Share Exchange, our President was our only employee.  Currently, we  have 1,365 employees, consisting of 589 in manufacturing and operation, 15 in research and development, 730 in sales and marketing and 41 in general and administrative.  None of our personnel are represented under collective bargaining agreements. We consider our relations with our employees to be good.
  
FOR ADDITIONAL INFORMATION

We are a reporting company and file annual, quarterly and current reports, proxy statements and other information with the SEC.  For further information with respect to the Company, you may read and copy its reports, proxy statements and other information, at the SEC public reference rooms at 100 F.  Street, N.E., Washington, D.C. 20549. You can request copies of these documents by writing to the SEC and paying a fee for the copying cost.  Please call the SEC at 1-800-SEC-0330 for more information about the operation of the public reference rooms.  The Company’s SEC filings are also available at the SEC’s web site at http://www.sec.gov.

Copies of Company’s Annual Reports on Form 10K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are all available on our website ( http://www.tianyinpharma.com ) free of charge, within a week after we file same with the SEC or by sending a request for a paper copy to our outside securities counsel: Leser, Hunter, Taubman & Taubman, c/o Tianyin Pharmaceutical Co., Inc, 17 State Street, Suite 2000, New York, NY 10004.

ITEM 1A.                      RISK FACTORS

Risks Related To Our Business

Our growth is dependent on our ability to successfully develop, acquire or license new drugs.

Our growth is supported by continuous investment in time, resources and capital to identify and develop new drugs, dosage and delivery system, via introducing new products or line extensions each year and to expand distribution into new territories each year.  This strategy has the advantage of building brands through geographic expansion and establishing incremental capabilities for new product introductions. If we are unable to either develop new products on our own or acquire licenses for new products from third parties, our ability to grow revenues and market share will be adversely affected.  In addition, we may not be able to recover our investment in the development of new drugs, given that projects may be interrupted, unsuccessful, not as profitable as initially contemplated or we may not be able to obtain necessary financing for such development if we are unable to fund such development from our future revenues. Similarly, there is no assurance that we can successfully secure such rights from third parties on an economically feasible basis.
 
 
 
 
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We may not be able to secure financing needed for future operating needs on acceptable terms, or on any terms at all.

From time to time, we may seek additional financing to provide the capital required to expand our production facilities, R&D initiatives and/or working capital, as well as to repay outstanding loans if cash flow from operations is insufficient to do so.  We cannot predict with certainty the timing or amount of any such capital requirements.  If such financing is not available on satisfactory terms, we may be unable to expand our business or to develop new business at the rate desired. If we are able to incur debt, we may be subject to certain restrictions imposed by the terms of the debt and the repayment of such debt may limit our cash flow and our ability to grow.  If we are unable to incur debt, we may be forced to issue additional equity, which could have a dilutive effect on our current stockholders.

Expansion of our business may put pressure on our management and the operational infrastructure which could impede our ability to meet an increased demand for our products.

Our business plan is to significantly grow our operations to meet increasing demand for our products. Growth in our business may place a significant strain on our personnel, management, financial systems and other resources.  The evolution of our business also presents numerous risks and challenges that include continued acceptance of our products, sales and market share expansion, costs for expansion, technological evolvement and industrial dynamics.
 
If we are successful in obtaining rapid market growth of our products, we will be required to deliver large volumes of quality products and services to customers on a timely basis at a reasonable cost to those customers.  Meeting any such increased demands will require us to expand our manufacturing facilities, to increase our ability to purchase raw materials, to increase the size of our work force, to expand our quality control capabilities and to increase the scale upon which we provide our products and services.  Such demands would require more capital and working capital than we currently have available and we may be unable to meet the needs of our customers, which could adversely affect our relationship with our customers and reduce our revenues.

There can be no assurance that we can sustain or increase profitability.

Although we have recently achieved operating profits, there can be no assurance that we can sustain or increase profitability.  Unexpected situations, expenses, and delays are frequently encountered in developing and marketing products.  These include, but are not limited to, competition, the need to develop customers and market expertise, market conditions, sales, marketing, increases in the cost of raw materials and governmental regulation.  Our failure to meet any of these conditions would have a materially adverse effect upon us and may force us to reduce or curtail our operations. We may not achieve our business growth objectives and the failure to achieve such goals would have an adverse impact on our business and results of operations.  In addition, we expect to incur additional general and administrative expenses as a public company in the United States which could also have a negative impact on our future profitability.

Our growth strategy includes the pursuit of acquisitions and new product development which could have a material adverse affect on our business, financial condition, results of operations and growth prospects.

Our business strategy includes growth through strategic acquisitions and the development of new products and technologies which will involve significant capital expenditure and risks. Innovative pharmaceutical development involves R&D costs that may achieve no tangible results instead adversely affect our future profitability. In addition, any acquisition or combination that we consummate will likely involve, among other things, the payment of cash, the incurrence of contingent liabilities and the amortization of expenses related to goodwill and other intangible assets, and transaction costs, which may adversely affect our business, financial condition, results of operations and growth prospects. Our ability to integrate and organize any new businesses and/or products, whether internally developed or obtained by acquisition or combination, will likely require significant expansion of our operations. There is no assurance that we will be able to obtain the necessary resources for such expansion, and the failure to do so could have a material adverse effect on our business, financial condition, results of operations and growth prospects.  In addition, future acquisitions or combinations by the company involve risks of, among other things, entering markets or segments in which we have no or limited prior experience, the potential loss of key employees or difficulty, delay or failure in the integration of the operations of any such new business with our current business and operating and financial difficulties of any new or newly combined operations, any of which could have a materially adverse effect on our business, financial condition, results of operations and growth prospects.  Moreover, there can be no assurance that the anticipated benefits of any internally developed new business segment or business combination will be realized.
 
 
 
 
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Our current products have certain side effects.  If side effects associated with our current or future products are not identified prior to their marketing and sale, we may be required to withdraw such products from the market, perform lengthy additional clinical trials or change the labeling of our products, any of which could hinder or adversely impact our growth.
 
Our current products have certain side effects.  If significant side effects of our medicines are identified after they are marketed and sold,  1) those medicines listed in the national and provincial medicine catalogs may be removed from the catalogs or downgraded to a lower tier; 2) regulatory authorities may withdraw or modify their approvals of such medicines; 3) we may be required to reformulate these medicines, change the ways in which they are marketed, conduct additional clinical trials, change the labeling of these medicines or implement changes to obtain new approvals for our manufacturing facilities; 4) we may be less successful in tendering processes used by state-owned hospitals for medicine purchases; 5) we may have to recall these medicines from the market and may not be able to re-launch them; 6) we may experience a significant decline in sales of the affected products; 7) our reputation may suffer; and 8) we may become a target of lawsuits.
 
The occurrence of any of these events would harm our sales of these medicines and substantially increase the costs and expenses of marketing these medicines, which in turn could cause our revenues and net income to decline.  In addition, if any severe side effects are discovered to be associated with another manufacturer’s traditional Chinese medicine products used to treat medical conditions similar to those that our medicines are used to treat, the reputation and, consequently, sales of our medicines could be adversely affected.

We may be subject to product liability claims in the future.

We face an inherent business risk of exposure to product liability claims in the event that the uses of our products are alleged to have caused adverse side effects. Side effects or marketing or manufacturing problems pertaining to any of our products could result in product liability claims or adverse publicity. These risks will exist for those products in clinical development and with respect to those products that receive regulatory approval for commercial sale.  Furthermore, although we have not historically experienced any problems associated with claims by users of our products, we do not currently maintain product liability insurance and  there could be no assurance that we are able to acquire product liability insurance with terms that are commercially feasible.
 
 We may not be able to obtain manufacturing or marketing approval for our future products, and failure to obtain approvals for our future products could materially harm our business prospects.

All medicines must be approved by the SFDA, before they can be manufactured, marketed or sold in China.  The SFDA requires a pharmaceutical manufacturer to have successfully completed clinical trials of a new medicine and demonstrated its manufacturing capability before approval to manufacture that new medicine is granted.  Clinical trials are expensive and their results are uncertain.  In addition, the SFDA and other regulatory authorities may apply new standards for safety, manufacturing, labeling, marketing and distribution of future products. Complying with these standards may be time-consuming and expensive.  Furthermore, our future products may not be efficacious or may have undesirable or unintended side effects, toxicities or other characteristics that may preclude us from obtaining approval or may prevent or limit their commercial use.  As a result, we may not be able to obtain SFDA or other governmental approvals for our future products on a timely basis or at all.  Even if we do obtain approvals, such approvals may be subject to limitations on the indicated uses for which we may market a product, which may limit the size of the market for such a product.

Failure to obtain approval from the SFDA to convert a provisional national production standard of our principal products to a national final production standard would require us to suspend or cease the production of existing or new products.

After the SFDA approves a new medicine, it normally directs the manufacturer to produce that medicine according to a provisional standard which is valid for two years, during which the SFDA closely monitors the production process and quality consistency of the medicine for developing a national final production standard. Three months before a medicine’s provisional standard expires, the manufacturer of that medicine is required to apply to the SFDA to convert its provisional standard to a final standard.  In practice, the SFDA’s approval process could take a few years. However, during the SFDA’s review period (including after the expiration of the two-year provisional standard period), the manufacturer may continue to produce the medicine according to the provisional standard.
 
 
 
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The retail prices of our principal products are subject to price controls administered by the government authorities which may limit the pricings of our products. It is also possible that we may be required to lower the wholesale prices of our products as a result of any government-mandated price reductions.

The retail pharmaceutical prices in China are subject to price controls administered by the Price Control Office under the National Development and Reform Commission, or the NDRC, and provincial price control authorities, either in the form of fixed prices or price ceilings. From time to time, the NDRC publishes a list of medicines subject to price controls. The NDRC directly regulates retail prices of certain medicines on the list and authorizes provincial price control authorities to regulate retail prices of the remainder on that list. The limitation on our ability to raise the wholesale prices of our products may prevent us from absorbing or offsetting the effect resulting from any increase in the cost of raw materials or other costs, which would lower our margins.

Furthermore, in response to a rapid increase in prices of medicines, in August 2006, the NDRC lowered the price ceilings of more than 400 medicines in China. This order, which was reported as the NDRC’s nineteenth order for nationwide price reductions for medicines since 1998, resulted in an average reduction of 30% in retail prices of those medicines affected by the order.  Should we be required to lower the prices of our principal products in the future as a result of any government-mandated reduction in the price ceilings of our products, our future revenue and profitability would be adversely affected.
 
 Our products that have been included in national and provincial medicine catalogs of the National Medical Insurance Program may be removed from the national or provincial medicine catalogs or downgraded to a lower tier, and our new products may encounter difficulty in seeking inclusion in these catalogs.

The Ministry of Labor and Social Security, or the MLSS, together with other government authorities, determines which medicines are to be included in or removed from the national medicine catalog for the National Medical Insurance Program, and under which tier a medicine should fall, both of which affect the amounts reimbursable to program participants for their purchases of those medicines.  These determinations are based on a number of factors, including price and efficacy.  Provincial governments are required to include all Tier 1 medicines listed in the national medicine catalog in their provincial medicine catalogs, but can use their discretion to add other medicines to, or exclude the Tier 2 medicines listed in the national medicine catalog from, their provincial medicine catalogs, as long as the combined total numbers of medicines added and excluded do not exceed 15% of the number of the Tier 2 medicines.  In addition, provincial governments may use their discretion to upgrade a nationally classified Tier 2 medicine to Tier 1 in their provincial medicine catalogs, but may not downgrade a nationally classified Tier 1 medicine to Tier 2. Depending on which tier a medicine is classified in the provincial medicine catalog, a National Medical Insurance Program participant residing in that province can be reimbursed for the full cost of a Tier 1 medicine and for 80-90% of the cost of a Tier 2 medicine.  23 of our products are currently included in the National Medical Insurance Program. If the relevant government authorities decide to remove our products from the national or provincial medicine catalogs, or downgrade our products currently in Tier 1 to Tier 2, such removal or downgrading would reduce the affordability of our products and change the public perception regarding our products as being efficacious, safe and reliable, which in turn would adversely affect the sales of these products and reduce our net revenues.  Furthermore, if we are unable to obtain approval from the relevant government authorities to include our new products in the national or provincial medicine catalogs, sales of our new products may be materially and adversely affected.

The failure to maintain our relationships with our existing customers or the failure to obtain new customers could negatively impact our business.

We maintain purchase orders for the sales of our products to our customers.  Although we have entered into agreements to supply our customers, we cannot assure that such agreements will be renewed when the terms of such agreements expire or that our relationships with our customers will be maintained on satisfactory terms or at all.  The failure to maintain our relationships with our customers or the failure to obtain new customers could negatively affect our revenues and decrease our earnings or have an adverse impact on our business.

We rely on a limited number of suppliers and the loss of any of our suppliers, or delays or problems in the supply of materials used in our products, could materially and adversely affect our operations and growth.
 
