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EX-32.2 - EXHIBIT 32.2 - Shangri-La Tibetan Pharmaceuticals, Inc.v232460_ex32-2.htm
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EX-31.2 - EXHIBIT 31.2 - Shangri-La Tibetan Pharmaceuticals, Inc.v232460_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Shangri-La Tibetan Pharmaceuticals, Inc.v232460_ex31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - Shangri-La Tibetan Pharmaceuticals, Inc.Financial_Report.xls

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 

FORM 10-Q/A
First Amendment

  
x
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the three and six month periods ended June 30, 2011
 
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from              to             .
 
Commission File Number 001-35038


Tibet Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
 

   
British Virgin Islands
 
Not Applicable
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification number)
 
Tibet Pharmaceuticals, Inc.
Room 1701, 17/F
90 Jaffe Rd.
Wanchai, Hong Kong
(Address of principal executive offices and zip code)
 
(852) 9798 5569
(Registrant’s telephone number, including area code)


Securities registered under Section 12(b) of the Exchange Act:
 
Title of each class
 
Name of each exchange on which registered
Common shares, $0.001 par value per share
 
NASDAQ Global Market
 
Securities registered under Section 12(g) of the Exchange Act:
None.

  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
 
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
       
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
The Company is authorized to issue 50,000,000 Shares. As of the date of this report, the Company has issued and outstanding 14,845,834 Shares.
 
Explanatory Note: The Registrant is filing this amendment for the sole purposes of (i) including XBRL files required to be filed within 30 days of the filing of this Form 10-Q and (ii) supplementing the previously filed Management's Discussion and Analysis with comparisons of the three months ended June 30, 2011 and 2010. Other than as described above, the Form 10-Q is identical to the previously filed Form 10-Q. The Registrant has filed the entire Form 10-Q/A as a convenience to allow shareholders to review the entire document in a single location.
 
 
 

 
TIBET PHARMACEUTICALS, INC.
FORM 10-Q
 
INDEX

PART I. FINANCIAL INFORMATION
1
Item 1.
Financial Statements
1
Item 2.
Management’s Discussion and Analysis of Financial Conditions and Results of Operations
1
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
6
Item 4.
Controls and Procedures
6
PART II. OTHER INFORMATION 6
  6
Item 1.
Legal Proceedings
6
Item 1A.
Risk Factors
6
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
6
Item 3.
Defaults upon Senior Securities
7
Item 4.
Submission of Matters to a Vote of Security Holders
7
Item 5.
Other Information
7
Item 6.
Exhibits
7
 
 
i

 
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
We have made statements in this quarterly report that constitute forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “could” and similar expressions. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.
 
Examples of forward-looking statements include:
 
projections of revenue, earnings, capital structure and other financial items;
 
 
statements of our plans and objectives;
 
 
statements regarding the capabilities and capacities of our business operations;
 
 
statements of expected future economic performance; and
 
 
assumptions underlying statements regarding us or our business.
 
The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. Many factors could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Consequently, you should not place undue reliance on these forward-looking statements.
 
The forward-looking statements speak only as of the date on which they are made, and, except as required by law; we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
 
In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
 
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update this forward-looking information. Nonetheless, the Company reserves the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this Report. No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.
 
 
ii

 
 
PART I. FINANCIAL INFORMATION
 
Item 1.       Financial Statements
 
See the financial statements following the signature page of this report, which are incorporated herein by reference.
 
Item 2.       Management’s Discussion and Analysis of Financial Conditions and Results of Operations
 
The following discussion and analysis of our company’s financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes included elsewhere in this report. In this report, the terms “we,” “the Company,” “TBET,” “our company,” and “our” refer to Tibet Pharmaceuticals, Inc., a British Virgin Islands company.  “CTP” refers to, China Tibetan Pharmaceuticals Limited (Hong Kong) Limited, our wholly-owned subsidiary (Hong Kong).  “WFOE” refers to CTP’s wholly-owned subsidiary Yibo Information Consulting (Shenzhen) Company Ltd. (People’s Republic of China), and “YSTP” refers to Yunnan Shangri-La Tibetan Pharmaceutical Group Limited, our operating subsidiary in the People’s Republic of China.
 
This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors.
 
Overview
 
The Company focuses on the research, development, manufacturing, marketing and selling of modernized traditional Tibetan medicines in China. All of the Company’s current products are offered and derived from Tibetan- based traditional medicines and are manufactured by YSTP using plant based natural materials, particularly the herbs and minerals found in the high- altitude, low-temperature, and pollution-free environment of Qinghai-Tibet Plateau. As of June 30, 2011, the Company sold 5 prescription and over-the-counter Tibetan medicine products.  Each has been approved by China’s SFDA as having medicinal purpose and having demonstrated safety and efficacy for the treatment of one or more therapeutic indications.
 
In the last two years, YSTP’s business has grown rapidly as a result of China’s strengthening economy, the strong demand in China for traditional Chinese and Tibetan medicines, the government’s efforts to improve health care in China, and the increase in the number of elderly people in China.
 
For the six-month periods ended June 30, 2011 and June 30, 2010, the Company’s total revenues amounted to approximately $16.98 million and $14.85 million, respectively. Net income attributable to TBET was $6.10 million and $6.23 million, respectively.
 
Critical Accounting Policies
 
Revenue Recognition
 
The Company’s revenue recognition policies are in compliance with the Revenue Recognition Topic of the FASB Accounting Standards Codification (“ASC 605”) and the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured.
 
Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
 
 
1

 
 
The Company has distributor arrangements with certain parties for sale of its pharmaceutical products. The distributor agreements do not provide chargeback, price protection, or stock rotation rights. Accordingly, revenue is recognized when products are delivered to and received by the distributors.
 
If the products sold have quality issues, the Company is responsible because of the product warranty included in each sale. However, the customers cannot return merchandise without permission of the Company. The return is recorded on the date the return is authorized. A quality warranty reserve provision has been made for the anticipated cost to replace items. The quality reserve accruals, in amounts of $1,097,503 and $977,612 as of June 30, 2011 and June 30, 2010, respectively, were included in the accrued expenses and other payables on the consolidated balance sheets.
 
Revenues are recorded net of value-added taxes.
 
Prepaid Expenses
 
Advertising expenses consist primarily of costs of promotion for corporate image and product marketing and costs of direct advertising; the figure does not include the costs of developing and supporting our distribution network or the costs of direct marketing to actual and prospective customers. The Company records payments made to advertising companies for the purpose of reserving prime-time advertising space as prepaid expenses in the consolidated balance sheet. The Company expenses the prepaid advertising amount when the advertisement is published or aired. All other advertising costs are expensed as incurred. For the six-month periods ended June 30, 2011 and June 30, 2010, prepaid advertising costs were $64,985 and $61,934, respectively.
 
Prepaid expenses also include expenses associated with obtaining Good Manufacturing Practices (“GMP”) certification, which expenses are being amortized during the period of the certificate of authentication. GMP is a Chinese government certification program available to Chinese pharmaceutical producers.
 
