Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
x ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2012
o 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.
(Exact name of registrant as specified in its charter)
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Delaware
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(State or other jurisdiction of incorporation)
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(I.R.S. Employer Identification or
Organization No.)
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23rd Floor, UnionsunYangkuo Plaza No.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 o 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 o 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 o
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 o
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.
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Large accelerated filer o
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Accelerated Filer o
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Non-accelerated filer o
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Smaller reporting company x
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of March 14, 2013, the Registrant has 29,332,791 shares of common stock outstanding and -0- shares of Series A Preferred Stock outstanding.
Explanatory Note
We are filing this Amendment No. 1 to Form 10-K for the year ended June 30, 2012 (“Amended Report”) pursuant to a SEC comment letter dated February 26, 2013. This Amended Report is being filed to amend the disclosures in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies and Estimates – Inventory” at page 40 and “Item 9A. Controls and Procedures” at page 62-64 of the Form 10-K filed with the SEC on September 28, 2012 (“Original Report”). This Amended Report may not reflect events occurring after the filing of the Original Report, nor does it modify or update those disclosures presented therein, except with regard to the modifications described in this Explanatory Note. Accordingly, this Amended Report should be read in conjunction with the Original Report and our other reports filed with the SEC subsequent to the filing of our Original Report, including any amendments to those filings.
In addition, pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as a result of this Amended Report, the certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, filed and furnished, respectively, as exhibits to the Original Report have been re-executed and re-filed as of the date of this Amended Report and are included as exhibits hereto.
TIANYIN PHARMACEUTICAL CO., INC
FORM 10-K/A INDEX
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Page
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PART II
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Item 7
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Management’s Discussion and Analysis of Financial Conditions and Results of Operations
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4
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Item 9A
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Controls and Procedures
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12
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PART IV
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Item 15
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Exhibits, Financial Statements Schedules and Reports
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14
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Signatures
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15
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PART II
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MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
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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.
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.
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 TPI for the fiscal years ended June 30, 2012 and 2011 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 58 products approved by the SFDA including the patented Gingko Mihuan Oral Liquid (“GMOL”), 24 of which are included in the National Reimbursement List. Further, we have 6 trademarks granted and 16 trademarks pending. Chengdu Tianyin Pharmaceutical Co., Ltd (“Chengdu Tianyin”), was established in 1994 in Chengdu, China as a pharmaceutical company that manufactures and sells modernized traditional Chinese medicines and branded generics. The current management of Chengdu Tianyin acquired 100% of the equity interest of the Company 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 that operates our business.
In June 2009, to optimize our business model through stronger distribution channels, Chengdu Tianyin invested $0.7 million to establish a wholly-owned trading subsidiary, Chengdu Tianyin Medicine Trading Co., Ltd (“TMT”) for sales and distribution of medicine produced by Chengdu Tianyin and other pharmaceutical companies.
On August 21, 2009, Chengdu Tianyin, Sichuan Mingxin Pharmaceutical and an individual investor established Sichuan Jiangchuan Pharmaceutical Co., Ltd (“JCM”), whose major business is to produce macrolide antibiotic active pharmaceutical ingredients (API). Total registered capital of JCM is approximately $2.9 million, of which Chengdu Tianyin accounts for approximately 87%. JCM is considered a cornerstone in the foundation we are building for a broader strategy to establish a significant presence by the Company in the macrolide antibiotics industry in China.
In preparation for the new Good Manufacturing Practice (GMP) standards stipulated by the PRC government in early 2011, TPI initiated a process to optimize the manufacturing facilities and production lines of the Company in compliance with the new GMP standards by 2013. Concurrently, the city of Chengdu also re-designated various industrial parks of nearby counties to be used for particular industries such as the automobile, biotechnologies, pharmaceuticals and chemical engineering sector’s. As a consequence of these changes, TPI’s manufacturing facility located in the Longquan district, east of Chengdu, has been designated for the automotive industry. Therefore our facility is scheduled to be relocated to Qionglai city, south of Chengdu, which is designated for the pharmaceutical industry. The Qionglai facility (QLF) is approximately 18 miles from the Company’s recently completed JCM facility. The proposed relocation project also includes our TCM pre-extraction plant which, is located near the center of the city of Chengdu that is currently surrounded by a rapidly expanding residential area. The QLF facility is estimated to be 80 mu or approximately 13 acres. Both pre-extraction plant and the formulation plant will subsequently be relocated. The combined QLF plant, designed and constructed according to the latest GMP standards, is expected to relieve the current capacity saturation at the current facilities. The re-location cost is estimated at $25 million for Phase I which, when completed at the end of the 2012 calendar year, is expected to expand the current capacity by 30%. For Phase II QLF, an additional $10 million may be invested to double the current capacity. Since the official start of the relocation project in February 2012, the construction of the QLF project has been progressing on schedule. The pre-extraction plant will be relocated during the Phase I of the QLF project that is estimated to start in early 2013.