We generally rely on a limited number of suppliers for most of the primary materials used in our products.  Our suppliers may not be able to supply the necessary materials without interruption and we may not have adequate remedies for such failure, which could result in a shortage of our products.  If one of our suppliers fails or refuses to supply us for any reason, it could take time and expense to obtain a new supplier.  In addition, our failure to maintain existing relationships with our suppliers or to establish new relationships in the future could negatively affect our ability to obtain the materials used in our products in a timely manner.  The search for new suppliers could potentially delay the manufacture of our products, resulting in shortages in the marketplace and may cause us to incur additional expense.  Failure to comply with applicable legal requirements subjects our suppliers to possible legal or regulatory action, including shutdown, which may adversely affect their ability to supply us with the materials we need for our products.  Any delay in supplying, or failure to supply, materials for our products by any of our suppliers could result in our inability to meet the commercial demand for our products, and could adversely affect our business, financial condition, results of operations and growth prospects.
 
 
 
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 We may not be able to adequately protect our intellectual property, which could cause us to be less competitive.

We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Unauthorized parties may attempt to copy or otherwise obtain and use our technology. We cannot be certain that our measures will prevent all misappropriations of our technology, particularly in countries where the laws may not protect our intellectual property rights as fully as in other countries such as the U.S. In addition, third parties may seek to challenge, invalidate, circumvent or render unenforceable any intellectual property rights owned by us.  From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs, diversion of our management’s attention and diversion of our other resources.
 
Our existing indebtedness may adversely affect our ability to obtain additional funds and may increase our vulnerability to economic or business downturns.

We are subject to a number of risks associated with our indebtedness, including: 1) we must dedicate a portion of our cash flows from operations to pay debt service costs; 2) we have less funds available for operations and other purposes; it may be more difficult and expensive to obtain additional funds through financings, if available at all; 3) we are more vulnerable to economic downturns and fluctuations in interest rates, less able to withstand competitive pressures and less flexible in reacting to changes in our industry and general economic conditions; 4) if we default under any of our existing credit facilities or if our creditors demand payment of a portion or all of our indebtedness, we may not have sufficient funds to make such payments.
 
 
If we are unable to attract, train, retain and motivate our salespeople, our revenues may be materially and adversely affected.
 
We rely on our prescription medicine and OTC medicine salespeople, who are dispersed across China, to market our products to the regional distributors as well as hospitals and retail pharmacies. We believe that our current sales have resulted, to a significant extent, from the dedication, efforts and performance of our salespeople. We believe that our future success will depend on those same factors. If we are unable to attract, train, retain and motivate our prescription medicine and OTC medicine salespeople, sales of our products may be materially and adversely affected.
 
Our future success depends in part on our ability to make strategic acquisitions and investments.
 
Although up till now, we have achieved the compounded annual growth with pure organic growth, as part of our plan to expand our manufacturing capacity and product offerings, we may make strategic acquisitions in the highly-fragmented traditional Chinese medicine sector. Strategic acquisitions could subject us to uncertainties and risks, including:1) high acquisition and financing costs; 2) potential ongoing financial obligations and unforeseen or hidden liabilities; 3) failure to achieve the intended objectives, benefits or revenue-enhancing opportunities; 4) cost of and difficulties in integrating acquired businesses and managing a larger business; and 5) diversion of our resources and management attention. Our failure to consummate or handle the risks associated with these acquisitions and investments could have a material adverse effect on our market penetration and revenues growth.
 
 
 
 
 
 
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The failure to increase our current manufacturing capacity as the market demand for our products grow could materially and adversely affect our business, financial condition, results of operations and growth prospects.

We currently have one pre-extraction production workshop, two solid preparation workshops and a liquid production workshop and they are all located within 5 square kilometers. Manufacturing products at one site presents risks because a disaster, such as a fire or hurricane, may interrupt our manufacturing capability.  In such an event, we will have to resort to alternative sources of manufacturing that could increase our costs as well as result in significant delays. Any increase in costs, slowdowns or shutdowns could have a material adverse affect on our business, financial condition, results of operations and growth prospects.
 
According to the market demand, management may add facilities, use high-efficiency equipment, increase employees’ working hours or extend hours of operation. We believe that we can adjust the existing capacity and future production capacity in a very short period of time to meet the market needs. We intend to expand our manufacturing operations by adding production lines, but there is no assurance that we will have the financial resources required for this planned expansion or that any such expansion will be successful or completed in a timely fashion or within budget. Additionally, although we believe we can quickly adjust our capacity, we may encounter difficulties and significant unexpected costs and delays in scaling up our manufacturing operations.  The failure to scale-up manufacturing operations in a timely and cost-effective way may adversely affect our income.  Any lack of manufacturing capacity to meet current demand could have a material adverse affect on our business, financial condition, results of operations and growth prospects.

The loss of one or more members of our management team or other key employees could affect our operation and growth.

Our success and future growth depends to a significant degree on the skills and continued services of our management team and other key employees.  We do not currently have an employment agreement with our named executive officer although we intend to enter into one in the near future, nor do we currently maintain key person life insurance.  If one or more members of our management or other key employees were to resign or no longer be able to serve as our employees, it could impair our revenue growth, business and future prospects.  In addition, our ability to execute our business plan is dependent on our ability to attract and retain additional highly skilled personnel.
  
If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our Common Stock.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We maintain a system of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

As a public company, we will have significant additional requirements for enhanced financial reporting and internal controls.  We will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting.  The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.
 
We cannot assure you that we will not, in the future, identify areas requiring improvement in our internal control over financial reporting.  We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth.  If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our Common Stock.
 
 
 
 
18

 

 
Our Form 10-K for the year ended June 30, 2009 is currently under the SEC review, there are outstanding comments on the Form 10-K for FY2009 and the SEC may issue further comments. If we receive further comments which are applicable to our operations, business or financial statement for the year ended June 30, 2010, we may need to amend this current Form 10-K or even restate our financial results for FY 2010.

On March 5, 2010, we received the first comment letter from the SEC on our Form 10-K for the fiscal year of 2009 and,  to date, we have received the three comments letter on this Form 10-K for the FY 2009. Since March 5, 2010, we have been responding to and amending our disclosure per the SEC’s comments.  The latest response letter was filed as correspondence on September 22, 2010 responding to the comments we received on September 5, 2010. As we have outstanding SEC comments and the SEC may issue further comments on the Form 10-K for the fiscal year 2009, if these comments are applicable to our operation, business or financial statement for the year ended June 30, 2010, we may have to amend this current Form 10-K or even restate our financial results contained in this filing.
 
Risks Related To Our Industry

We face intense competition that may prevent us from maintaining or increasing market share for our existing products and gaining market acceptance of our future products.  Our competitors may develop or commercialize products before or more successfully than us.

The pharmaceutical market in China is intensely competitive, rapidly evolving and highly fragmented.  Our competitors may develop products that are superior to or more affordable than ours or they may more effectively market products that compete with ours.  We also face competition from manufacturers of western medicines, including multinational companies, that manufacture western medicines with similar curative effects and that can be used as substitutes for our products.  Our competitors’ greater size in some cases provides them with a competitive advantage with respect to manufacturing costs because of their economies of scale and their ability to purchase raw materials at lower prices.  Many of our competitors also have better brand name recognition, more established distribution networks and larger customer bases. Our failure to adapt to changing market conditions and to compete successfully with existing or new competitors may materially and adversely affect our financial condition and results of operations.
 
The production of pharmaceuticals depends on the supply of quality medicinal raw materials.

The supply and market prices of pharmaceutical raw materials may be influenced by various factors such as weather conditions and the occurrence of natural disasters or sudden increases in demand that would impact our costs of production.  There is no assurance that we would be able to pass on any resulting increase in costs to our customers and therefore any substantial fluctuation in supply or the market prices of raw materials may adversely affect our results of operations and profitability.
 
 If we do not keep pace with rapid technological change, we will be unable to sustain a meaningful market position.

The pharmaceutical industry in China is characterized by rapid changes in technology, constant enhancement of industrial know-how and the frequent emergence of new products.  Future technological improvements and continued product developments in the pharmaceutical market may render our existing products obsolete or affect their viability and competitiveness. Failure to respond to frequent technological advances by improving our existing products or developing new products in a timely manner and achieving desirable level of market acceptance may adversely affect our business and profitability.
 
Pharmaceutical companies in China are required to hold a number of permits and licenses to carry on their business.  Our ability to obtain and maintain these regulatory approvals is uncertain.

All pharmaceutical manufacturing companies in China are required to obtain certain permits and licenses from various PRC government authorities, including a pharmaceutical manufacturing permit and a good manufacturing practice certificate, or a GMP certificate, for each of its production facilities in China [See “Regulations—Regulations Relating to Pharmaceutical Industry”]. We have obtained permits, licenses and GMP certificates for production facilities we use in the manufacture of our pharmaceutical products which are subject to periodic renewal and/or reassessment by the relevant PRC government authorities, and the standards of compliance required in relation to them may change from time to time.  We intend to apply for the renewal of these permits and licenses when required by applicable laws and regulations.  Our failure to obtain such renewals may prevent us from continuing those portions of our business that require these permits and licenses.  Furthermore, any changes in compliance standards or new laws or regulations that may be introduced in the future may prohibit or render it more restrictive for us to conduct our business or may increase our compliance costs, which may adversely affect our operations or profitability.
 
 
 
 
19

 

 
The ongoing anti-corruption campaign initiated by the Chinese government targeting state-owned hospitals could adversely affect our sales designated for hospitals.

The Chinese government has recently launched a nationwide campaign against corrupt practices that have been frequently engaged by state-owned hospitals in China, including their acceptance of kickbacks or other illegal gains and benefits in connection with their providing medical services and purchasing medical equipment and medicines.  In mid 2006, the China’s Ministry of Health ordered all state-owned hospitals to review, among other things, their procurement policies and procedures and rectify problems and deficiencies, if any, by the end of 2006. As a result of this campaign, many state-owned hospitals have since diverted a significant portion of their attention and resources to their internal inspection and rectification activities and are reviewing their procurement policies.  If the anti-corruption campaign becomes more intensified, causing a significant change to the hospitals’ procurement policies and procedures or otherwise resulting in a further delay for state-owned hospitals to resume their normal procurement of our products, our sales designated for hospitals, which account for a very substantial portion of our total sales, could be adversely affected.

Risks Related To Doing Business in China

Changes in China’s political or economic situation could harm us and our operational results.

Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the government could change these economic reforms or any of the legal systems at any time.  This could either benefit or damage our operations and profitability.  Some of the things that could have this effect are: level of government involvement in the economy; control of foreign exchange; methods of allocating resources; balance of payments position; international trade restrictions and international conflict. The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or the OECD, in many ways.  The economic reforms in China have been conducted under a tight grip of the Chinese government.  As a result of these differences, we may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries.
 
Our business is largely subject to the uncertain legal environment in China and your legal protection could be limited.
 
The Chinese legal system is a civil law system based on written statutes.  Unlike common law systems, it is a system in which precedents set in earlier legal cases are not generally used.  The overall effect of legislation enacted over the past 20 years has been to enhance the protections afforded to foreign invested enterprises in China.  However, these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and their interpretation and enforcement involve uncertainties.  These uncertainties could limit the legal protections available to foreign shareholders, such as the right of foreign invested enterprises to hold licenses and permits such as requisite business licenses.  Because most of our officers and directors, after the Share Exchange, will reside outside of the United States, it may be difficult, if not impossible, to acquire jurisdiction over those persons if a lawsuit is initiated against us and/or our officers and directors by a shareholder or group of shareholders in the United States.  Also, because our officers will likely be residing in China at the time such a suit is initiated, achieving service of process against such persons would be extremely difficult.  Furthermore, because the majority of our assets are located in China it would also be extremely difficult to access those assets to satisfy an award entered against us in United States court.  Moreover, we have been advised that the PRC does not have treaties with the United States providing for the reciprocal recognition and enforcement of judgments of courts.
 
Recent PRC regulations relating to the establishment of offshore companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to distribute profits to us or otherwise adversely affect us.

China State Administration of Foreign Exchange, or the SAFE, issued a public circular on October 21, 2005 concerning the acquisition by an offshore company controlled by PRC residents of onshore assets in China. This circular requires that (1) a PRC resident shall register with a local branch of the SAFE before he or she establishes or controls an overseas special purpose vehicle, or SPV, for the purpose of overseas equity financing (including convertible debt financing); (2) when a PRC resident contributes the assets of or his or her equity interests in a domestic enterprise to an SPV, or engages in overseas financing after contributing assets or equity interests to an SPV, such PRC resident must register his or her interest in the SPV and any changes in such interest with a local branch of the SAFE; and (3) when the SPV undergoes a material change outside of China, such as a change in share capital or merger or acquisition, the PRC resident shall, within 30 days from the occurrence of the event that triggers the change, register such change with a local branch of the SAFE.  Furthermore, PRC residents who are shareholders of SPVs established before November 1, 2005 are required to register with a local branch of the SAFE before March 31, 2006.
 
 
 
 
20

 
 
In addition, SAFE issued updated internal implementing rules, or the Implementing Rules in relation to Notice 75.  The Implementing Rules were promulgated and became effective on May 29, 2007.  Such Implementing Rules provide more detailed provisions and requirements regarding the overseas investment foreign exchange registration procedures.  However, even after the promulgation of Implementing Rules there still exist uncertainties regarding the SAFE registration for PRC residents’ interests in overseas companies.  It remains uncertain whether PRC residents, who may indirectly hold our shares through the participation and exercise of stock options to purchase shares of Time Poly Management Limited (one of our shareholders) are required to go through the overseas investment foreign exchange registration procedures under Notice 75 or Implementing Rules.
 