Research and development costs
 
Research and development costs are incurred in the development of the new products and processes, including significant improvements and refinements to existing products. All research and development costs are expensed as incurred. Expenses recorded for the six-month periods ended June 30, 2011 and June 30, 2010 were approximately $287,258 and $289,413 respectively.
 
Advertising Expense
 
The Company expenses its advertising costs when the expense is incurred. Advertising expense for the six-month periods ended June 30, 2011 and June 30, 2010 were approximately $64,140 and $61,729, respectively.
 
Cash and Cash Equivalents
 
Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. At June 30, 2011 and December 31, 2010, cash and cash equivalents totals were $29,518,598 and $7,579,283, respectively.  The June 30, 2011 total reflects the receipt of proceeds of the Company’s January 24, 2011 initial public offering (“IPO”) of three million shares of its common stock at an offering price of $5.50.
 
Comprehensive Income
 
The Company follows the Comprehensive Income Topic of the FASB Accounting Standards Codification (“ASC 220”). Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.
 
 
2

 
 
Basis of Presentation
 
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). The Company’s functional currency is the Chinese Renminbi; however, the accompanying consolidated financial statements have been translated and presented in United States Dollars. These financial statements are prepared on a historical pro forma basis. The consolidated financial statements include the accounts of the Company, its subsidiary and variable interest entity (“VIE”) for which the Company is the primary beneficiary. All inter-company accounts and transactions have been eliminated in the consolidation. Please also refer to Note 1 of the Company’s financial statements which follow the signature page of this report for the discussion on accounting for the reorganization and acquisition. These financial statements have been prepared on a historical pro-forma basis.
 
Translation Adjustment
 
As of June 30, 2011 and June 30, 2010, respectively, the accounts of the Company were maintained, and its financial statements were expressed, in Chinese Yuan Renminbi (“CNY”). Such financial statements were translated into U.S. Dollars (“USD”) in accordance with the Foreign Currency Matters Topic of the FASB Accounting Standards Codification (“ASC 830”), with the CNY as the functional currency. According to ASC 830, all assets and liabilities were translated at the current exchange rate, stockholders’ equity is translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with the Comprehensive Income Topic of the FASB Accounting Standards Codification (“ASC 220”), as a component of shareholders’ equity. Transaction gains and losses are reflected in the income statement.
 
Impairment of Long-lived Assets
 
The Company adopted the Property, Plant and Equipment in accordance with FASB Accounting Standard Codification (“ASC 360”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business.” The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of June 30, 2011 and June 30, 2010, there were no impairments of its long-lived assets.
 
Factors Affecting Results of Operations – Generally
 
The Company believes the most significant factors that directly or indirectly affect sales revenues and net income are:
 
 
global economic conditions;
 
 
the changes in China’s macro-economic environment and healthcare-related government strategies and policies;
 
 
the increase in number of elderly people and their perception and acceptance of traditional Tibetan medicine as effective, having fewer side effects, and being a safe alternative to western medicines;
 
 
the Company’s ability to attract and retain distributors, key customers and direct sales force;
 
 
the Company’s ability to selectively pursue strategic acquisitions and licensing opportunities;
 
 
new product introductions by the Company and its competitors; and
 
 
the Company’s ability to price its products at levels that provide favorable margins.
 
 
3

 
 
Results of Operations
 
Comparison of the Three Months Ended June 30, 2011 and 2010:
 
   
For Three-Month Periods Ended June 30,
 
   
2011
   
2010
   
Change
 
   
Amount ($)
   
% of Total Revenue
   
Amount ($)
   
% of Total Revenue
   
Amount ($)
   
%
 
Revenue
    8,746,125             7,831,878             914,247       11.7 %
Cost of goods sold
    (4,880,369 )     55.8 %     (3,740,344 )     47.8 %     (1,140,025 )     30.5 %
Gross profit
    3,865,756       44.2 %     4,091,534       52.2 %     (225,778 )     (5.5 ) %
                                                 
Total operating expenses
    (363,444 )     4.2 %     (668,010 )     8.5 %     304,566       (45.6 ) %
Operating income
    3,502,312       40.0 %     3,423,524       43.7 %     78,788       2.3 %
 
Total revenue was approximately $8.75 million for the three months ended June 30, 2011 as compared to approximately $7.83 million for the three months ended June 30, 2010.  This represents an increase of approximately $0.91 million, or 11.7%, which was primarily due to continuous growth in sales of the Company’s existing five commercialized products. The Company’s sales volume for the three months ended June 30, 2011 increased 11.43% compared to the same period in 2010. As of June 30, 2011, revenues generated from sales of YSTP’s 25 Ingredients Mandrake Pill, its largest revenue producer, increased 43.12% from $2.93 million in the three months ended June 30, 2010 to $4.20 million in the same period in 2011. Expansion of YSTP’s existing distributor network also contributed to increases in the Company’s revenue during the three months ended June 30, 2011.
 
YSTP’s gross profit margin decreased from 52.2% in the three months ended June 30, 2010 to 44.2% in the same period of 2011, mainlydue to rising price of raw materials used in the Company’s products.  Raw material prices increased somewhat beginning in the second half of 2010.
 
Selling expenses decreased by $0.52 million, or 167.36%, from $0.31 million in the three months ended June 30, 2010, to $(0.21) million in the same period of 2011. The decrease mainly resulted from the offset of accruals for quality warranty by $0.40 million.  
 
Research and development costs decreased by $949, or 0.67%, from $141,344 in the three months ended June 30, 2010 to $140,395 in the same period of 2011. The Company plans to spend about the same dollar amount on its research and development activities in 2011.
 
Other general and administrative expenses increased approximately by $0.22 million, or 101%, from $0.21 million in the three months ended June 30, 2010, to $0.43 million in the same period of 2011, primarily as a result of the bad debt reserved in accordance with the Company policy.
 
Net interest expense was $0 in the three months ended June 30, 2011, compared to net interest expense of $45,311 in the same period of 2010.
 
The Company’s net income for the three months ended June 30, 2011 and 2010 were $3,534,799 and $3,379,965, respectively. The increase in net income is primarily a result of the decrease in total operating expenses.
 
Comparison of the Six Months Ended June 30, 2011 and 2010:
 
 
  
For Six-Month Periods Ended June 30,
 
 
  
2011
   
2010
   
Change
 
 
  
Amount ($)
   
% of Total
Revenue
   
Amount ($)
   
% of Total
Revenue
   
Amount ($)
   
%
 
Revenue
  
 
16,982,685
  
   
—  
  
   
14,851,362
  
   
—  
  
   
2,131,323
  
   
14.4
Cost of goods sold
  
 
(9,642,180
   
57
   
(7,216,188
   
49
   
(2,425,992
   
33.6
Gross profit
  
 
7,340,505
  
   
43
   
7,635,174
  
   
51
   
(294,669)
  
   
(3.9)
 
  
                                             
Total operating expenses
  
 
(1,285,313
   
7.6
   
(1,321,150
   
9
   
35,837
     
(2.7)
Operating income
  
 
6,055,192
  
   
35.6
   
6,314,024
  
   
42
   
(258,833)
  
   
(4)
 
Total revenue was approximately $16.98 million for the six months ended June 30, 2011 as compared to approximately $14.85 million for the six months ended June 30, 2010.  This represents an increase of approximately $2.13 million, or 14.4%, growth that was primarily due to continuous growth in sales of the Company’s existing five commercialized products. The Company’s sales volume for the six months ended June 30, 2011 increased 13.2% compared to the same period in 2010. As of June 30, 2011, revenues generated from sales of YSTP’s 25 Ingredients Mandrake Pill, its largest revenue producer, increased 31.3% from $6.16 million in the six months ended June 30, 2010 to $8.09 million in the six months of 2011. Expansion of YSTP’s existing distributor network also contributed to increases in the Company’s revenue during the six months ended June 30, 2011.
 