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Competitive environment
The market for pharmaceutical products is highly competitive. Our operations may be affected by government policies, post-market studies, pipeline development, technological advance by competitors, industrial 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. In addition, the ongoing healthcare reform in China provides opportunities as well as challenges to our pipeline development and market expansion.
Development and Growth Strategy
Research and Development
The cornerstone of our business development strategy relies upon our partnership-based research and development (R&D) efforts which support us in developing and commercializing our product pipeline and ultimately with our marketing and sales through our expanding distribution network. 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 TPI 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 sales and marketing growth in the past years. 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 a series of pipeline drugs with our partnership research institutes, of which we are entitled to purchase the exclusive ownership and intellectual properties upon the SFDA approval. Though the pending period of SFDA approval varies from one to several years depending on the individual drug, we expect that the SFDA approval process to last for a number of years taking the consideration of current healthcare reform environment.
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 preparation within 6 months after 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.
Management plans to selectively pursue strategic acquisitions and licensing opportunities as effective means to broaden our product portfolio, leverage our resources and expand our market coverage.
Jiangchuan Macrolide Facility (“JCM”)
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 to establish a manufacturing plant for Active Pharmaceutical Ingredients (“API”) of macrolides antibiotics. In August 2009, we partnered with Sichuan Mingxin Pharmaceutical Co., Ltd. in the launch of a new joint venture, Sichuan Jiangchuan JV (“JCM”), which primarily engages in the R&D, manufacturing, sales and marketing of API and chemical intermediates of macrolide antibiotics. The joint venture is 87% owned by TPI. The JCM construction was completed in 2011 and received GMP certification in 2012. As of September 27, 2012, JCM facility has started its operation.
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Tianyin Medicine Trading Distribution Business (“TMT”)
We have been developing the distribution portfolio of TMT which distributes products manufactured by both TPI and other pharmaceutical companies to fuel our expanding sales network as well as to provide synergy to our existing organic product portfolio. TMT has been distributing mainly TPI's own products since its inception in 2009. Following the signing of the distribution contract with Jiangsu Lianshui Pharmaceutical in 2010, one of the most celebrated national brand injection pharmaceutical manufacturers to distribute approximately 15 Lianshui-branded generic injection products including cough suppressant, antibiotics, anti-inflammatory medicines and products for other healthcare indications, the distribution contract has been successfully extended for the following three years till 2013. The annual distribution revenue from TMT reached approximately $16.5 million for the fiscal year 2012.
Guidance
We have met and exceeded the $66.0 million fiscal year 2012 revenue forecast. The net income for fiscal year 2012 is $6.4 million which is slightly below our forecast net income of $6.5 million. The forecasted net income excludes any non-cash expenses associated with stock compensation plans or stock option expenses.
We believe the following factors will influence the future growth perspectives of our Company:
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1)
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Market expansion and revenue growth of TPI’s core product portfolio led by flagship product Gingko Mihuan Oral Liquid (GMOL) and other major products;
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2)
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Ramp up of JCM revenue in the fiscal year 2013;
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3)
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The gradual stabilization of generic sales following the progressive pricing restrictions caused by the ongoing healthcare reform;
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4)
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Steady TMT distribution revenue contribution; and
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5)
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QLF relocation and smooth transition of production capacity.
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Our market analysis leads us to believe that the generic pricing pressure is likely to continue, but the JCM along with the TMT distribution revenue are expected to offset the generic sales decrease and support the revenue growth of the Company at the percentage about 10 – 15% for the coming year. We forecast the fiscal 2013 revenue to be between $75 to $80 million and a net margin around 10%.
Our current facilities operate at approximately 90% of the total capacity on 24 hours per day schedule. We are in the process of optimizing the usage of the remaining capacity and expanding the existing capacities to meet the increasing market demand.
Management will continue to evaluate the Company's business outlook and communicate any changes on a quarterly basis or as when appropriate.
Discussion on Operating Results
Comparison of results (in $ million) for the fiscal years ended June 30, 2012 and 2011
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Years Ended June 30
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2012
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2011
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Sales
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$ |
69.6
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$
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95.2
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Cost of Sales
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$ |
45.3
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$
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52.7
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Gross profit
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$ |
24.3
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$
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42.5
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Selling, general and administrative and R&D expenses
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$ |
15.8
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$
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24.4
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Other income (expenses)
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$ |
0.1
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$
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1.6
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Income taxes
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$ |
2.4
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$
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4.1
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Net income attributable to TPI
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$ |
6.4
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$
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15.6
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| Pro forma net income | $ | 6.4 | $ | 18.9 | ||||
Sales for the fiscal year ended June 30, 2012 was $69.6 million, decreased 26.9% from $95.2 million for the fiscal year ended June 30, 2011, due to generic pricing pressure as a result of the healthcare reform, coupled with our delayed JCM production ramp up. As a result of these events we witnessed a 17% reduction of TPI’s organic portfolio revenue from $63.9 million for the fiscal year ended June 30, 2011 to $53.0 million for the fiscal year ended June 30, 2012. We are presently exploring and implementing various growth strategies to stabilize our generic sales. In addition to introducing distribution revenue from TMT and macrolide API revenue, we are also focusing on expanding our sales efforts at AAA and AA rated hospitals in major cities of China to strengthen our high-end hospital pharmaceutical market segment. Our top five products by sales are:
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Product Description
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Amount | ||
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Ginkgo Mihuan Oral Liquid (GMOL)
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$ |
17.1 million
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Apu Shuangxin Granules (APU)
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$ |
2.7 million
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Xuelian Chongcao (XLCC)
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$ |
2.2 million
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Azithromycin Dispersible Tablets (AZI)
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$ |
3.0 million
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Qingre Jiedu Oral Liquid (QRE)
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$ |
3.5 million
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6
The core product portfolio totaled $28.5 million or 53.8% of the organic portfolio revenue.