As a result, we cannot predict how these regulations will affect our business operations following the Share Exchange.  For example, our ability to conduct foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, may be subject to compliance with the SAFE registration requirements by such PRC residents, over whom we have no control.  In addition, we cannot assure you that such PRC residents will be able to complete the necessary approval and registration procedures required by the SAFE regulations.  We will require all our shareholders who are PRC residents to comply with any SAFE registration requirements, if required by Notice 75, Implementing Rules or other applicable PRC laws and regulations, although we have no control over either our shareholders or the outcome of such registration procedures.  Such uncertainties may restrict our ability to implement our business combination strategy and adversely affect our business and prospects following a business combination.

The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with our acquisition of Chengdu Tianyin under a recently adopted PRC regulation.

On August 8, 2006, six PRC regulatory agencies: the PRC Ministry of Commerce, or MOFCOM, the State Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or CSRC, and the SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or New M&A Rule, which became effective on September 8, 2006.  The New M&A Rule purports, among other things, to require offshore special purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.

On September 21, 2006, pursuant to the New M&A Rule and other PRC laws and regulations, the CSRC, in its official website, promulgated relevant guidance with respect to the issues of listing and trading of domestic enterprises’ securities on overseas stock exchanges, or the Administrative Permits, including a list of application materials with respect to the listing on overseas stock exchanges by SPVs.

There are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations, including the New M&A Rule.  Although we do not believe that our Share Exchange transaction required prior CSRC approval, the interpretation and application of the New M&A Rule remains unclear.  Accordingly, we cannot assure you that the Share Exchange transaction, wherein we indirectly acquired Chengdu Tianyin, did not require the prior approval of the CSRC. If our transaction is found to have violated the CRSC regulations, we do not know what penalties, if any, would be imposed upon us as a result of our failure to obtain such approval.  These uncertainties could inhibit our new business activities because the CSRC has declined to officially clarify the applicability of this New M&A Rule to us and the Share Exchange transaction.  If CSRC approval was required for us to consummate the Share Exchange, our failure to obtain or delay in obtaining the CSRC approval would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.  These sanctions could include fines and penalties on our operations in China, restriction or limitation on our ability to pay dividends outside of China, and other forms of sanctions that may cause a material and adverse effect on our business, results of operations and financial conditions.  However, the New M&A Rule does not stipulate the specific penalty terms, so we are not able to predict what penalties we may face, and how such penalties will affect our business operations or future strategy.
 
 
 
 
 
21

 

 
The New M&A Rule also established additional procedures and requirements that are expected to make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise that owns well-known trademarks for China’s traditional brands.  We may grow our business in part by acquiring other traditional Chinese medicine businesses.  Complying with the requirements of the New M&A Rule in completing this type of transaction could be time-consuming, and any required approval processes, including Ministry of Commerce approval, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
  
We may not be guaranteed a continuance to receive the preferential tax treatment we currently enjoy, and dividends paid to us from our operations in China may become subject to income tax.

The PRC government has provided various incentives to the companies located in the western areas of China and the foreign invested enterprises, particularly to companies incorporated in specified economic and technological development zones and engaged in the encouraged business as determined by PRC laws or regulations and companies confirmed by appropriate government authorities as foreign-invested manufacturing enterprises with an operating term of more than ten years.  These incentives include limited tax exemptions, reduced tax rates and other preferential treatments. Chengdu Tianyin, as a biopharmaceutical company incorporated at Chengdu and a foreign-invested enterprise, or FIE, has been confirmed by the relevant tax bureau to be eligible for these preferential enterprise income tax treatments. Pursuant to the Notice of Tax Preferences Policies for the Development of Western Regions (Caishui [2001] No.202), promulgated on December 30, 2001, or the Tax Notice 202, both domestic companies and FIEs, which are established in the western regions (including Sichuan Province) and are engaged in the encouraged industries (including the TCM manufacture business), shall be entitled to a 15% national enterprise income tax rate for a period commencing from 2001 to 2010. Currently, Chengdu Tianyin is entitled to a 15% national enterprise income tax rate since January 2001.

However, since China joined the World Trade Organization, or WTO, in November 2001, these preferential tax treatments have been criticized as not being WTO-compliant.  On March 16, 2007, the new Enterprise Income Tax Law was promulgated that will be effective as of January 1, 2008.  Under the new Enterprise Income Tax Law, FIEs and domestic companies would be subject to a uniform tax rate of 25%, but there would be a five-year transitional period for FIEs, during which they would be allowed to continue to enjoy their existing preferential tax treatments.  Furthermore, in accordance with the Notice of Implementing the Transitional Preferential Policies of Enterprise Income Tax promulgated by the State Council on December 26, 2007, the preferential policies of enterprise income tax for the enterprises in western regions shall continue to be implemented, after the effectiveness of the new Enterprise Income Tax Law on January 1, 2008, which means the enterprises located in western regions would be allowed to continue enjoying their existing preferential tax treatments for a two-year transition period; the local tax governmental authority may have discretion in implementing such transitional periods.  If the new Enterprise Income Tax Law is implemented and its transition period for FIEs runs out, the effective tax rate of Chengdu Tianyin will increase significantly unless Chengdu Tianyin is otherwise eligible for preferential treatment.  Any increase in Chengdu Tianyin’s enterprise income tax rate in the future could have a material adverse effect on our financial condition and results of operations.

The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.

China only recently has permitted provincial and local economic autonomy and private economic activities and, as a result, we are dependent on our relationship with the local government in the province in which we operate our business.  Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership.  Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters.  We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements.  However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.  Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.
 
 
 
 
22

 

 
Future inflation in China may inhibit our activity to conduct business in China.

In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation.  During the past ten years, the rate of inflation in China has been as high as 20.7% and as low as -2.2%.  These factors have led to the adoption by Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation.  While inflation has been more moderate since 1995, high inflation may in the future cause Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.
 
 Government regulations regarding environmental matters in China may adversely impact our business.

Our manufacturing operations are subject to numerous laws, regulations, rules and specifications relating to human health and safety and the environment.  These laws and regulations regulate, among other matters, wastewater discharge, air quality and the generation, handling, storage, treatment, disposal and transportation of solid and hazardous wastes and release of hazardous substances into the environment.  In addition, third parties and governmental agencies in some cases have the power under such laws and regulations to require remediation of environmental conditions and, in the   case of governmental agencies, to impose fines and penalties.  We make capital expenditures from time to time to stay in compliance with applicable laws and regulations.

We have obtained all permits and approvals and filed all registrations required for the conduct of our business, except where the failure to obtain any permit or approval or file any registration would not have a material adverse effect on our business. The PRC governmental authorities have not revealed any material environmental liability that would have a material adverse effect on us.  We have not been notified by any governmental authority of any continuing noncompliance, liability or other claim in connection with any of our properties or business operations, nor are we aware of any other material environmental condition with respect to any of our properties or arising out of our business operations at any other location.  However, in connection with the ownership and operation of our properties (including locations to which we may have sent waste in the past) and the conduct of our business, we potentially may be liable for damages or cleanup, investigation or remediation costs.
 
No assurance can be given that all potential environmental liabilities have been identified or properly quantified or that any prior owner, operator, or tenant has not created an environmental condition unknown to us.  Moreover, no assurance can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the properties will not be affected by the condition of land or operations in the vicinity of the properties (such as the presence of underground storage tanks), or by third parties unrelated to us.  State and local environmental regulatory requirements change often. It is possible that compliance with a new regulatory requirement could impose significant compliance costs on us.  Such costs could have a material adverse effect on our business, financial condition and results of operations.
 
We may have difficulty establishing adequate management, legal and financial controls in the PRC.
 
The PRC historically has been deficient in Western style management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems.  We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC.  As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.
 
Changes in foreign exchange regulations in the PRC may affect our ability to pay dividends in foreign currency or conduct other foreign exchange business.
 
Renminbi, or RMB, is not a freely convertible currency currently, and the restrictions on currency exchanges may limit our ability to use revenues generated in RMB to fund our business activities outside the PRC or to make dividends or other payments in U.S. dollars. The PRC government strictly regulates conversion of RMB into foreign currencies.  Over the years, foreign exchange regulations in the PRC have significantly reduced the government’s control over routine foreign exchange transactions under current accounts.  In the PRC, the State Administration for Foreign Exchange, or the SAFE, regulates the conversion of the RMB into foreign currencies.  Pursuant to applicable PRC laws and regulations, foreign invested enterprises incorporated in the PRC are required to apply for “Foreign Exchange Registration Certificates.”  Currently, conversion within the scope of the “current account” (e.g. remittance of foreign currencies for payment of dividends, etc.) can be effected without requiring the approval of SAFE.  However, conversion of currency in the “capital account” (e.g. for capital items such as direct investments, loans, securities, etc.) still requires the approval of SAFE.
 
 
 
 
23

 
 
Risks Relating to Our Securities

Insiders have substantial control over us, and they could delay or prevent a change in our corporate control even if our other stockholders wanted it to occur.
 
Our executive officers, directors, and principal stockholders own, in the aggregate, approximately 34.7% of our outstanding Common Stock.  These stockholders are able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could delay or prevent an outside party from acquiring or merging with us even if our other stockholders wanted it to occur.

The market price of our Common Stock may be volatile and there may not be sufficient liquidity in the market for our securities in order for investors to sell their securities.

During the past two and half years our Common Stock has had a trading price range between $0.68 per share to $5.25 per share. The market price of our Common Stock has been and will likely continue to be highly volatile, as is the stock market in general. Factors that may materially affect the market price of our Common Stock are beyond our control, these factors may materially adversely affect the market price of our Common Stock, regardless of our performance.  In addition, the public stock markets have experienced extreme price and trading volume volatility. These broad market fluctuations may influence the market price of our Common Stock. There is currently only a limited public market for our Common Stock, which is listed on the NYSE Amex, and there can be no assurance that a trading market will develop further or be maintained in the future. As of September 28, 2010,  the closing bid price of our Common Stock was $2.69 per share and we had approximately 279 shareholders of record of our Common Stock and 5 shareholders of record of our Preferred Stock, not including shares held in street name.  

The outstanding warrants may adversely affect us in the future and cause dilution to existing shareholders.

There are currently 9,575,565 warrants outstanding.  The terms of these warrants expire as early as 2013 and as late as 2015.  The exercise price of these warrants range from $1.60 to $4.50 per warrant. Exercise of the warrants may cause dilution in the interests of other shareholders as a result of the additional Common Stock that would be issued upon exercise. In addition, sales of our Common Stock issuable upon exercise of the warrants could have a depressive effect on the price of our stock, particularly if there is not a coinciding increase in demand by purchasers of our Common Stock. Further, the terms on which we may obtain additional financing during the period any of the warrants remain outstanding may be adversely affected by the existence of these warrants as well.

Our Common Stock may be considered a “penny stock” and may be difficult to sell.

The SEC has adopted regulations which generally define a “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our Common Stock is less than $5.00 per share and, therefore, it may be designated as a “penny stock” according to SEC rules.  This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities.  These rules may restrict the ability of brokers or dealers to sell our Common Stock and may affect the ability of investors to sell their shares.
 
The market for penny stocks has experienced numerous frauds and abuses which could adversely impact investors in our stock.

Penny stocks are frequent targets of fraud or market manipulation. Patterns of fraud and abuse include: Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; “Boiler room" practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons; Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market.

 
 
 
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ITEM 2.                      DESCRIPTION OF PROPERTY

All land in China is owned by the State.  Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes.  In the case of land used for industrial purposes, the land use rights are granted for a period of 50 years.  This period may be renewed at the expiration of the initial and any subsequent terms.  Granted land use rights are transferable and may be used as security for borrowings and other obligations. Chengdu Tianyin currently owns land use rights to approximately 29,651 square meters of land and approximately 10,780 square meters of buildings consisting of manufacturing facilities, employee quarters and office buildings in Chengdu, China.  Chengdu Tianyin holds five State-owned Land Use Rights Certificates and eight Building Ownership Certificates for the land use rights and buildings owned by it, which include the State-owned Land Use Rights Certificate (No.: Qingyangguoyong [2007] No. 12133), State-owned Land Use Rights Certificate (No.: Qingyangguoyong [2007] No. 12132), State-owned Land Use Rights Certificate (No.: Longguoyong [2002] No. 17188), State-owned Land Use Rights Certificate (No.: Longguoyong [2007] No. 76483), State-owned Land Use Rights Certificate (No.: Qingguoyong [2007] No. 12575); Building Ownership Certificate (No.: Chengfangquanjianzheng Jianzheng Zi No.1570035), Building Ownership Certificate (No.: Chengfangquanjianzheng Jianzheng Zi No.1599930), Building Ownership Certificate (No.: Chengfangquanzheng Jianzheng Zi No.1570039) , Building Ownership Certificate (No.: Longfangquanzheng Jianzheng Zi No.0119728), Building Ownership Certificate (No.: Longfangquanzheng Jianzheng Zi No.0119727), Building Ownership Certificate (No.: Longfangquanzheng Jianzheng Zi No.0119729) and, Building Ownership Certificate (No.: Longfangguan No. 0070870) and the Building Ownership Certificate (No.: Longfangguan No. 0070869).