YSTP’s gross profit margin decreased from 51% in the six months ended June 30, 2010 to 43% in the same period of 2011, due to rising price of raw materials used on the Company’s products.  Raw material prices increased somewhat beginning in the second half of 2010.
 
Selling expenses decreased by $435,508, or 73%, from $598,237 in the six months ended June 30, 2010, to $162,729 in the same period of 2011. The decrease resulted from a decrease in accruals for quality warranty by $520,708 and was offset by increases in sales salaries, sample fees and utilities.  
 
Research and development costs decreased by $2,155, or 0.7%, from $289,413 in the six months ended June 30, 2010 to $287,258 in the same period of 2011. The Company plans to spend about the same dollar amount on its research and development activities in 2011.
 
Other general and administrative expenses increased by $401,826, or 92.7%, from $433,500 in the six months ended June 30, 2010, to $835,326 in the same period of 2011, primarily as a result of business expansion and the issuance of stock to the Company’s investor relations/public relations firm, Trilogy Capital Partners, Inc.
 
Net interest expense was $0 in the six months ended June 30, 2011, compared to net interest expense of $90,625 in the same period of 2010.
 
The Company’s net income for the six months ended June 30, 2011 and 2010 were $6,100,311 and $6,227,846, respectively. The decrease in net income is primarily a result of rising price of raw materials.
 
Liquidity and Capital Resources
 
As highlighted in the consolidated statements of cash flows, the Company’s liquidity and available capital resources are impacted by four key components: (i) cash and cash equivalents, (ii) operating activities, (iii) financing activities, and (iv) investing activities.
 
 
 
4

 
 
Statement of Consolidated Cash Flows Ended June 30, 2011 and 2010
 
 
  
For the six months ended
June 30, 2011
($)
   
For the six months ended
June 30, 2010
($)
   
Change
($)
 
Net cash provided by operating activities
  
 
7,052,774
  
   
4,529,109
  
   
2,523,665
 
Net cash provided by investing activities
  
 
0
     
1,413,394
  
   
(1,413,394
Net cash provided by (used in) financing activities
  
 
14,420,401
     
(2,378,567
)
   
16,798,968
  
Effects of exchange rate
  
 
466,140
  
   
51,448
     
414,692
  
Cash, beginning of period
  
 
7,579,283
  
   
4,081,752
  
   
3,497,531
  
Increase in cash
  
 
21,939,315
  
   
3,615,384
  
   
18,323,930
  
Cash, end of period
  
 
29,518,598
  
   
7,697,136
  
   
21,821,462
  
 
Cash Flows and Working Capital
 
As of June 30, 2011, the Company had working capital of $38,302,666, including cash of $29,518,598. The Company’s cash includes cash-in-hand and bank savings.
 
Cash Provided by Operating Activities
 
Net cash provided by operating activities was $7,052,774 in the six months ended June 30, 2011, compared to $4,529,109 provided in the same period of 2010. The $2,523,665 increase in cash from operating activities in the six months ended June 30, 2011 was due to a decrease in net income of $127,536, and a decrease in accrued expenses and other payables of $523,961, a decrease in other receivables of $99,283. These cash decreases were offset by an increase in account receivables of $1,407,135, an increase in bad debt reserve of $125,010, an increase in inventory of $389,894, an increase in prepaid expenses of $58,473, and an increase in accounts payable of $1,058,300, an increase in trade deposit paid of $1,491, an increase in value-added tax payable of $114,770 and an increase in stock compensation of $150,836. Non-cash transactions consisted of the following: (i) $373,940 in depreciation and (ii) $173,978 in amortization.
 
Cash Used in Investing Activities
 
Net cash provided by investing activities was $0 in the six months ended June 30, 2011, compared to $1,413,394 in the same period of 2010.
 
Cash Used in Financing Activities
 
The cash generated from financing activities was $14,420,401 in the six months ended June 30, 2011, compared to a net cash of $2,378,567 used in the same period of 2010. The Company IPO consisted of an offering of 3,000,000 of the Company’s common shares at $5.50 per share. The gross proceeds of the offering were $16,500,000, associated financing costs were $2,079,599, and the net proceeds received by the Company totaled $14,420,401.
 
Effect of change in exchange rate
 
Net cash gain due to currency exchange was $466,140 in the six months ended June 30, 2011, compared to a gain of $51,448 in the same period of 2010.
 
Off-Balance Sheet Arrangements
 
The Company does not have any off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to its investors.
 
Contractual Obligations
 
The Company does not have any outstanding contractual obligations as of June 30, 2011.
 
 
5

 
 
Item 3.        Quantitative and Qualitative Disclosures about Market Risk
 
Not applicable.
 
Item 4.        Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Our Company maintains a system of controls and procedures designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
As of June 30, 2011, our company carried out an evaluation, under the supervision of and with the participation of management, including our company’s chief executive officer and chief financial officer, of the effectiveness of the design and operation of our company’s disclosure controls and procedures. Based on the foregoing, the chief executive officer and chief financial officer concluded that our company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective in timely alerting them to information required to be included in our Company’s periodic Securities and Exchange Commission filings.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in our company’s internal controls over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the three or six months ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our company’s internal control over financial reporting.
 
PART II. OTHER INFORMATION
 
Item 1.       Legal Proceedings
 
None.
 
Item 1A.     Risk Factors
 
Not applicable, as the Registrant is a smaller reporting company.
 
Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds
 
(a) None.
 
(b) The Section entitled “Use of Proceeds” appearing in the registration statement filed with the Commission on May 14, 2010, as amended (file no. 333-166854) (the “Registration Statement”) and the prospectus filed pursuant to Rule 424(b)(3) of the Securities Act of 1933 (the “Securities Act”) on January 11, 2011 (the “IPO Prospectus”) is incorporated by reference. The effective date of the Registration Statement was December 28, 2010. The Registration Statement registered the offering of up to 3,000,000 common shares (the “Offering”). As of June 30, 2011, the Company had received the proceeds of the offering, had not yet applied it to any use, and is holding the proceeds in a bank account pending their use.
 
 
6

 
(c) None.
 
Item 3.       Defaults upon Senior Securities
 
None.
 
Item 4.       Submission of Matters to a Vote of Security Holders
 
Not applicable.
 
Item 5.        Other Information
 
None.
 