We intend to expand our manufacturing facility over the next few years and believe that we currently have enough land to satisfy such expansion.

In furtherance of our proposed joint venture with Sichuan Jiangchuan Pharmaceutical Co.,Ltd., In April 2009, we entered into a land supply agreement with the Sichuan Xinjin County Government to acquire 100 mu (approximately 66,700 square meters) of land within the Xinjin Chemical Industrial Park.

We currently rent office space located at 23rd Floor, Unionsun Yangkuo Plaza, No. 2, Block 3, Renmin Road South, Chengdu, Postal Code: 610041, China. The rental agreement is renewed annually and the rent, which is US$147,059 per annum, is paid quarterly.

ITEM 3.                      LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.  We are not aware of any pending or threatened legal proceeding that, if determined in a manner adverse to us, could have a material adverse effect on our business and operations.

ITEM 4.                      (REMOVED AND RESERVED)



PART II

ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITY

The Company’s common stock is traded on the AMEX under the symbol “TPI”; our cusip number is 88630M104. We first began trading on August 14, 2007 on the Over the Counter Bulletin Board.  Beginning on October 1, 2008, we began trading on the AMEX under the symbol “TPI.” Accordingly, the following table sets forth the quarterly high and low bid prices for the common stock since the quarter ended September 30, 2008.  The prices set forth below represent inter-dealer quotations, without retail markup, markdown or commission and may not be reflective of actual transactions.
 
 
 
 
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High
   
Low
 
Quarter ended September 30, 2008
 
$
2.50
   
$
1.66
 
Quarter ended December 31, 2008
 
$
2.25
   
$
1.10
 
 Quarter ended March 31, 2009
 
$
1.57
   
$
1.00
 
 Quarter ended June 30, 2009
 
$
3.50
   
$
2.16
 
 Quarter ended September 30, 2009    3.87      3.79  
 Quarter ended December 31, 2009    4.32      4.10  
 Quarter ended March 31, 2010
 
$
3.78
   
$
3.62
 
 Quarter ended June 30, 2010
 
$
2.91
   
$
2.16
 
 
At September 28, 2010, the closing bid price of the common stock was $2.69 and we had approximately 279 record holders of our commons stock, 5 record holders of our Series A Preferred Stock. This number excludes any estimate by us of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed.
 
In 2008, we granted five (5) year Class A Warrants to purchase 4,757,814 shares of our Common Stock, $0.001 par value per share at an initial exercise price of $2.50 per share , and seven (7) year Class B Warrants to purchase 4,757,814 shares of our Common Stock at an initial exercise price of $3.00 per share .  In 2009, we granted three (3) year warrants to purchase 306,914 shares of our Common Stock, at an initial exercise price of $4.50 per share, subject to adjustment.The exercise prices of the Warrants are subject to weighted average and other anti-dilution adjustments.  As of September 28, 2010, 3,898,438 of the Class A Warrants, 4,257,814 of the Class B Warrants and 306,913 of the Class C Warrants were outstanding.  We also granted warrants to purchase 1,522,500 shares of Common Stock with an exercise price of US$1.60, $2.50 and $3.00 per share to TriPoint Global Equities, LLC, the placement agent in the January 2008 Financing.  In connection with the 2009 Financing, we granted warrants to purchase 122,766 shares of common stock at $3.25 and 24,553 shares at $4.50 to TriPoint Global Equities, LLC, the placement agent or its designees of such financing. As of September 28, 2010, there are 1,112,400 placement agent warrants outstanding.

Dividend Policy

On March 26, 2009, we announced that the Board of Directors declared an annual cash dividend of $0.10 per common share that will be paid quarterly. The initial dividend of $.025 was paid to common shareholders of record on April 30, 2009, with the actual distribution occurring around June 10, 2009. The cash dividend was paid solely to common stockholders and was not be paid on shares owned by management, advisors or other inside shareholders, all of whom have agreed to waive receipt of the dividend.  The majority of the Company's Series A Preferred Shareholders approved the cash dividend as of April 14, 2009.
 
On July 8, 2009, the Company declared a quarterly cash dividend to be paid to its common stock shareholders. The dividend of $0.025 per common share, with the total amount of $172,023 had been declared to shareholders of record as of July 31, 2009 and paid on September 9, 2009.

On September 30, 2009, the Company recorded $233,683 as dividends to the investors of the Company’s January 2008 financings, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. A resolution was approved by the Company’s Board of Director’s and the Company paid dividends to the investor group who invested in the Company’s January 2008 financing in cash on October 31, 2009.

On October 5, 2009, the Company declared a quarterly cash dividend to be paid to its common stock shareholders. The dividend of $0.025 per common share, with the total amount of $344,322 has been declared to shareholders of record as of October 30, 2009 and actually paid on December 10, 2009.
 
 
 
 
26

 
 
On December 31, 2009, the Company recorded $98,538 as dividends to the investors of the Company’s 2008 financings, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. A resolution was approved by the Company’s Board of Director’s and the Company paid dividends in cash to those investors on January 31, 2010.
 
On January 11, 2010, the Company declared a quarterly cash dividend to be paid to its common stock shareholders. The dividend of $0.025 per common share, with the total amount of $403,085 has been declared to shareholders of record as of January 31, 2010 and actually paid on February 25, 2010.

On March 31, 2010, the Company recorded $82,541 as dividends to the investors of the Company’s January 2008 financings, representing the quarterly dividend (10% per annum) in accordance with the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. A resolution was approved by the Company’s Board of Director’s and the Company decided to pay the dividends in cash to those investors.

On May 12, 2010, we announced the temporary suspension of common stock dividend in our 3rd quarterly report. We believe by focusing the capital on our strategic growth plan instead of paying a dividend at the present time to our common shareholders, we should be able to generate greater long-term returns for our shareholders. Given the opportunities presented by China’s ongoing healthcare reform and the necessary approvals that we are required to obtain from our preferred holders to continue to pay a dividend to our common shareholders, we decided to suspend our common share dividend program. As a policy management believes that in the event we experience a shortage of opportunities to efficiently invest and grow our business with our excess cash on hand, then a dividend payable is an appropriate use of excess capital.
 
Description of Equity Compensation Plans

We do not have any equity compensation plans. Our Board of Directors may adopt one or more equity compensation plans in the future.

Recent Sales of Unregistered Securities

During the past three years, we effected the following transactions in reliance upon exemptions from registration under the Securities Act as amended. Unless stated otherwise; (i) that each of the persons who received these unregistered securities had knowledge and experience in financial and business matters which allowed them to evaluate the merits and risk of the receipt of these securities, and that they were knowledgeable about our operations and financial condition; (ii) no underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with the transactions; (iii) the transactions did not involve a public offerings; and (iv) each certificate issued for these unregistered securities contained a legend stating that the securities have not been registered under the Act and setting forth the restrictions on the transferability and the sale of the securities.

To accomplish the Share Exchange with Raygere, we issued an aggregate of 12,790,800 shares of common stock in exchange for all of the issued and outstanding capital stock of Raygere.  The shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act for issuances not involving any public offering.

Pursuant to the Securities Purchase Agreement, we issued an aggregate of $15,225,000 Notes, which are initially convertible into an aggregate of 9,515,625 shares of our Series A Preferred Stock and Warrants to purchase an aggregate of 9,515,628 shares of our Common Stock.  The shares were issued to 27 accredited investors pursuant to the exemption from registration provided by Section 4(2) of the Securities Act for issuances not involving any public offering.

In connection with the financings we completed on January 16, 2008 and January 25, 2008, we issued TriPoint Global Equities, LLC, the placement agent to the Financings, placement agent warrants, identical to those issued to the Investors pursuant to the Securities Purchase Agreement, to purchase up to an aggregate of 1,522,500 shares of our common stock.  The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering.
 
 
 
 
27

 

 
On May 9, 2008, we issued 20,000 shares of Common stock to employees. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering.

On June 30, 2008, we issued 236,488 shares of common stock to the investors of our 2008 financings as payment of the quarterly dividend per the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock.  The dividend shares were issued to these investors pursuant to the exemption from registration provided by Section 4(2) of the Securities Act for issuances not involving any public offering.

On December 31, 2008, we issued 223,558 shares of common stock to the investors of our 2008 financings as payment of the quarterly dividend per the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock.  The dividend shares were issued to these investors pursuant to the exemption from registration provided by Section 4(2) of the Securities Act for issuances not involving any public offering.

On March 31, 2009, we issued 216,610 shares of common stock to the investors of our 2009 financings as payment of the quarterly dividend per the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock.  The dividend shares were issued to these investors pursuant to the exemption from registration provided by Section 4(2) of the Securities Act for issuances not involving any public offering.
 
On May 5, 2009, we issued 45,000 shares of common stock to Chesapeake Group, Inc., for the investor relates services they will provide to us, The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering.
 
On October 27, 2009, we completed a private equity financing of $4,987,500, with eight accredited investors (the “2009 Financing”). Net proceeds from the offering are approximately $4,490,000. Pursuant to the financing, we issued, for $4,987,500, a total of 1,534,570 units of our securities at $3.25 per unit. Each unit consists of (i) one share of the Company's common stock, par value $0.001 per share (the "Common Stock"), and (ii) a Class C Warrant, with each Class C Warrant exercisable at $4.50 to purchase one-fifth of a share of Common Stock, such that the total amount of warrants issued to each investor as shall be equal to twenty percent (20%) of the number of units purchased by each purchaser. Each of the warrants has a term of three (3) years. In connection with this financing, we granted warrants to purchase 122,766 shares of common stock at $3.25 and 24,553 shares at $4.50 to TriPoint Global Equities, LLC, the placement agent or its designees.



ITEM 6.                   SELECTED FINANCIAL DATA

Not applicable.

 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

FORWARD-LOOKING INFORMATION
 
This report contains forward-looking statements regarding our plans, expectations, estimates and beliefs.  Actual results could differ materially from those discussed in, or implied by, these forward-looking statements.  Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” and other similar expressions.  In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.  We have based these forward-looking statements largely on our expectations.
 
Forward-looking statements are subject to risks and uncertainties, certain of which are beyond our control.  Actual results could differ materially from those anticipated as a result of the factors described in the “Risk Factors” and detailed in our other Securities and Exchange Commission filings.
 
 
 
 
28

 

 
Because of these risks and uncertainties, the forward-looking events and circumstances discussed in this report or incorporated by reference might not transpire.  Factors that cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in the “Risk Factors” section and elsewhere in this report.

We did not conduct any operations during periods up through the date of the Share Exchange. However, we have included elsewhere in this report the historical consolidated financial statements of the Company and its subsidiaries, which we own as a result of the Share Exchange. The following discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of this report. Actual results may differ materially from those contained in any forward-looking statements.

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of the Company for the  year ended June 30, 2009 and should be read in conjunction with such financial statements and related notes included in this report.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of Chengdu Tianyin for the fiscal years ended June 30, 2010 and 2009 and should be read in conjunction with such financial statements and related notes included in this report.

Overview

We are engaged primarily in the development, manufacturing, marketing and sale of patented biopharmaceuticals, branded generics, modernized Chinese medicines and other pharmaceuticals in China. We currently manufacture and market a comprehensive portfolio of 56 products approved by SFDA including the patent protected Gingko Mihuan Oral Liquid (GMOL), 23 of which are included in the highly selective National Medicine Catalog of the National Medical Insurance program. And as of June 30, 2010, we had 10 drug candidates pending the SFDA approval. Additionally, we have 6 trademarks granted and 16 trademarks pending.

Established in 1994, Chengdu Tianyin is a manufacturer and supplier of modernized traditional Chinese medicines. The current management of Chengdu Tianyin acquired 100% of the equity interest of Chengdu Tianyin in 2003. On October 30, 2007, Grandway completed the acquisition of the 100% of the equity interest and now owns 100% of the equity interest of Chengdu Tianyin, a company located in Chengdu, China that operates our business.

In June 2009, Chengdu Tianyin invested $723,500 to establish a wholly-owned trading subsidiary, Chengdu Tianyin Medicine Trading Co., Ltd (“Tianyin Medicine Trading”) for sales and distribution of medicine produced by Chengdu Tianyin. We expect the establishment of Tianyin Medicine Trading will help optimize our business model through better distribution channels. 

Competitive environment

The market for pharmaceutical products is highly competitive. Our operations may be affected by technological advances by competitors, industry consolidation, patents granted to competitors, competitive combination products, new products offered by our competitors, as well as new information provided by other marketed products and/or other post-market studies.


 
 
 
29

 
 
Development and growth strategy
 
The cornerstone of our business development strategy relies upon our partnership-based research and development (R&D) efforts. Under this R&D model, we are entitled to purchase the exclusive ownership and intellectual properties of new drugs developed by research institutes upon SFDA approval. Prior to our purchase, the institutes take the full financial responsibility for the costs incurred during the R&D phase. The purchase price for these drugs ranges from $250,000 to $800,000 per candidate, which is based upon the development costs for individual products and the expected revenue from the product. Usually, we expect the material net cash inflows from drugs in late stage development to begin within three years upon SFDA approval.  Since the projects are targeted for well defined marketable products and Tianyin will retain the full ownership of these SFDA-approved products and related intellectual properties, the subsequent commercialization is expected to be accretive upon new products’ market entry. In addition, we are able to leverage these R&D resources to further facilitate market recognition and commercialization of these products. With this strategy in place, we increased market penetration and revenue growth in 2010 and plan to continue to expand and enhance marketing and sales going forward.  Part of this strategy involves increasing and improving our marketing and sales activities to enhance the market leadership of our key leading products and to increase the sales of other products by expanding our sales force, solidifying our distribution network and expanding our market segment coverage, while increasing our marketing and promotional activities.

Currently, we have 10 pipeline drugs with our partnership research institutes, of which we are entitled to purchase the exclusive ownership and intellectual properties upon the SFDA approval. They are Huangtengsu Tablets, Lifei Tablets, Fuyang Granules, Shuxiong Tablets, Suxiao Zhixie Capsules, Shuanghuang Xiaoyan Tablets, Huoxiang Zhengqi Capsules, Jiegu Xujing Ointment, Runing Tablets, Dengzhan Huasu Tablet. These drugs are currently pending for SFDA approval. Though the pending period of SFDA approval varies from one to several years depending on the individual drug, we expect to receive SFDA approvals for these drugs within one and a half to two years based on our past experience.
 
Pursuant to the terms under our contractual arrangements with our partner research institutes, we are required to pay a certain amount of the purchase price to acquire the exclusive ownership and intellectual properties of these candidate drugs upon SFDA approval. Our purchase price for these drugs ranges from $250,000 to $800,000 per candidate, which is based upon the development costs for individual product and the expected revenue from the product. Usually, we expect the material net cash inflows from drugs in late stage development to begin within three years upon SFDA approval.

This R&D model reduces the financial risks from a prolonged or uncertain approval process and limits the impact on our financial position and liquidity by the unexpected delay of any individual drug approval.  The possible uncertainties in receiving the approval involve endpoint measurement during these clinical trials. To facilitate successful trials, we assist our partnership institutes with development during the early stage of the trials, including patient and control group selection, trial design, endpoint measurement and etc. A successfully run trial depends on a variety of well-calibrated scientific and technical indices that are required for SFDA approval. If some of these indices are unable to reach satisfactory result, we can either troubleshoot or terminate the development in the early stage, which will not impact us financially. 
 
As part of our continuing growth strategy, we will continue our partnership-based R&D efforts to further commercialize and broaden our product pipeline. We usually begin drug commercialization within 6 months of the SFDA approval. However, there are several factors that may lead to delays in this process including: mass manufacturing capacity readiness, marketing network preparedness and the indication seasonality. On average, we expect the material net cash flow to be positive from these drugs within two years to two and half years after their market entry.

As of September 28, 2010, we have received 6 SFDA drug approvals as the following and the material net cash inflows from these drugs to begin in the year of  2013.

The following is a list of SFDA approved products in the fiscal 2010: 
 
Drug Name
 
 SFDA Approval Number
     
           
1.  Yinqiao Jiedu Tablets
 
Z20093555
     
           
2.  Kangjun Xiaoyan Capsule
 
Z20090855
     
           
3.  Xiaoyan Lidan Tablets II
 
Z20093681
     
           
4.  Fleroxacin Tablets I
 
H20094057
     
           
5.  Fleroxacin Tablets II
 
H20094038
     
           
6.  Clindamycin Tablets
 
H20103200
   
 
 
 
 
 
30

 
 
Descriptions of the function of the above products are as follows:
 
 
·
Yinqiao Jiedu Tablets for acute respiratory system ailments, such as the influenza and the common cold. 
 
·
Kangjun Xiaoyan Capsule for sore throat and gum caused by fever and cold
 
·
Xiaoyan Lidan Tablets II for acute cholangtis and cholecystitis.
 
·
Fleroxacin Tablets I for bronchitis, pneumonia and other respiratory infections, genitourinary system infection and gastrointestinal infections.
 
·
Fleroxacin Tablets II for urogenital infections, including urinary tract infections, bacterial prostatitis, Neisseria gonorrhea urethritis or cervicitis, respiratory tract infections, gastrointestinal tract infections, bone and joint infections, skin and soft tissue infections and sepsis.
 
·       Clindamycin Tablets for various bacterial infections.
 
Management plans to selectively pursue strategic acquisitions and licensing opportunities as part of our growth strategy. We believe that strategic acquisitions and licensing provide effective means to broaden our product portfolio, consolidate our resources and expand our market coverage. As part of these initiatives, in April 2009, we entered into a land supply agreement with the Sichuan Xinjin County Government to acquire 100 mu (approximately 66,700 square meters) of land within the Xinjin Chemical Industrial Park. We plan to establish a manufacturing plant for Active Pharmaceutical Ingredients (“API”) of macrolides antibiotics on the site. In August 2009, we partnered with Sichuan Mingxin Pharmaceutical Co., Ltd. in the launch of a new joint venture, Sichuan Jiangchuan JV, which primarily engages in the research and development, manufacturing, sales and marketing of API and chemical intermediates of macrolides antibiotics. The joint venture is 77% owned by Tianyin. We plan to fund the Sichuan Jiangchuan JV in two phases with a total investment estimated to reach approximately $20 million (Phase I: $10 million for plant construction, auxiliary facilities construction and equipment purchase. Phase II: $10 million for construction of high output manufacturing lines). We expect to fund the Sichuan Jiangchuan JV through internal cash flow, funds from the exercise of investor warrants from our previous financing and possible future financings. Currently Phase I of the project is being carried out and expected to be completed by the end of the 2010 calendar year.
 
Product Sales and Fiscal Year 2011 Financial Guidance

We reaffirm our FY2011 revenue guidance of $113.0 million, representing revenue growth of 76.8% based on:
1) steady revenue growth of existing product portfolio especially our lead products such as Gingko Mihuan Oral Liquid (GMOL) for age-related cardiovascular and central nervous system disorders such as coronary heart diseases and stroke, Xuelian Chongcao Oral Liquid (XLCC) for immunity enhancement, Azithromycin Tablets (AZI) for bacterial infections and Apu Shuangxin (Benorylate) Granules (APU) for rheumatoid arthritis; 2) capacity ramp-up of Tianyin's newly completed production facility; 3) new product market entries from Tianyin's pipeline; 4) revenue contribution from Jiangchuan macrolide facility; 5) business development of Tianyin’s distribution arm that focuses on higher margin, specialty products by other pharmaceuticals that are complementary to our existing product portfolio. In our forecast, we assume steady pricings for our products and the revenue growth are driven by the increase in sales. Management will continue to evaluate the Company's business outlook and communicate any changes on a quarterly basis or as when appropriate

For the fiscal year 2011, we reaffirms our net income forecast of $18.0 million, representing net income growth of approximately 50% year over year. Forecasted net income does not include non-cash expenses associated with stock compensation plans, stock option expenses and /or future interest expense.
 
 
31

 

 
Discussion on Operating Results

The operating results of our business are listed as follows. All references to the results of operations and financial condition are those of Chengdu Tianyin.
 
Comparison of results (in $ million) for the fiscal years ended June 30, 2010 and 2009

Year Ended June 30
 
2010
   
2009
 
Sales
  $
63.9
   
$
   42.9
 
Cost of Sales
  $
30.6
   
$
21.5
 
Gross profit
  $
33.3
   
$
21.4
 
Selling, general and administrative and research and development expenses
  $
18.6
   
$
11.7
 
Other expense
  $
0.07
   
$
0.17
 
Income taxes
  $
2.6
   
$
  1.6
 
Net income
  $
12.0
   
$
  7.9
 
Foreign currency transaction adjustment
  $
0.29
   
$
0.073
 
Comprehensive income
  $
12.3
   
$
 8.0
 

Sales.  Sales delivered $63.9 million for the FY2010 from $42.9 million for FY2009, up 49.0% year over year, supported by our continuous sales channel expansion and market penetration for our current product portfolio especially the lead products. The results exceeded our targeted $63.0 million FY2010 revenue guidance and validated our growth strategies on sales and market, manufacturing capacity expansion along with new pipeline development. Our lead product sales are Ginkgo Mihuan Oral Liquid (GMOL): $22.8 million, Apu Shuangxin Oral Liquid (APU) $6.0 million, Xuelian Chongcao (XLCC): $3.9 million, Azithromycin Dispersible Tablets (AZI): $4.1 million, Qingre Jiedu Oral Liquid (QRE): $3.6 million, which totaled $40.4 million, representing 63.0% of the FY2010 revenue.

                    Cost of Sales.  Cost of sales for the fiscal year ended June 30, 2010 was $30.6 million or 47.9% of the sales compared to $21.5 million or 50.2% of the sales for the fiscal year ended June 30, 2009. Our cost of sales primarily consists of the costs of direct raw materials, labor, depreciation and amortization of the manufacturing equipment and facilities, and other overhead. The decrease in our cost of sales was the result of an increase of higher margin products in our sales mix along with enhanced cost control processes that we implemented that yielded greater efficiencies in our production and manufacturing processes.

Gross profit.  As a result of product mix optimization, gross profit for FY 2010 was approximately $33.3 million with 52.1% gross margin, compared with 49.8% in FY 2009. During FY 2010, we expand our sales in high margin products, such as GMOL. The price change has very limited impact on our gross margin. The factors that influence the gross margins of our major products include 1) raw material price (85% of the cost of goods sold) and 2) production cost (15% of the cost of goods sold).
 
   Operating and R&D Expenses.  Selling, general and administrative and R&D expenses were $19.0 million in FY 2010 compared to $11.7 million in FY 2009. The increase was primarily due to our recent sales and marketing strategies that increased our sales payroll and marketing expenses, along with the compensation expenses to external service providers. We anticipate these costs may continue to increase but will in line with our revenue growth.
 
                    Net income.  Net income was $12.0 million in FY 2010, compared with $7.9 million for FY 2009. The increase in our net income was primarily the result of the revenue growth along with improved product margins.
 
 
 
 
32

 

 
Foreign Currency Translation Adjustment.  Our reporting currency is the US dollar.  We have evaluated the determination of its functional currency based on the guidance in ASC Topic, “Foreign Currency Matters,” which provides that an entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. We have raised financings in the U.S. dollar, paid operating expenses primarily in the U.S. dollar, paid dividends to its shareholders of common stock and expected to receive any dividends that may be declared by its subsidiaries in U.S. dollars. Therefore, it has been determined that our functional currency is the U.S. dollar based on the expense and financing indicators, in accordance with the guidance in ASC 830-10-85-5.  However, the functional currency of Chengdu Tianyin, our indirectly owned operating subsidieary is Renminbi (RMB). Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period.  Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity.  Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

   Currency translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of shareholders' equity and amounted to $0.30 million as of June 30, 2010. The balance sheet amounts with the exception of equity at June 30, 2010 were translated at 6.78887  RMB to 1.00 US dollar as compared to 6.82593 RMB to 1.00 US dollar at June 30, 2009.  The equity accounts were stated at their historical rate.  The average translation rates applied to income statement accounts for the years ended June 30, 2010 and 2009 were the average exchange rates during the years.

Comprehensive Income.  The comprehensive income was $12.3 million in FY2010 compared with $8.0 million for FY2009. For the year ended June 30, 2010. 

 
Liquidity and Capital Resources
Discussion of cash flow

   
For the fiscal years ended June 30,
 
   
2010
   
2009
 
Cash flow from operating activities
 
 $
15,400,098
   
$
8,336,998
 
Cash flow from investing activities
 
 $
(8,845,245
  $
(7,843,281
)
Cash flow from financing activities
 
 $
7,991,760
    $
(185,531
 

Operating activities
 
As of June 30, 2010, we had working capital totaling approximately $32.1 million, including cash and cash equivalents of $27.0 million. As of June 30, 2010, we had cash and cash equivalents of $27.0 million. Net cash generated from operating activities was $15.4 million for FY2010 ended June 30, 2010 as compared to $8.3 million for FY2009. The strong cash flow was primarily the result of net income growth and further improved accounts receivable $8.2 million 12.8% of the FY2010 revenue versus $5.6 million or 13.1% of the FY2009 revenue. We believe that Tianyin is adequately funded to meet all of our working capital and capital expenditure needs for FY 2011. The cash used in investing activities for FY2010 and FY2009 totaled $8.8 million and $7.8 million respectively. The increase was mainly due to our new drug development and the construction of Jiangchuan facility.

Investing activities

Net cash used in investing activities for the fiscal year ended June 30, 2010 and 2009 totaled $8.8 million and $7.8 million respectively which are related to the acquisition of intangible drug, and property and equipment. The increase of cash used in investing activities during the fiscal year ended June 30, 2010 was mainly the result of our pipeline development and the construction of Jiangchuan macrolide facility.

Financing activities

Net cash used in financing activities for FY2010 totaled $8.0 million, offset by dividends paid, which is related to the 2009 financing, compared with $0.20 million mainly related to the stocks bought back and dividend payment.
 
 
 
 
33

 

 
Borrowings and Credit Facilities

The short-term bank borrowings outstanding as of June 30, 2010 were $1.5 million compared with $1.4 million as of June 30, 2009 which bore an average interest rate of 5.6286% and 7.881% per annum, respectively, and it was adjusted quarterly according to the loan rate of the People’s Bank of China. These loans are borrowed from various financial institutions and represent the maximum amount of each facility. These loans do not contain any financial covenants or restrictions. The borrowings have a one year term and expire at various times throughout the year. The short-term bank borrowings of US$1.5 million as of June 30, 2010 and as of June 30, 2009 were secured by the property and equipment of Chengdu Tianyin. 