Item 6.        Exhibits
 
The following documents are filed herewith:

Exhibit
Number
 
Document
     
 3(i).1
 
Articles of Association of the Registrant (1)
     
 3(i).2
 
Amended and Restated Articles of Association of the Registrant (1)
     
 3(i).3
 
Articles of Association of Registrant reflecting name change (1)
     
3(ii).1
 
Memorandum of Association of the Registrant (1)
     
3(ii).2
 
Amended and Restated Memorandum of Association of Registrant (1)
     
3(ii).3
 
Memorandum of Association of Registrant reflecting name change (1)
     
     4.1
 
Specimen Share Certificate (1)
     
   10.1
 
Translation of Entrusted Management Agreement for YSTP (1)
     
   10.2
 
Translation of Shareholder Voting Proxy Agreement for WFOE (1)
     
   10.3
 
Translation of Pledge of Equity Interest Agreement for WFOE (1)
     
   10.4
 
Translation of Exclusive Option Agreement for YSTP (1)
     
   10.5
 
Form of Lock-Up Agreement (1)
     
   10.6
 
Translation of Medicinal Materials Procurement Contract (Ba Sang) (1)
     
   10.7
 
Translation of Medicinal Materials Procurement Contract (Chun Sheng) (1)
     
   10.8
 
Translation of Medicinal Materials Procurement Contract (Cili Peichu) (1)
     
   10.9
 
Translation of Medicinal Materials Procurement Contract (Kunming Morningstar Printing Co.) (1)
 
 
7

 
 
   10.10
 
Translation of Medicinal Materials Procurement Contract (Xiong Ba) (1)
     
   10.11
 
Translation of Sales Contract (Hangzhou Hesheng Medicine Co. Ltd) (1)
     
   10.12
 
Translation of Sales Contract (Kunming Shangri-La Medicine Co. Ltd.) (1)
     
   10.13
 
Translation of Agreement on Prescription and Industrialization Development of Tibetan Medicine (Kunming Institute of Botany of Chinese Academy Of Sciences) (1)
     
   10.14
 
Translation of Agreement on Research into Tibetan Medicine Pharmacology and Effect (Second Military Medical University of Chinese People’s Liberation Army) (1)
     
   10.15
 
Retainer Contract (Sabrina Ren) (1)
     
   10.16
 
Retainer Contract (Hong Yu) (1)
     
   21.1
 
Subsidiaries of the Registrant (1)
     
   31.1
  
Certifications pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2)
     
   31.2
  
Certifications pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2)
     
   32.1
  
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)
     
   32.2
  
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)
     
   99.1
  
Code of Business Conduct and Ethics (1)
     
   99.2
  
Audit Committee Charter (3)
     
   101
  The following materials from the Tibet Pharmaceuticals, Inc. Form 10-Q for the quarter ended June 30, 2011 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income and Comprehensive Income, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Stockholders' Equity and (v) related notes, tagged as blocks of text. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Section 11 and 12 of the Securities Act and Section 18 of the Exchange Act.
 

(1)
Incorporated by reference from registration statement filed with the Commission on May 14, 2010, as amended (file no. 333-166854).
(2)
Filed herewith.
(3)
Incorporated by reference from the registrant’s annual report on Form 10-K, File no. 001-35038, filed on March 30, 2011.
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, in Shangri-La County, Diqing, Yunnan Province, China, on August 26, 2011.
 
 
TIBET PHARMACEUTICALS, INC.
   
 
/s/    Hong Yu
 
Hong Yu
 
Chief Executive Officer
 
(Principal Executive Officer)
   
 
Date: August 26, 2011
 
 
8

 
 
TIBET PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
 
 
  
June 30,
2011
(Unaudited)
 
  
December 31,
 2010
 
ASSETS
  
     
  
     
Current Assets
  
     
  
     
Cash and cash equivalents
  
$
29,518,598
  
  
$
7,579,283
  
Accounts receivable- related party
  
 
3,700,297
  
  
 
3,170,048
  
Accounts receivable- non-related party (net of bad debt reserve of $125,010 and $0 respectively)
  
 
8,592,423
  
  
 
9,076,045
  
Other receivables
  
 
107,535
  
  
 
105,115
  
Inventories
  
 
1,255,543
  
  
 
1,197,066
  
 
  
     
  
     
Total current assets
  
 
43,174,396
  
  
 
21,127,557
  
Property, plant and equipment, net
  
 
5,929,331
  
  
 
6,166,243
  
Intangible assets
  
 
515,241
  
  
 
600,443
  
Prepaid expenses
  
 
296,725
  
  
 
302,033
  
 
  
     
  
     
Total Assets
  
$
49,915,693
  
  
$
28,196,276
  
 
  
     
  
     
LIABILITIES AND STOCKHOLDERS’ EQUITY
  
     
  
     
Current Liabilities
  
     
  
     
Accounts payable
  
$
3,161,182
  
  
$
2,877,746
  
Accrued expenses and warranty reserve
  
 
1,775,535
  
  
 
1,836,840
  
Total current liabilities
  
 
4,936,717
 
  
 
 4,714,586
 
 
  
     
  
     
Stockholders’ Equity:
  
     
  
     
Common stock, $0.001 par value, 50,000,000 shares authorized, 14,845,834 and 11,812,500 issued and outstanding as of June 30, 2011 and December 31, 2010 respectively
  
 
14,845
  
  
 
11,812
  
Additional paid in capital
  
 
23,063,969
  
  
 
8,495,765
  
Retained earnings
  
 
15,594,279
  
  
 
9,493,969
  
Accumulated Other Comprehensive Income
  
 
2,164,980
 
  
 
1,339,241
  
Statutory reserve
  
 
4,140,903
  
  
 
4,140,903
  
 
  
     
  
     
Total stockholders’ equity
  
 
44,978,976
  
  
 
23,481,690
  
 
  
     
  
     
Total Liabilities and Stockholders’ Equity
  
$
49,915,693
  
  
$
28,196,276
  

The accompanying notes are an integral part of these financial statements.
 
 
F-1

 
 
TIBET PHARMACEUTICALS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

   
Six months ended June 30,
   
Three months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Sales
  $ 16,982,685     $ 14,851,362     $ 8,746,125     $ 7,831,878  
Cost of sales
    (9,642,180 )     (7,216,188 )     (4,880,369 )     (3,740,344 )
                                 
Gross profit
    7,340,505       7,635,174       3,865,756       4,091,534  
Selling, general and administrative expense
    (1,285,313 )     (1,321,150 )     (363,444 )     (668,010 )
Income from operations
    6,055,192       6,314,024       3,502,312       3,423,524  
                                 
Interest income
    48,298       6,680       34,071       2,976  
Interest expense and bank charges
    (3,179 )     (92,858 )     (1,584 )     (46,535 )
Total Other Income (Expense)
    45,119       (86,178 )     32,487       (43,559 )
                                 
Income before income taxes
    6,100,311       6,227,846       3,534,799       3,379,965  
                                 
Income taxes
                       
Net income
    6,100,311       6,227,846       3,534,799       3,379,965  
Other comprehensive income
    825,739       93,062       699,533       91,584  
                                 
Comprehensive income
  $ 6,926,050     $ 6,320,908     $ 4,234,332     $ 3,471,549  
Weighted average common shares outstanding
    14,336,699       11,797,914       14,336,699       11,797,914  
Basic and diluted
  $ 0.43     $ 0.53     $ 0.25     $ 0.29  

The accompanying notes are an integral part of these financial statements.
 