Stock Repurchase Program
 
On October 27, 2008, the Board of Directors authorized the Company to repurchase up to US$3.0 million of its common stock from time to time in the open-market or through privately negotiated transactions. The Company's original announcement stated that the buyback would be conducted through January 2009, but we later extended the buyback through June 30, 2009. As of June 30, 2010, a total of 83,785 shares had been bought back at prevailing market prices. Shares purchased were retired to treasury. The share repurchase program is to continue for the coming FY2011.

Cash dividend
 
On March 26, 2009, we announced that our Board of Directors declared an annual cash dividend of $0.10 per common share that will be paid quarterly. The initial dividend of $0.025 was paid to common shareholders of record on April 30, 2009, with the actual distribution occurring around June 10, 2009. The cash dividend was paid solely to common stockholders and was not be paid on shares owned by management, advisors or other inside shareholders, all of whom have agreed to waive receipt of the dividend. The majority of the Company's Series A Preferred Shareholders had approved the cash dividend as of April 14, 2009. Subsequent quarterly cash dividends were then paid to our common shareholders on July 8, 2009, October 5, 2009, and January 11, 2010 with the dividend amount of $0.025 per common share, with total amount of $172,023, $344,322 and $403,085 respectively, were paid to shareholders of record as of July 31, 2009, October 30, 2009 and February 25, 2010.
 
In May 2010, we announced the temporary suspension of our dividend to our common shareholders. The China health care industry, through the ongoing healthcare reform, is currently evolving and realizing an ever changing and dynamic competitive landscape. As a result of the reform, opportunities exist for Tianyin to capture a greater market share by investing the internal capital resources in our strategic growth plan. We believe by focusing the capital on our strategic growth plan instead of making dividend payments at the present time to our common shareholders, we are able to generate greater long-term returns for our shareholders. Given these opportunities and the necessary approvals that we are required to obtain from our preferred holders to continue to pay a dividend to our common shareholders, we have decided to suspend our common share dividend program. Management believes that in the event we experience a shortage of opportunities to efficiently invest and grow our business with our excess cash on hand, then a dividend payable is an appropriate use of excess capital.
 
Critical Accounting Policies and Estimates

Our consolidated financial information has been prepared in accordance with generally accepted accounting principles in the United States, which requires us to make judgments, estimates and assumptions that affect (1) the reported amounts of our assets and liabilities, (2) the disclosure of our contingent assets and liabilities at the end of each fiscal period and (3) the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.

When reviewing our financial statements, you should consider (1) our selection of critical accounting policies, (2) the judgment and other uncertainties affecting the application of those policies, and (3) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgment and estimates used in the preparation of our financial statements.
 
 
 
 
34

 

 
Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the Unites States of America (GAAP).

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.
 
Cash and Cash Equivalents

In accordance with Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows," we consider all highly liquid instruments with original maturities of three months or less to be cash and cash equivalents.
 
Accounts Receivable and Bad Debt Reserve

Accounts receivable are stated at the amount management expects to collect from balances outstanding at the end of the period. Sales of goods are subject to revenue recognition condition. Even if we have not received the payment, they should be recognized as revenue and increase accounts receivable accordingly. Based on its assessment of the credit history with customers having outstanding balances and our current relationships with such customers, management decides whether any realization of losses on balances outstanding at the end of the period will be deemed uncollectible based on the age of the receivables. As such, we reserve 1% of accounts receivable balances that have been outstanding less than one year, 50% of accounts receivable balances that have been outstanding between one year and two years, and 100% of receivable balances that have been outstanding for more than two years. The allowance for doubtful accounts at June 30, 2010 and 2009 was $421,079 and $171,947, respectively.

Accounts receivable was approximately US$8.2 million for the year ended June 30, 2010 as compared to approximately US$5.6 million for the year ended  June 30, 2009, an increase of approximately US$2.6 million . During the year ended June 30, 2010, sales revenue was $63.9 million, as compared to $42.9 million during the fiscal year of 2009. Based upon our periodic review of customers using credit, we believe our credit risk remains under control and do not have any significant changes.  We only grant credit to customers with proven sales records and all credit sales must be approved by the CEO and our finance department.  Moreover, we conduct a credit review at least annually for each of our customers that we grant credit. In addition, we have an internal policy that requires finance staff and sales personnel to closely monitor the collection and credit status of each client with credit.  If the credit sales exceed the credit granted to a customer, or the account receivable is over 60 days, we will suspend all sales to that customer until we receive their payments and their account is brought current. Customers without any sales history must pay prior to the shipment of goods.
 
Inventory
 
Ending inventory is stated at the lower of cost or market at the balance sheet date. Subsequent measurement of inventory uses the "lower of cost and net realizable value" accounting principle which is related to the historical cost and net realizable value on accounting measurement basis. Inventory is determined using the weighted-average cost method. Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. Management continually evaluates the recoverability based on assumptions about customer demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves or write-downs may be required that could negatively impact our gross margin and operating results. The inventory reserve at June 30, 2010 and 2009 was $[139,014] and $138, 259, respectively.  The inventory reserve was for obsolete raw material with carrying value less than the net realizable value.

Two major factors account for our low level of inventory relative to our growth in production. First, we have optimized our product portfolio to contain more products with higher gross margin. As a result, the increase in inventory is lower than the increase in revenue.  Second, after adopting lean production processes, we have increased our product turnover by shortening the business cycle between accepting orders and delivering products.
 
 
 
 
35

 

 
Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method, over 5 and 40 years. The carrying value of long-lived assets is evaluated whenever changes in circumstances indicate the carrying amount of such assets may not be recoverable. If necessary, we recognize an impairment loss for the difference between the carrying amount of the assets and their estimated fair value. Fair value is based upon current and anticipated future undiscounted cash flows. Expenditures for maintenance and repairs are charged to operations as incurred; additions, renewals and betterments are capitalized. Based upon its most recent analysis, we believe that no impairment of property and equipment exists for the year ended June 30, 2010.

Valuation of Long-Lived Assets

We adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Per SFAS 144, we are required to periodically evaluate the carrying value of long-lived assets and to record an impairment loss when indicators of impairment are present and the discounted cash flows estimated to be generated by those assets are less than the asset’s carrying amounts.

In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.

Revenue Recognition

We recognize revenue of product sales and the cost related when title has been transferred, the risks and rewards of ownership have been transferred to the customer, both the cost and the revenue are determinable, and the collection of the related receivable is probable, which is generally at the time of shipment. The shipment term for most of our customer sales is “Cost plus Freight” (“C&F”).  Our contracted logistic companies pick up the goods from our warehouse and deliver them to the warehouses designated by our customers.  We grant credit to customers with proven sales records. Sales to customers without sales records require advance payment prior to shipment of goods.  Our CEO and Finance Department must pre-approve all credit sales. We conduct a credit review, on at least an annual basis, for each of our customers that we grant credit.  In addition, we call on our finance staff and sales personnel to closely monitor the credit recovery and credit status of each client with credit. Our internal controls require that we identify any obsolete and/or excess inventory, and estimate accruals based on the principle of lower of costs and market value (“LCM”). Although we have adopted the principle of lean production, such accruals are generally not significant. Currently we do not have any sales on consignment and we do not use consignment sales as our sales method.  After products arrive at customers’ warehouses (FOB destination), both the risk and ownership of the products are transferred to customers. Since all of our products received GMP certification and we maintain high quality standards, returns of products are basically negligible. Finally, although the pharmaceutical is highly competitive, we believe that the GMP certification and  high quality of our products, coupled with the new SFDA product filing and registration policy, which provides, so long as no other company within our immediate pharmaceutical industry produces a product superior to ours in terms of current advances and product breakthroughs, protection to formulas and production techniques of our approved products, prohibits producing and selling similar products without the SFDA’s approval, and thus other companies are prevented from producing and distributing new products that would compete directly with ours.  As a result of the aforementioned, the bad debt provision for the year ended June 30, 2010 was $421,079, and $171,947 respectively.
 
Cost of Goods Sold

Based on the matching principle, we recognize cost of goods sold at the same time when the related revenue has been recognized. We adopt the “weighted average method” to determine the cost of goods sold, using the average unit cost weighted by the number of units acquired at the various units cost times the sales volume during the accounting period. If the sales revenue or inventory accounting estimates change because of the changes in accounting principles on which these estimates relied or we obtain new information, and accumulate more experience, in such cases, we may revise our accounting estimates based on the new circumstances. We utilize prospective method to account for changes in accounting estimates. As a result, changes in accounting estimates only affect the current period; the impact will be recognized only for the current period.  Any changes that affect both current and future periods, should be recognized for both the current and future periods.
 
 
 
 
36

 

 
Advertising Costs

We expense the cost of advertising as incurred. Advertising costs for the years ended June 30, 2010 and 2009 was $3,536,694 and $1,854,214, respectively.

Impairment of Intangible Assets

We evaluate the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable.  Such circumstances could include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset.  We measure the carrying amount of the asset against the estimated discounted future cash flows associated with it at a risk-free rate of interest.  Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized.  The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value.  The fair value is measured based on quoted market prices, if available.  If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows.  The evaluation of asset impairment requires us to make assumptions about future cash flows over the life of the asset being evaluated.  These assumptions require significant judgment and actual results may differ from assumed and estimated amounts.  During the year ended June 30, 2010, we had no impairment losses using the method described above.
 
Income Taxes

Deferred income taxes are computed using the asset and liability method, such that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial reporting amounts and the tax basis of existing assets and liabilities based on currently enacted tax laws and tax rates in effect in the People’s Republic of China for the periods in which the differences are expected to reverse. Income tax expense is the tax payable for the period plus the change during the period in deferred income taxes. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. No differences were noted between the book and tax bases of our assets and liabilities, respectively. Therefore, there are no deferred tax assets or liabilities for the years ended June 30, 2010 and 2009.  Although we do not believe that we have significant tax liability in the U.S., since we recently paid cash dividends, we are seeking to engage an international tax expert to advise us with regard to U.S. and international tax compliance.

We are subject to PRC Enterprise Income Tax at a rate of 15% of net income.

Fair Value of Financial Instruments

We consider the carrying amounts reported in the balance sheet for current assets and current liabilities qualifying as financial instruments and approximating fair value.
 
 Foreign Currency Translation and Transactions

We have evaluated the determination of its functional currency based on the guidance in ASC Topic, “Foreign Currency Matters,” which provides that an entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. On the Tianyin Pharmaceutical level, we have raised financings in the U.S. dollar, paid our operating expenses primarily in the U.S. dollar, paid dividends to our shareholders of common stock and expected to receive any dividends that may be declared by our subsidiaries in U.S. dollars.

Therefore, it has been determined that our functional currency is the U.S. dollar based on the expense and financing indicators, in accordance with the guidance in ASC 830-10-85-5. The Company uses United States dollars (“U.S. Dollar” or “US$” or “$”) for financial reporting purposes. The subsidiaries within the Company maintain their books and records in their respective functional currency, being the primary currency of the economic environment in which their operations are conducted. Assets and liabilities of a subsidiary with functional currency other than U.S. Dollar are translated into U.S. Dollars using the applicable exchange rates prevailing at the balance sheet date. Items on the statements of income and comprehensive income and cash flows are translated at average exchange rates during the reporting period. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.
 
 
 
 
37

 

 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Other
 
Inflation has not had a significant effect on our operations, as increased costs to us have generally been offset by increased prices of products and services sold.
 

ITEM 7A   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not Applicable

ITEM 8.                      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
Tianyin Pharmaceutical Co., Inc.

We have audited the accompanying consolidated balance sheets of Tianyin Pharmaceutical Co., Inc. (the “Company”) as of June 30, 2010 and 2009, and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tianyin Pharmaceutical Co., Inc. as of June 30, 2010 and 2009, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
 


/s/ Patrizio & Zhao, LLC
Certificed Public Accountants & Consultants
Parsippany, New Jersey
September 24, 2010

 
38

TIANYIN PHARMACEUTICAL CO., INC. 


Consolidated Balance Sheets

   
June 30,
   
June 30,
 
   
2010
   
2009
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 27,009,066     $ 12,352,223  
Accounts receivable, net of allowance for doubtful accounts of $421,079
               
   and $171,947 at June 30, 2010 and 2009, respectively
    8,185,240       5,620,519  
Inventory
    3,588,824       3,808,289  
Advance payments
    382,980       1,188,115  
Loans receivable
    294,600       -  
Other current assets
    77,283       683,189  
Total current assets
    39,537,993       23,652,335  
                 
Property and equipment, net
    14,968,822       9,642,526  
                 
Intangibles, net
    15,232,286       12,037,483  
                 
Total assets
  $ 69,739,101     $ 45,332,344  
                 
Liabilities and stockholders’ equity
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 1,715,781     $ 1,392,639  
Accounts payable – construction related
    2,248,849       -  
Short-term bank loans
    1,473,000       1,399,075  
VAT taxes payable
    658,312       458,930  
Income taxes payable
    861,614       490,514  
Other taxes payable
    19,564       11,890  
Dividends payable
    72,995       325,417  
Other current liabilities
    429,135       307,934  
Total current liabilities
    7,479,250       4,386,399  
                 
Total liabilities
    7,479,250       4,386,399  
                 
Stockholders’ equity:
               
Common stock, $0.001 par value, 50,000,000 shares authorized,
    27,326       17,909  
   27,326,527 and 17,908,912 shares issued and outstanding at
               
  June 30, 2010 and 2009, respectively
               
Series A convertible preferred stock, $0.001 par value, 1,360,250 and
    1,360       7,147  
   7,146,500 shares issued and outstanding at June 30, 2010 and 2009,
               
   Respectively
               
Additional paid-in capital
    29,623,396       19,694,514  
Statutory reserve
    3,732,883       2,299,807  
Treasury stock
    (111,587 )     (111,587 )
Retained earnings
    25,687,770       16,486,775  
Accumulated other comprehensive income
    2,845,076       2,551,380  
Total stockholders’ equity
    61,806,224       40,945,945  
                 
Noncontrolling interest
    453,627       -  
                 
Total equity
    62,259,851       40,945,945  
                 
Total liabilities and equity
  $ 69,739,101     $ 45,322,344  
                 

The accompanying notes are an integral part of these consolidated financial statements.                                                                                                                                                
 
39

TIANYIN PHARMACEUTICAL CO., INC.


Consolidated Statements of Operations and Comprehensive Income

   
For the Years Ended June 30,
 
   
2010
   
2009
 
             
Sales
  $ 63,939,684     $ 42,894,355  
                 
Cost of sales
    30,594,639       21,516,065  
                 
Gross profit
    33,345,045       21,378,290  
                 
Operating expenses
               
Selling expenses
    12,796,881       7,825,939  
General and administrative expenses
    4,949,179       3,491,804  
Research and development
    852,848       343,952  
Total operating expenses
    18,598,908       11,661,695  
                 
Income from operations
    14,746,137       9,716,595  
                 
Other income (expenses):
               
                 
Interest (expense) income, net
    (25,649 )     261,463  
Impairment loss on intangible assets
    -       (431,344 )
Other expenses
    (39,518 )     -  
Total other expenses
    (65,167 )     (169,881 )
                 
Income before provision for income taxes
    14,680,970       9,546,714  
                 
Provision for income taxes
    2,626,143       1,639,104  
                 
Net income
    12,054,827       7,907,610  
                 
Less: Net income attributable to noncontrolling interest
    11,677       -  
                 
Net income attributable to Tianyin Pharmaceutical Co., Inc.
    12,043,150       7,907,610  
                 
Other comprehensive income
               
Foreign currency translation adjustment
    293,696       73,506  
                 
Comprehensive income
  $ 12,336,846     $ 7,981,116  
                 
Basic earnings per share
  $ 0.47     $ 0.41  
Diluted earnings per share
  $ 0.40     $ 0.32  
                 
Weighted average number of common shares outstanding:
               
Basic
    24,427,329       15,937,411  
Diluted
    30,081,685       24,805,281  


The accompanying notes are an integral part of these consolidated financial statements.                                                                                                                                                
 
40

TIANYIN PHARMACEUTICAL CO., INC.

Consolidated Statements of Stockholders’ Equity

                                             
Accumulated
       
                     
Series A
   
Additional
               
other
   
Total
 
   
Common Stock
   
Treasury
   
Preferred Stock
   
Paid in
   
Statutory
   
Retained
   
Comprehensive
   
Stockholders’
 
   
Number
   
Par Value
   
Stock
   
Number
   
Par Value
   
Capital
   
Reserve
   
Earnings
   
Income
   
Equity
 
                                                             
Balance at July 1, 2008
    14,738,450     $ 14,739     $ -       9,384,375     $ 9,384     $ 18,002,439     $ 1,380,806     $ 10,963,131     $ 2,477,874     $ 32,848,373  
     
  Series A conversion
    2,237,875       2,237       -       -       (2,237 )     -       -       -       -       -  
  Net income
    -       -       -       -       -       -       -       7,907,610       -       7,907,610  
  Statutory reserve
    -       -       -       -       -       -       919,001       (919,001 )     -       -  
  Other comprehensive income
    -       -       -       -       -       -       -       -       73,506       73,506  
  Dividend declared
    -       -       -       -       -       1,064,937       -       (1,391,021 )     -       (326,084 )
  Treasury stock
    -       -       (111,587 )     -       -       -       -       -       -       (111,587 )
  Dividend payments in shares and cash
    902,587       903       -       (2,237,875 )     -       378,142       -       (73,944 )     -       305,101  
  Service provider shares/options
    30,000       30       -       -       -       248,996       -       -       -       249,026  
     
Balance at June 30, 2009
    17,908,912     $ 17,909     $ (111,587 )     7,146,500     $ 7,147     $ 19,694,514     $ 2,299,807     $ 16,486,775     $ 2,551,380     $ 40,945,945  
     
  Common shares issued in 2009 funding
    1,534,570       1,535       -       -       -       4,484,539       -       -       -       4,486,074  
  Series A conversion
    5,786,250       5,787       -       (5,786,250 )     (5,787 )     -       -       -       -       -  
  Warrants (options) exercised
    2,096,795       2,095       -       -       -       4,406,657       -       -       -       4,408,752  
  Service provider options/warrants
    -       -       -       -       -       1,037,686       -       -       -       1,037,686  
  Net income
    -       -       -       -       -       -       -       12,043,150       -       12,043,150  
  Statutory reserve
    -       -       -       -       -       -       1,433,076       (1,433,076 )     -       -  
  Other comprehensive income
    -       -       -       -       -       -       -       -       293,696       293,696  
  Dividends declared and paid
    -       -       -       -       -       -       -       (1,409,079 )     -       (1,409,079 )
     
Balance at June 30, 2010
    27,326,527     $ 27,326     $ (111,587 )     1,360,250     $ 1,360     $ 29,623,396     $ 3,732,883     $ 25,687,770     $ 2,845,076     $ 61,806,224  

                                                         The accompanying notes are an integral part of these consolidated financial statements.
 
41

 

TIANYIN PHARMACEUTICAL CO., INC.


Consolidated Statements of Cash Flows

   
For the Years Ended June 30,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net Income
  $ 12,043,150     $ 7,907,610  
Adjustments to reconcile net income to net cash
               
  provided by (used in) operating activities:
               
Depreciation and amortization
    953,767       676,605  
Provision for bad debts
    247,131       81,512  
Loss on disposal of fixed assets
    39,518       -  
Impairment loss on intangible assets
    -       431,344  
Share-based payments
    1,037,686       249,026  
Noncontrolling interest
    11,677       -  
Changes in current assets and current liabilities:
               
Accounts receivable
    (2,770,322 )     (1,223,282 )
Inventory
    239,233       (237,975 )
Other current assets
    606,785       (62,705 )
Accounts payable and accrued expenses
    315,202       49,867  
Accounts payable – construction related
    2,239,231          
VAT taxes payable
    222,833       180,701  
Income tax payable
    366,845       147,897  
Other taxes payable
    (19,223 )     (28,213 )
Dividend payable
    (252,422 )     -  
Other current liabilities
    119,007       164,611  
Total adjustments
    3,356,948       429,388  
                 
Net cash provided by operating activities
    15,400,098       8,336,998  
                 
Cash flows from investing activities:
               
Loans receivable
    (293,340 )     -  
Additions to property and equipment
    (59,946 )     (58,014 )
Additions to construction in progress
    (5,749,230 )     (4,179,902 )
Additions to intangible assets-drug
    (2,742,729 )     (2,417,250 )
Advance payments for intangible assets-drug
    -       (1,188,115 )
                 
Net cash used in investing activities
    (8,845,245 )     (7,843,281 )
                 
Cash flows from financing activities:
               
Proceeds from short-term bank loans
    66,002       -  
Additional paid-in capital
    8,894,828          
Dividend declared and paid
    (1,409,079 )     (73,944 )
Treasury stock
    -       (111,587 )
Proceeds from minority shareholders
    440,010       -  
                 
Net cash provided by (used in) financing activities
    7,991,761       (185,531 )
                 
Effect of foreign currency translation on cash
    110,229       (13,113 )
                 
Net increase in cash and cash equivalents
    14,656,843       295,073  
                 
Cash and cash equivalents at beginning of year
    12,352,223       12,057,150  
                 
Cash and cash equivalents at end of year
  $ 27,009,066     $ 12,352,223  
                 
Supplemental schedule of non-cash activities
               
Advance payments for intangible assets-drug
  $ 808,152     $ -  
                 

The accompanying notes are an integral part of these consolidated financial statements.                                                                                                                                                
 
42

 
TIANYIN PHARMACEUTICAL CO., INC.

Notes To Consolidated Financial Statements
June 30, 2010 and 2009


Note 1 – Organization and Nature of Business

Tianyin Pharmaceutical Co., Inc. (Formerly Viscorp, Inc.), a public shell company as defined in Rule 12b-2 of the Exchange Act of 1934, was established under the laws of Delaware on August 20, 2002. The accompanying consolidated financial statements include the financial statements of Tianyin Pharmaceutical Co., Inc. and its subsidiaries (the “Company” or “Tianyin”). The Company’s primary business is to research, manufacture, and sell pharmaceutical products.

On January 16, 2008, Viscorp Inc. (“Viscorp”) completed a reverse acquisition of Raygere Limited (“Raygere”), which was incorporated in the British Virgin Islands on January 26, 2007. To accomplish the exchange of shares Viscorp issued 12,790,800 shares of common stock on a one to one ratio for a 100% equity interest in Raygere, per the terms of the Share Exchange and Bill of Sale of assets of Viscorp and Charles Driscoll. Viscorp was delivered with zero assets and zero liabilities at time of closing. Following the reverse acquisition, Viscorp changed the name to Tianyin Pharmaceutical Co., Inc. The transaction was regarded as a reverse merger whereby Raygere was considered to be the accounting acquirer as its shareholders retained control of Tianyin after the exchange. Although the Company is the legal parent company, the share exchange was treated as a recapitalization of Raygere. Thus, Raygere is the continuing entity for financial reporting purposes. The financial statements have been prepared as if Raygere had always been the reporting company and then on the share exchange date, had changed its name and reorganized its capital stock.

In September 2007, Raygere acquired 100% interest in Grandway Groups Holdings Ltd. (“Grandway”), which was incorporated on May 25, 2007, in the city of Hong Kong, the People’s Republic of China (“PRC”). On October 30, 2007, Grandway acquired 100% equity interest in Chengdu Tianyin Pharmaceutical Co., Ltd (“Chengdu Tianyin”), which was incorporated on April 1, 1994 in the city of Chengdu, the People’s Republic of China. As a result of the acquisition, Chengdu Tianyin became the wholly owned subsidiary of Grandway and an indirect wholly owned subsidiary or Raygere. The transaction was regarded as a reverse merger whereby Chengdu Tianyin was considered to be the accounting acquirer as both Grandway and Raygere were holding companies with no significant operations and Chengdu Tianyin continues as the primary operating entity even after the exchange, although Raygere is the legal parent company. As such, Chengdu Tianyin (and its historical financial statements) is the continuing entity for financial reporting purposes. The consolidated financial statements reflect all predecessor statements of income and cash flow activities from the inception of Chengdu Tianyin in July 2007.

In June 2009, Chengdu Tianyin invested $723,500 to establish a wholly-owned trading subsidiary, Chengdu Tianyin Medicine Trading Co., Ltd (“Tianyin Medicine Trading”) for sales and distribution of medicine produced by Chengdu Tianyin. As of June 30, 2010, the financial results of Tianyin Medicine Trading are consolidated into the consolidated financial statements presented herein.

On August 21, 2009, Sichuan Jiangchuan Pharmaceutical Co., Ltd (“Jiangchuan”) was established by Chengdu Tianyin, Sichuan Mingxin Pharmaceutical and an individual investor with crude drug production as its major business. Total registered capital of Sichuan Jiangchuan is $2,934,000, of which Chengdu Tianyin accounts for 77%. As of June 30, 2010, registered capital of $1,173,600 has been invested and the results of Jiangchuan are consolidated into the consolidated financial statements presented herein.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United Stated of America. The consolidated financial statements include the accounts of Tianyin Pharmaceutical Co., Inc. and its controlling subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.


 
43

 
TIANYIN PHARMACEUTICAL CO., INC.

Notes To Consolidated Financial Statements
June 30, 2010 and 2009


Note 2 – Summary of Significant Accounting Policies (continued)

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation reserves for accounts receivable, inventory and income taxes. Actual results could differ from those estimates

Cash and Cash Equivalents

In accordance with Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows,” codified in ASC Topic 230, the Company considers all highly liquid instruments with original maturities of three months or less to be “cash equivalents”.

Accounts Receivable

Accounts receivable are stated at the amount management expects to collect from balances outstanding at the end of the period.  Based on its assessment of the credit history with customers having outstanding balances and current relationships with them, management makes conclusions whether any realization of losses on balances outstanding at the end of the period will be deemed uncollectible based on the age of the receivables. The Company reserves 1% of accounts receivable balances that have been outstanding less than one year, and 50% of accounts receivable balances that have been outstanding more than one year. The allowance for doubtful accounts at June 30, 2010 and 2009 was $421,079 and $171,947, respectively.