 
F-2

 
 
TIBET PHARMACEUTICALS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010

   
Six months ended June 30,
 
 
  
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
  
             
Net income
  
$
6,100,311
  
 
$
6,227,846
  
Adjustments to reconcile net income to net cash provided by
  
             
Operating activities:
  
             
Depreciation
  
 
 373,940
  
   
353,152
  
Amortization
  
 
   173,978
  
   
226,230
  
Bad Debt Reserve
   
125,010
     
 
Stock based compensation
   
150,836
     
 
Changes in assets and liabilities provided/(used) cash
  
             
Accounts receivable
  
 
110,291
     
(1,296,844)
 
Trade deposit paid
  
 
  
   
97,793
 
Inventories
  
 
   (30,918)
  
   
(420,812)
  
Prepaid expenses
  
 
 (64,985)
  
   
(123,459)
  
Accounts payable
  
 
222,187
     
(836,113)
  
Accrued expenses and warranty reserve
  
 
 (244,293)
  
   
279,668
  
Value-added tax payable
  
 
 136,417
  
   
21,648
 
 
  
             
Net cash provided by operating activities
  
 
7,052,774
  
   
4,529,109
  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
  
             
Due from shareholder
   
     
1,553,115
 
Purchase of property & equipment
   
     
(139,721)
 
Net cash provided by operating activities
  
 
  
   
1,413,394
  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
  
             
IPO Proceeds
  
 
14,420,401
     
 
Dividend paid
   
     
(2,498,567)
 
Issuance of Common
   
     
120,000
 
Net cash provided (used) in financing activities
  
 
14,420,401
     
(2,378,567)
 
 
  
             
Effect of exchange rate changes on cash and cash equivalents
  
 
466,140
  
   
51,448
  
NET CHANGE IN CASH AND CASH EQUIVALENTS
  
 
21,939,315
  
   
3,615,384
  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
  
 
7,579,283
  
   
4,081,752
  
 
  
             
CASH AND CASH EQUIVALENTS, END OF PERIOD
  
$
29,518,598
  
 
$
7,697,136
  

The accompanying notes are an integral part of these financial statements.
 
 
F-3

 
 
TIBET PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
 
    
Shares of
Common
Stock
Outstanding
   
Common
Stock
   
Additional
Paid-in
Capital
   
Accumulated
Retained
Earnings
   
Statutory
Reserve
   
Accumulated
Other
Comprehensive
Income/(Loss)
   
Total
   
Due from
stockholder
   
Total
Stockholders’
Equity
 
Balance, January 1, 2010
    11,782,500     $ 11,782     $ 8,375,795     $ 193,793     $ 2,811,323     $ 694,588     $ 12,087,281     $ (1,550,085 )   $ 10,537,196  
Stock based compensation
    30,000       30       119,970                               120,000               120,000  
Net income
                            13,142,085                       13,142,085               13,142,085  
Distribution
                            (2,512,330 )                     (2,512,330 )             (2,512,330
Transfer to statutory reserve
                            (1,329,580 )     1,329,580                                  
Foreign currency translation adjustments
                                            644,653       644,653               644,653  
Change in due from stockholder
                                                            1,550,085       1,550,085  
Balance, December 31, 2010
    11,812,500     $ 11,812     $ 8,495,765     $ 9,493,968     $ 4,140,903     $ 1,339,241     $ 23,481,689     $     $ 23,481,689  
Stock issuance
    3,000,000       3,000       14,417,401                               14,420,401               14,420,401  
Stock based compensation
    33,334       33       150,803                               150,836               150,836  
Net income
                            6,100,311                       6,100,311               6,100,311  
Distribution-Net Income
                            .                       0                  
Transfer to Statutory Reserve
                                                    0               0  
Foreign currency translation
                                            825,739       825,739               825,739  
Change in due from stockholder
                                                                       
Balance, June 30, 2011
    14,845,834     $ 14,845     $ 23,063,969     $ 15,594,279     $ 4,140,903     $ 2,164,980     $ 44,978,976           $ 44,978,976  
 
The accompanying notes are an integral part of these financial statements.
 
 
F-4

 
 
TIBET PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
Note 1 – ORGANIZATION AND NATURE OF OPERATIONS
 
Tibet Pharmaceuticals Inc. (formerly known as Shangri-La Tibetan Pharmaceuticals, Inc., the “Company”), was incorporated on December 22, 2009 under the laws of British Virgin Islands. In July 2010, the Company changed its name to Tibet Pharmaceuticals, Inc. China Tibetan Pharmaceuticals Limited (“CTP”), the Company’s 100% owned subsidiary, was established in Hong Kong on January 6, 2010 as a limited liability company. Other than the equity interest in CTP, the Company does not own any assets or conduct any operations. CTP holds all of the outstanding equity interest in Yibo Information Consulting (Shenzhen) Company Ltd., a company established on March 18, 2010 in the PRC as a wholly foreign owned enterprise (“WFOE”). Other than the equity interest in WFOE, CTP does not own any assets or conduct any operations. Yunnan Diqing Shangri-La Tibetan Medicine Co., Ltd was incorporated on April 19, 2000 as a domestic Chinese corporation. On December 24, 2002, it changed its name to Yunnan Shangri-La Tibetan Pharmaceutical Group Limited (“YSTP”). YSTP is engaged in manufacturing, marketing, selling, researching and developing modernized traditional Tibetan medicines in China.
 
WFOE conducts its business through YSTP via a series of contractual arrangements. YSTP is consolidated as a variable interest entity (“VIE”). The Company does not conduct any substantive operations of its own, but conducts its primary business operations through WFOE’s VIE. The Company holds its interest in the VIE through WFOE.
 
Effective control over the VIE was transferred to the Company through the series of contractual arrangements without transferring legal ownership in the VIE (the “reorganization”). As a result of these contractual arrangements, the Company maintained the ability to approve decisions made by the VIE and was entitled to substantially all of the economic benefits of the VIE, and therefore the Company consolidates the VIE. Immediately before and after the reorganization, the ultimate shareholder controlled the VIE; therefore, the reorganization is accounted for as a transaction between entities under common control. Accordingly, the accompanying consolidated financial statements have been prepared as if the current corporate structure had been in existence throughout the periods presented.
 
Chinese laws and regulations currently do not prohibit or restrict foreign ownership in pharmaceutical manufacturing businesses. However, Chinese laws and regulations do prevent direct foreign investment in certain industries. On March 26, 2010, to protect the Company’s shareholders from possible future foreign ownership restrictions, YSTP and all of the shareholders of YSTP entered into an entrusted management agreement with WFOE, which provides that WFOE will be entitled to the full guarantee for the performance of such contracts, agreements or transactions entered into by YSTP. WFOE is also entitled to receive the residual return of YSTP. As a result of the agreement, WFOE will absorb 100% of the expected losses and gains of YSTP, which results in WFOE being the primary beneficiary of YSTP.
 