Inventory

Inventory is stated at the lower of cost or market. Cost is determined using the weighted-average cost method. Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. Management continually evaluates the recoverability based on assumptions about customer demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves or write-downs may be required that could negatively impact our gross margin and operating results. The inventory reserve at June 30, 2010 and 2009 was $139,014 and $138,259, respectively.

Property and Equipment

Property and equipment are stated at cost. Depreciation is calculated based on the straight-line method over the estimated useful lives of the assets as follows:
 
   Vehicles    5 to 10 years  
   Furniture, machinery and equipment   5 to 10 years  
   Buildings and improvements  10 to 50 years  

Construction in progress primarily represents the construction costs of plants.  machinery and equipment Costs incurred are capitalized and transferred to property and equipment upon completion, at which time depreciation commences.

Cost of repairs and maintenance is expensed as incurred. Gain or loss on disposal of property and equipment, if any, is recognized in the consolidated statements of operations.


 
44

 
TIANYIN PHARMACEUTICAL CO., INC.

Notes To Consolidated Financial Statements
June 30, 2010 and 2009


Note 2 – Summary of Significant Accounting Policies (continued)

Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” codified in ASC Topic 360-10-35, the Company reviews the recoverability of its long-lived assets on a periodic basis in order to identify business conditions, which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future discounted cash flows. If the total of the expected future discounted cash flows is less than the total carrying value of the assets, a loss is recognized for the difference between the fair value (computed based upon the expected future discounted cash flows) and the carrying value of the assets.

Intangible Assets

Intangible assets comprised of approved drugs and rights to use land. Intangible asset is carried at cost, less related accumulated amortization. Intangible assets representing approved drugs are separated into two groups: Traditional Chinese Medicine (TCM) and Non Traditional Chinese Medicine (NTCM). TCM are subject to impairment test at least annually to determine if the carrying value of the asset is impaired. NTCM drugs are amortized on a straight-line basis over their estimated useful life of 10 years.

Land use rights with a finite useful life is amortized on a straight line basis over its estimated useful life of 50 years.

Revenue Recognition

The Company derives its revenues primarily from sale of pharmaceutical products. In accordance with the provisions of Staff Accounting Bulletin No. 104, codified in ASC Topic 480, revenue should not be recognized until it is realized or realizable and earned.  Revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. In this regard, the Company’s revenue is recognized when merchandise is received by customers (FOB destination)pursuant to contractual terms of sales, title and risk of loss passes to the customers and the collectability is reasonably assured.
 
Research and Development

Research and development (R&D) costs towards the continued research and modification on marketed products are expensed when incurred. R&D costs for the years ended June 30, 2010 and 2009 was $852,848 and $343,952, respectively.

Advertising Costs

The Company expenses the cost of advertising as incurred. Advertising costs for the years ended June 30, 2010 and 2009 was $3,536,694 and $1,854,214, respectively.

Impairment of Intangible Assets

The Company applies the provisions of Financial Accounting Statement No. 142 “Goodwill and Other Intangible Assets (SFAS 142)” which addresses how goodwill and other acquired intangible assets should be accounted for in financial statements. In this regard, the Company tests these intangible assets for impairment annually or more frequently if indicators of potential impairment are present. Such circumstances could include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the asset against the estimated discounted future cash flows associated with it at a risk-free rate of interest.  Should the present value of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value.

 
45

 
TIANYIN PHARMACEUTICAL CO., INC.
 
Notes To Consolidated Financial Statements
June 30, 2010 and 2009

Note 2 – Summary of Significant Accounting Policies (continued)

Impairment of Intangible Assets (continued)

The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. During the year ended June 30, 2010, the Company applied a five-year benchmark borrowing interest rate of 5.76% as the discount rate and recorded the impairment loss of $0 and $431,344 related to intangible assets for the years ended June 30, 2010 and 2009, respectively.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A valuation allowance is provided to reduce the carrying amount of deferred tax assets if it is considered more likely than not that some portion, or all, of the deferred tax assets will not be realized. No differences were noted between the book and tax bases of the Company’s assets and liabilities, respectively. Therefore, there are no deferred tax assets or liabilities for the years ended June 30, 2009 and 2008. The standard corporate income tax rate has decreased from 33% to 25% beginning on January 1, 2008, when the new Chinese tax law became effective.

The operating subsidiary Chengdu Tianyin is a wholly foreign-owned enterprise incorporated in the PRC and subject to PRC Foreign Enterprise Income Tax (“FEIT”) Law. Chengdu Tianyin is entitled to the preferential tax treatment for opening up its production facility in Western China in Sichuan Province. The applicable reduced preferential state EIT rate under this policy is 15% until December 31, 2010. Accordingly, the Company is subject to Enterprise Income Tax at a rate of 15% on net income. The Company is not subject to any income taxes in the United States.

We are subject to PRC Enterprise Income Tax at a rate of 15% of net income. As domestic invested companies, the effective tax rates of Tianyin Medicine Trading and Sichuan Jiangchuan are both 25% each from their operations.

Fair Value of Financial Instruments

The Company’s financial instruments include cash equivalents, accounts receivable, notes receivable, accounts payable, short-term debt and other financial instruments associated with the issuance of the common stock.  The carrying values of cash equivalents, accounts receivable, notes receivable, and accounts payable approximate their fair value because of the short maturity of these instruments. The carrying amounts of the Company’s bank borrowings under its credit facility approximate fair value because the interest rates are reset periodically to reflect current market rates.
 
The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”) on January 1, 2008.  SFAS 157 has been codified as ASC 820-10, “Fair Value Measurements.”  ASC 820-10, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820-10 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions

Foreign Currency Translation and Transactions

The Company evaluated the determination of its functional currency based on the guidance in ASC Topic, “Foreign Currency Matters,” which provides that an entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash.
 
 
 
 
46

TIANYIN PHARMACEUTICAL CO., INC.
 
Notes To Consolidated Financial Statements
June 30, 2010 and 2009
 

 
On its own, the Company raises financing in U.S. dollars, pays its own operating expenses primarily in U.S. dollars, paid dividends to its shareholders of common stock and expects to receive any dividends that may be declared by its subsidiaries in U.S. dollars.

Therefore, it has been determined that the Company’s functional currency is the U.S. dollar based on the expense and financing indicators, in accordance with the guidance in ASC 830-10-85-5.

The Company uses United States dollars for financial reporting purposes. The subsidiaries within the Company maintain their books and records in their respective functional currency, being the primary currency of the economic environment in which their operations are conducted. Assets and liabilities of a subsidiary with functional currency other than U.S. Dollar are translated into U.S. Dollars using the applicable exchange rates prevailing at the balance sheet date. Items on the statements of income and comprehensive income and cash flows are translated at average exchange rates during the reporting period. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.

Comprehensive Income

The Company has adopted SFAS No. 130, codified in ASC Topic 220-10, Reporting Comprehensive Income, which establishes rules for the reporting and display of comprehensive income, its components and accumulated balances. ASC 220-10 defines comprehensive income to include all changes in equity, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on available-for-sale marketable securities, except those resulting from investments by owners and distributions to owners.

Share -Based Compensation

The Company accounts for stock based compensation issued to non-employees in accordance with SFAS No. 123R, codified in ASC Topic 718, and Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in conjunction with Selling Goods or Services.” EITF No. 96-18 reached a consensus that the issuer should measure the fair value of the equity instruments using the stock price and other measurement assumptions as of the earlier of either of the following: (1) The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a "performance commitment"); or (2) The date at which the counterparty's performance is complete.

Earnings Per Share

In accordance with SFAS No. 128, “Computation of Earnings Per Share” (“SFAS No. 128”) and EITF No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128” (“EITF No. 03-6”),basic earnings per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. The Company’s Series A redeemable convertible preferred shares are participating securities. Diluted earnings per share is calculated by dividing net income attributable to ordinary shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the year. Ordinary equivalent shares consist of the ordinary shares issuable upon the conversion of the convertible preferred shares (using the if-converted method) and ordinary shares issuable upon the exercise of outstanding share options (using the treasury stock method).

Recent Accounting Pronouncements

In January 2010, the FASB expanded the disclosure requirements for fair value measurements relating to the transfers in and out of Level 2 measurements and amended the disclosure for the Level 3 activity reconciliation to be presented on a gross basis. In addition, valuation techniques and inputs should be disclosed for both Levels 2 and 3 recurring and nonrecurring measurements. The new requirements are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about the Level 3 activity reconciliation which are effective for fiscal years beginning after December 15, 2010. The Company adopted the new disclosure requirements on January 1, 2010 except for the disclosure related to the Level 3 reconciliation, which will be adopted on January 1, 2011. The adoption will not have an impact on its consolidated financial condition, results of operations or cash flows.

In October 2009, the FASB issued an amendment to the accounting and disclosure for revenue recognition. The amendment modifies the criteria for recognizing revenue in multiple element arrangements. Under the guidance, in the absence of vendor-specific objective evidence (“VSOE”) or other third party evidence (“TPE”) of the selling price for the deliverables in a multiple-element arrangement, this amendment requires companies to use an estimated selling price (“ESP”) for the individual deliverables. Companies shall apply the relative-selling price model for allocating an arrangement’s total consideration to its individual deliverables. Under this model, the ESP is used for both the delivered and undelivered elements that do not have VSOE or TPE of the selling price. The guidance is effective for the fiscal year beginning on or after June 15, 2010, and will be applied prospectively to revenue arrangements entered into or materially modified after the effective date. The Company intends to adopt the new guidance prospectively beginning January 1, 2011 and is currently evaluating the impact the adoption will have on its consolidated financial statements.
 
 
 
 
47

TIANYIN PHARMACEUTICAL CO., INC.
 
Notes To Consolidated Financial Statements
June 30, 2010 and 2009
 

 
In April 2009, FASB Staff Position (FSP) No. FSP 107-1 and APB 28-1 was issued to amend SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods as well as for annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. FSP 107-1 and APB 28-1 are effective for interim reporting periods ending after June 15, 2009. Adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In April 2009, FSP 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, was issued to provide additional guidance for estimating fair value in accordance with SFAS No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased.

This FSP also provides guidance on identifying circumstances which indicate that a transaction is not orderly. FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

Note 3– Inventory

Inventory at June 30, 2010 and 2009 consists of the following:

     June 30, 2010      June 30, 2009  
                 
Raw materials
  $ 268,443     $ 1,104,461  
                 
Work in process
    1,798,555       1,314,344  
Finished goods
    1,326,441       1,115,429  
Subtotal
    3,727,838       3,946,548  
Less: Inventory reserve
    139,014       138,259  
    Total
  $ 3,588,824     $ 3,808,289  

Note 4– Property and Equipment

Property and equipment at June 30, 2010 and 2009 consists of the following:

     June 30, 2010      June 30, 2009  
             
Buildings
  $ 8,784,057     $ 5,175,726  
Machinery and equipment
    2,640,194       1,200,827  
Office equipment and furniture
    56,145       48,777  
Vehicles
    63,045       397,340  
    Subtotal
    11,543,441       6,822,670  
Less: Accumulated depreciation
    2,348,544       2,165,795  
      9,194,897       4,656,875  
Add: Construction in progress
     5,773,925        4,985,651  
    Total
  $ 14,968,822     $ 9,642,526  

Depreciation expense for the fiscal years ended June 30, 2010 and 2009 was $518,573 and $378,038, respectively.

Note 5– Intangible Assets

Intangible assets at June 30, 2010 and 2009 consist of the following:

     June 30, 2010      June 30, 2009  
             
Land use rights
  $ 1,458,270     $ 1,450,350  
Approved drugs
    14,752,578       11,125,690  
   Intangible assets
    16,210,848       12,576,040  
Less: accumulated amortization
    978,562       538,557  
    Total
  $ 15,232,286     $ 12,037,483  
                 
 
 
 
 
48

TIANYIN PHARMACEUTICAL CO., INC.
 
Notes To Consolidated Financial Statements
June 30, 2010 and 2009
 
 
Amortization expense for the fiscal years ended June 30, 2010 and 2009 was $435,194 and $298,567, respectively. The estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows:
  
For the Year Ending June 30,
Estimated Amortization Expense
 2011
 $ 499,090
 2012  
 $ 598,913
 2013
 $ 678,588
 2014 
 $ 766,588
 2015
   $ 862,412
 

Note 6 – Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

   
June 30, 2010
   
June 30, 2009
 
             
Accounts payable
  $ 1,535,781     $ 1,182,714  
Accrued expenses
    180,000       209,925  
    Total
  $ 1,715,781     $ 1,392,639  

The carrying value of accounts payable and accrued expenses approximates their fair value due to the short-term nature of these obligations.

Note 7 – Short-Term Bank Loans

Short-term bank loans consist of the following:

   
June 30, 2010
   
June 30, 2009
 
             
On July 11, 2008, the Company obtained a loan from Agricultural Bank of
           
China, out of which the principal is to be paid in full by July 10, 2009.The interest
           
is to be calculated using an annual fixed interest rate of 7.881% and paid
           
monthly. The loan is secured by the Company’s property and equipment.
  $ -     $ 520,075  
                 
On June 24, 2009, the Company obtained a loan from Agricultural Bank of
               
China, out of which the principal is to be paid in full by June 23, 2010.The interest
               
is to be calculated using an annual fixed interest rate of 5.6286% and paid