WFOE also entered into a pledge of equity agreement with the principal shareholders, who pledged all their equity interest in these entities to WFOE. The pledge of equity agreement, which was entered into by each principal shareholder, pledged each of the principal shareholders’ equity interest in WFOE as a guarantee for the entrustment payment under the Entrusted Management Agreement. The provincial Administration for Industry and Commerce approved and registered such pledge of equity by which WFOE owns the right of pledge legally.
 
 
F-5

 
 
TIBET PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
In addition, WFOE entered into an option agreement to acquire the principal shareholders’ equity interest in these entities at such times as it may wish to do so.
 
The following are brief descriptions of contracts entered between WFOE and YSTP:

(1) Entrusted Management Agreement. The domestic companies, YSTP and WFOE, have entered into an Entrusted Management Agreement, which provides that WFOE will be fully and exclusively responsible for the management of YSTP. As consideration for such services, YSTP has agreed to pay WFOE a management fee during the term of this agreement and the management fee shall equal to YSTP’s estimated earnings before tax. Also, WFOE will assume all operating risks related to this entrusted management service to YSTP and bear all losses of YSTP. The term of this agreement will be from the effective date thereof to the earlier of the following: (1) the winding up of YSTP, or (2) the termination date of this Agreement to be determined by the parties hereto, or (3) the date on which WFOE completes the acquisition of YSTP.
 
(2) Exclusive Option Agreement. All the shareholders of YSTP as well as YSTP has entered into an Exclusive Option Agreement with WFOE, which provides that WFOE will be entitled to acquire such shares form the current shareholders upon certain terms and conditions, meanwhile WFOE will be entitled an irrevocable exclusive purchase option to purchase all or part of the assets and business of YSTP, if such a purchase is or becomes allowable under PRC laws and regulations. The Exclusive Option Agreement also prohibits the current shareholders of YSTP as well as YSTP from transferring any portion of their equity interests, business or assets to anyone other than WFOE. WFOE has not yet taken any corporate action to exercise this right of purchase, and there is no guarantee that it will do so or will be permitted to do so by applicable law at such times as it may wish to do so.
 
(3) Shareholders’ Voting Proxy Agreement. All the shareholders of YSTP has executed a Shareholders’ Voting Proxy Agreement to irrevocably appoint the persons designated by WFOE with the exclusive right to exercise, on their behalf, all of their Voting Rights in accordance with the laws and YSTP’s Articles of Association, including but not limited to the rights to sell or transfer all or any of their equity interests of YSTP, and to appoint and elect the directors and Chairman as the authorized legal representative of YSTP. This agreement will be only terminated prior to the completion of acquisition of all of the equity interests in, or all assets or business of YSTP.
 
(4) Pledge of Equity Agreement. WFOE and the shareholders of YSTP have entered into a Pledge of Equity Agreement, pursuant to which all shareholder pledges all of their shares (100%) of YSTP, as appropriate, to WFOE. If YSTP or any of its respective shareholders breaches its respective contractual obligations in the “Entrusted Management Agreement”, “Exclusive Option Agreement” and “Shareholders’ Voting Proxy Agreement”, WFOE as Pledge, will be entitled to certain rights to foreclose on the pledged equity interests. Such YSTP shareholders cannot dispose of the pledged equity interests or take any actions that would prejudice WFOE’s interest
 
 
F-6

 
 
TIBET PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
Except for the disclosed above, there are no arrangements that could require the Company to provide financial support to the variable interest entities, including events or circumstances that could expose the Company to a loss. As stated in the disclosure of various agreements between the Company and its VIE, the Company has rights to acquire any portion of the equity interests of the VIE. Also the Company may allocate its available funds to its VIE for business purpose. There are no fixed terms of such arrangements.
 
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). The Company’s functional currency is the Chinese Renminbi; however the accompanying consolidated financial statements have been translated and presented in United States Dollars. These financial statements are prepared on a historical pro forma basis. The consolidated financial statements include the accounts of the Company, its subsidiary and VIE for which the Company is the primary beneficiary. All inter-company accounts and transactions have been eliminated in the consolidation. Please also refer to Note 1 for the discussion on accounting for the reorganization and acquisition. These financial statements have been prepared on a historical pro-forma basis.
 
Principles of Consolidation
 
Pursuant to US GAAP, YSTP is the VIE of TBET and the TBET is the primary beneficiary of the VIE. Accordingly, the VIE has been consolidated in the TBET’s financial statements.
 
TBET, CTP and WFOE were formed in 2009, 2010 and 2010, respectively, by YSTP and its shareholders as part of a plan by YSTP’s shareholders to reorganize YSTP’s corporate structure in preparation for listing in the U.S. In connection with the formation of TBET, CTP and WFOE, WFOE entered into several VIE agreements, or Control Agreements, with YSTP and its shareholders. These companies were formed, and the Control Agreements were executed, for the express purpose of restructuring YSTP as the controlled affiliate of a BVI company so that the resulting entity could become a publicly-traded company in the U.S. The shareholders having 100% of the voting rights in YSTP shares entered into a resolution dated December 10, 2009 that authorized this restructuring and the specific steps of forming a BVI company, a Hong Kong subsidiary of that company, the formation of Chinese wholly-foreign owned enterprise owned by the Hong Kong company, and entry into the Control Agreements. These resolutions require TBET to consolidate YSTP’s financial statements with TBET’s from its inception.
 
 
F-7

 
 
TIBET PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
Through the VIE agreements, TBET effectively has complete management and ownership control over YSTP, the VIE, and is able to dictate its operations. The equity holders of YSTP became the controlling owners of TBET. By reason of the VIE agreements, TBET is also able to obtain the financial interests such as obtaining periodic income of the VIE through technical and consulting service arrangements and obtaining the net assets of VIE through purchase of their equities at essentially no cost basis (by virtue of TBET’s ownership of CTP and CTP’s ownership of WFOE). TBET therefore concluded that its interest in the VIE is not a noncontrolling interest and therefore it is not classified as such. The amount of noncontrolling interest of the original shareholders of YSTP holding shares of the VIE for the TBET is zero. They exercise no controls over the VIE and no financial interests of ownership are due to them either for periodic income or the net assets. Indeed, they have ceded all such rights to WFOE (and, as a result, TBET) though the Control Agreements. Accordingly, the accompanying financial statements show the operations of TBET and its subsidiaries as well as YSTP as being operated under the common control of TBET.
 
Prior to these transactions, TBET, CTP, and WFOE were holding companies. Pursuant to ASC 805, the above transactions were accounted for as reorganization under common control. TBET presents the operation of YSTP since inception on a historical pro forma basis in the accompanying financial statements.

Translation Adjustment
 
As of June 30, 2011 and December 31, 2010, respectively, the accounts of the Company were maintained, and its financial statements were expressed, in Chinese Yuan Renminbi (“CNY”). Such financial statements were translated into U.S. Dollars (“USD”) in accordance with the Foreign Currency Matters Topic of the FASB Accounting Standards Codification (“ASC 830”), with the CNY as the functional currency. According to ASC 830, all assets and liabilities were translated at the current exchange rate, stockholders’ equity is translated at historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with the Comprehensive Income Topic of the FASB Accounting Standards Codification (“ASC 220”), as a component of shareholders’ equity. Transaction gains and losses are reflected in the income statement.
 
Use of Estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Comprehensive Income
 
The Company follows the Comprehensive Income Topic of the FASB Accounting Standards Codification (“ASC 220”). Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.
 
 
F-8

 
 
TIBET PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
Risks and Uncertainties
 
The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC’s economy. The Company’s business may be influenced by change in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
 
The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.
 
Contingencies
 
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.
 
Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
 
There were no contingencies of this nature at June 30, 2011.
 
Cash and Cash Equivalents
 
Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
 
Accounts Receivable
 
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis. The allowance for doubtful accounts were $125,010 and $0 as of June 30,2011 and December 31, 2010 respectively.
 
 
F-9

 
 
TIBET PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
Inventories
 
Inventories are valued at the lower of cost (determined on a weighted average basis) or market. As of June 30, 2011 and December 31, 2010, respectively, inventories consist of the following:
 
   
June 30, 2011
   
December 31, 2010
 
Raw materials
 
$
729,835
   
$
519,520
 
Package materials
   
357,353
     
96,298
 
Finished goods
   
168,355
     
581,248
 
Total
 
$
1,255,543
   
$
1,197,066
 
 
Property, Plant & Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:

Buildings
20 years
Machinery and equipment
10 years
Motor vehicles and others
5 years
 
As of June 30, 2011 and December 31, 2010, respectively, Property, Plant & Equipment consist of the following:
 
 
  
June 30, 2011
   
December 31, 2010
 
Buildings
  
$
5,692,315
  
 
$
5,564,217
  
Machinery and equipment
  
 
3,635,699
  
   
3,553,882
  
Motor vehicles and others
  
 
745,627
  
   
728,848
  
Sub-total
  
 
10,073,641
  
   
9,846,947
  
Less: Accumulated depreciation
  
 
(4,144,310
   
(3,680,704
Property, plant and equipment, net
  
$
5,929,331
  
 
$
6,166,243
  
 
 
F-10

 
 
TIBET PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
Depreciation expenses for the six months ended June 30, 2011 and 2010 totaled $373,940 and $353,152, respectively.
 
Intangible Assets
 
Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from ten to fifty years. Management evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. No impairments of intangible assets have been identified during any of the periods presented. The land use right will expire in 2050. All of the Company’s intangible assets are subject to amortization with estimated lives of:
 
Land use right
50 years
Proprietary technologies
10 years
 
As of June 30, 2011 and December 31, 2010, respectively, the components of finite-lived intangible assets are as follows:

 
  
June 30,
2011
   
December 31,
2010
 
Proprietary technologies
  
$
1,856,723
  
 
$
1,814,940
  
Land use right
  
 
309,454
  
   
302,490
  
 
  
 
2,166,177
  
   
2,117,430
  
Less: Accumulated amortization:
   
(1,650,936)
     
(1,516,987)
 
   
$
515,241
   
$
600,443
  
 
Amortization expense for the six months ended June 30, 2011 and 2010 were $97,737 and $91,124, respectively.
 
The estimated future amortization expenses related to intangible assets as of June 30, 2011 are as follows:
 
 
F-11

 
 
TIBET PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
Years ended December 31,
  
   
2011
  
$
197,278
  
2012
  
 
114,719
  
2013
  
 
6,165
  
2014
  
 
6,165
  
2015
  
 
6,165
  
Thereafter
  
$
184,749
  
 
Long-Lived Assets
 
The Company adopted the Property, Plant and Equipment in accordance with FASB Accounting Standard Codification (“ASC 360”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business.” The Company evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of June 30, 2011 and December 31, 2010, respectively, there were no impairments of its long-lived assets.

Revenue Recognition
 
The Company’s revenue recognition policies are in compliance with the Revenue Recognition Topic of the FASB Accounting Standards Codification (“ASC 605”) and the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured.
 
Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
 
The Company has distributor arrangements with certain parties for sale of its pharmaceutical products. The distributor agreements do not provide chargeback, price protection, or stock rotation rights. Accordingly, revenue is recognized when products are delivered to and received by the distributors.
 
If the products sold have quality issues, the Company is responsible because of the product warranty included in each sale. However, the customers cannot return merchandise without permission of the Company. The return is recorded on the date the return is authorized. A quality warranty reserve provision has been made for the anticipated cost to replace items. The quality reserve accruals in amount of $1,097,503 and $977,612 as of June 30, 2011 and 2010, respectively, were included in the accrued expenses and other payables on the consolidated balance sheets.
 
 
F-12

 
 
TIBET PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
Revenues are recorded net of value-added taxes.
 
Prepaid Expenses
 
Advertising expenses consist primarily of costs of promotion for corporate image and product marketing and costs of direct advertising. The Company records payments made to advertising companies for the purpose of reserving prime-time advertising space as prepaid expenses in the consolidated balance sheet. The Company expenses the prepaid advertising amount when the advertisement is published or aired. All other advertising costs are expensed as incurred. At June 30, 2011 and 2010, the prepaid advertising costs were $64,985 and $61,934 respectively.
 
Also, included in prepaid expenses is GMP authentication, which is being amortized during the period of the certificate of authentication.
 
Research and development costs
 
Research and development costs are incurred in the development of the new products and processes, including significant improvements and refinements to existing products. All research and development costs are expensed as incurred. Expenses recorded for the six months ended June 30, 2011 and 2010 were approximately $287,258 and $289,413, respectively.
 
Advertising Expense
 
The Company expenses its advertising costs when the expense is incurred. Advertising expense for the six months ended June 30, 2011 and 2010 were approximately $64,140 and $61,729 respectively.

Income Taxes
 
The Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

There are no differences between the Company’s tax bases of assets and liabilities and their financial reporting amounts, and therefore, there were no deferred tax assets or deferred tax liabilities at June 30, 2011 and 2010.
 
The Company is entitled to exemption from PRC income tax between 2008 and 2012. According to tax preferential policy of Yunnan Diqing Tibet Autonomous State and approval of governmental tax agency, after approval of document by the tax bureau of the People’s Government Office of Yunnan Diqing Autonomous State, the tax bureau of the Yunnan Diqing Tibet Autonomous State agreed to exempt the Company from income tax for 5 years between 2008 and 2012. The dollar effect of this tax holiday is $883,700, $1,525,078, $844,991and $1,556,962 for the three and six months ended June 30, 2011 and 2010, respectively. The pro-forma per share effect is $0.06, $0.11, $0.07 and $0.13 per share for the three and six months ended June 30, 2011 and 2010 respectively.
 
 
F-13

 
 
TIBET PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for uncertainty in Income Taxes.” FIN 48 clarifies the accounting for Income Taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition and clearly scopes income taxes out of SFAS 5, “Accounting for Contingencies.” FIN 48 is effective for fiscal years beginning after December 15, 2006. As a result of implementing FIN 48, there have been no adjustments to the Company’s financial statements. SFAS No. 109 and FIN 48 were superseded by the Income Taxes Topic of the FASB Accounting Standards Codification (“ASC 740”) in September 2009. However, this portion of the codification has no application to the Company as stated above. The Company is not subject to corporate taxes until 2012.
 
Statement of Cash Flows
 
In accordance with the Statement of Cash Flows Topic of the FASB Accounting Standards Codification (“ASC 230”), cash flows from the Company’s operations are based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets because of translation adjustments.
 
Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company has a diversified customer base, most of which are in China. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited. At June 30, 2011 and December 31, 2010, there was no allowance for uncollectible accounts as previously discussed.

Segment Reporting
 
The Company operates and manages its business as a single segment that includes primarily the development, manufacture and sale of modernized traditional Chinese medicine.
 
Recent Accounting Pronouncements
 
There were no recent accounting pronouncements that will have a material impact on the Company’s consolidated financial statements.
 
 
F-14

 
 
TIBET PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
Reclassification
 
Certain prior year accounts were reclassified to conform to the manner of presentation in the current period.
 
Note 3 – COMPENSATED ABSENCES
 
Regulation 45 of the local labor law of the People’s Republic of China (“PRC”) entitles employees to annual vacation leave after one year of service. In general, all leave must be utilized annually, with proper notification. Any unutilized leave is cancelled.
 
Note 4 – RELATED PARTY TRANSACTIONS
 
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Revenues derived from related party transactions for the six months ended June 30, 2011 and 2010 were $2,585,442 and $2,452,020, respectively. As of June 30, 2011 and December 31, 2010, the balances of accounts receivable from related party were $3,700,297 and $3,170,048, respectively.
 
Note 5 – STATUTORY RESERVE
 
In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprises income, after the payment of the PRC income taxes, shall be allocated to the statutory surplus reserves and statutory public welfare fund. Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent of the profit after tax to the surplus reserve fund and additional 5 to 10 percent to the public affair fund. The public welfare fund reserve was limited to 50 percent of the registered capital. Effective January 1, 2006, there is now only one fund requirement. The reserve is 10 percent of income after tax, not to exceed 50 percent of registered capital.
 
Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of June 30, 2011 and December 31, 2010, the Company had allocated $4,140,903 to these non-distributable reserve funds. Any allocation to the reserves for 2011 will be made at the end of the year.
 
 
F-15

 
 
TIBET PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
Note 6 – OTHER COMPREHENSIVE INCOME
 
Balances of related after-tax component, foreign currency translation adjustment comprising accumulated other comprehensive income, included in stockholders’ equity, as of June 30, 2011 and 2010, are as follows:

 
  
Foreign Currency
Translation Adjustment
 
  
Accumulated Other
Comprehensive Income
 
Balance at December 31, 2010
  
$
1,339,241
  
  
$
1,339,241
  
Change for six months ended June 30, 2011
  
 
825,739
  
  
 
825,739
  
Balance at June 30, 2011
  
$
2,164,980
  
  
$
2,164,980
  
 
Note 7 – CONCENTRATIONS
 
Two customers accounted for 24.7% and 27% of the Company’s revenues for the six months ended June 30, 2011 and 2010, respectively. One of these customers, Shangri-La Kunming Pharmaceutical Company, is a related party and represented 15% and 17% of the Company’s revenues for the six months ended June 30, 2011 and 2010, respectively
 
Three vendors accounted for 58.0% and 55.0% of the Company’s purchases for the six months ended June 30, 2011 and 2010, respectively. None of these vendors is a related party of the Company.
 
Note 8 – EQUITY
 
IPO Arrangement
 
On January 24, 2011, the Company completed its initial public offering (“IPO”) of 3,000,000 ordinary shares at $5.50 per share. The gross proceeds were $16,500,000 with financing costs of $2,079,599, and the net proceeds received by the Company were $14,420,401.
 
No warrants have been issued as of June 30, 2011.
 
Our Board of Directors and shareholders have approved a Share Incentive Plan to our employees and directors. This plan authorizes the issuance of up to 684,375 restricted common shares and options for redemption of restricted common shares. No options have been granted as of June 30, 2011.
 
Note 9 – EARNINGS PER SHARE
 
The following table sets forth the computation of basic and diluted earnings per common share:
 
 
F-16

 
 
TIBET PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
   
Six months ended June 30,
   
Three months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Basic and diluted earnings per share:
                       
Numerator:
                       
Net income used in computing basic earnings per share
  $ 6,100,311     $ 6,227,847     $ 3,534,799     $ 3,379,965  
Net income applicable to common shareholders
  $ 6,100,311     $ 6,227,847     $ 3,534,799     $ 3,379,965  
                                 
Denominator:
                               
Weighted average common shares outstanding
  $ 14,336,699     $ 11,797,914     $ 14,336,699     $ 11,797,914  
                                 
Basic and diluted earnings per share
  $ 0.43     $ 0.53     $ 0.25     $ 0.29  
 
Note 10 – COMMITMENTS
 
The Company has entered into three-year employment contracts with its chief executive officer, chief financial officer and chairman of the board. The agreements with CFO and Chairman expire April 29, 2013, each carries a renewal option of two years. The agreement with new CEO expires June 5, 2014, and carries a renewal option of two years.
 
The Company has entered into five-year research and development agreements with two third parties expiring December 28, 2011 and December 31, 2011, respectively. Combined fees for these services amount to approximately $142,000 annually.
 
On October 12, 2010, the Company has entered an agreement with an investor relations/public relations firm, Trilogy Capital Partners, Inc. (“Trilogy”). The agreement, as amended, provided that it would remain in force until six (6) months after the Company closes its Initial Public Offering (“IPO”). It provided that the Company would pay Fees for Trilogy’s services of $7,500 per month. As additional compensation, the Company agreed to issue the Firm 33,334 shares restricted common shares based on an estimated IPO’s per-share price. As of June 30, 2011, all of these shares have been issued. During the six months ended June 30, 2011, the Company recorded $150,836 as stock based compensation expenses, including $71,668 during the three months ended June 30, 2011.
 
Note 11 –RECENT DEVELOPMENTS
 
On June 6, 2011, Mr. Taylor Z. Guo resigned as CEO of the Company and as the General Manager and CEO of Yunnan Shangri-La Tibetan Pharmaceutical Group Limited (“YSTP”). Mr. Guo no longer holds any position as an officer or employee of either the Company or YSTP. Mr. Guo continues to serve as a director of the Company.
On June 6, the Company formally retained Mr. Hong Yu to serve as CEO of the Company, and also assumed the duties of General Manager and CEO of YSTP. Mr. Yu is the founder of YSTP and the largest shareholder of the Company. Mr. Yu has continuously served as the Chairman of the board of directors of both the Company and YST.
 
 
F-17

 
 
TIBET PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
Note 12 – SUBSEQUENT EVENTS
For the first six months ended June 30, 2011, the Company has evaluated subsequent events for potential recognition and disclosure from July 1, 2011 through the date the financial statements were available to be issued.
 
 
F-18