Cost of Sales for the fiscal year ended June 30, 2012 was approximately $45.3 million or 65.1% of the revenue, compared with $52.7 million or 55.4% of the revenue for the fiscal year ended June 30, 2011. Our cost of sales primarily consists of the direct raw material costs, labor, depreciation and amortization of manufacturing equipment and facilities and other overhead. The percentage increase of our cost of sales from the previous year was the result of generic pricing pressure which was discussed in the following “Gross profit” segment.
Gross profit for fiscal year ended June 30, 2012 was approximately $24.3 million with 35.0% gross margins compared with $42.5 million with 44.6% gross margin for fiscal year ended June 30, 2011. The decrease in gross margins was attributable to 1) generic pricing pressure, and 2) the lower margined TMT distribution revenues, whose gross margins average about 10%. During the fiscal year 2012, our organic product portfolio delivered approximately 45.0% gross margins, about 7% lower than 52.0% in fiscal year 2011. Provided the blend of the TMT lower margin distribution revenue and gross margin reduction associated with our proprietary portfolio as the current pricing trend continues, we anticipate our overall gross margin in the near term to stabilize around 35% for the fiscal 2013, depending upon the revenue mix of TMT revenue, JCM macrolide API revenue as compared to the proprietary portfolio’s revenue performance. The factors that influence the gross margins of our major products include raw material price (85% of the cost of goods sold) and production cost (15% of the cost of goods sold).
Operating and R&D Expenses were $15.8 million in fiscal year ended June 30, 2012, compared with $24.4 million in fiscal year ended June 30, 2011. The decrease is in line with the decrease of the revenue as a result of sales and margin decrease under the current market environment. We expect the operating expenses percentage to stabilize between 20 - 25% of the revenue for the coming year.
Net income was $6.2 million in fiscal year ended June 30, 2012, compared with $15.6 million in fiscal year ended June 30, 2011. The decrease is the result of sales decrease and margin compression from the previous year due to the ongoing healthcare reform that restricts both the sale and the pricing of pharmaceutical products particularly generics.
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 subsidiary 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 $2.1 million as of June 30, 2012. The balance sheet amounts with the exception of equity as of June 30, 2012 were translated at 6.30915 RMB to 1.00 US dollars as compared with 6.46412 RMB to 1.00 US dollars as of June 30, 2011. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the years ended June 30, 2012 and 2011 were the average exchange rates during the years.
Comprehensive Income was $8.3 million in fiscal year ended June 30, 2012, compared with $18.9 million in fiscal year ended June 30, 2011.
Liquidity and Capital Resources
Discussion of cash flow
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In $ millions
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For the fiscal years
ended June 30,
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2012
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2011
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Cash flow from operating activities
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$
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7.9
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$
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14.2
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Cash flow from investing activities
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$
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(5.1
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(11.7
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Cash flow from financing activities
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$
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(0.13
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1.1
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Operating activities
As of June 30, 2012, we had working capital totaling $42.1 million, including cash and cash equivalents of $38.5 million. Net cash generated from operating activities was $7.9 million for fiscal year ended June 30, 2012 as compared with $14.2 million for fiscal year ended June 30, 2011. This was mainly due to the decrease of revenue and net income from the previous year. At the end of fiscal year 2012, the accounts receivable was $11.3 million, 16.2% of the total revenue, as compared with $9.0 million, 9.5% of the total revenue for fiscal 2011. The increase of accounts receivable is mainly due to the extending payment cycle of distributors and hospitals under the ongoing healthcare reform. We believe that TPI is adequately funded to meet all of our working capital and capital expenditure needs for fiscal year 2013.
Investing activities
Net cash used in investing activities for the fiscal year ended June 30, 2012 totaled $(5.1) million compared with $(11.7) million in the fiscal year ended June 30, 2011 which are mainly related to the acquisition of land use rights for the QLF project, intangible assets due to approved drugs and the equipment. We expect in the first half of fiscal year 2013 the capital expenditure to reach close to $10 million due to the QLF relocation.
Financing activities
Net cash provided by financing activities for fiscal year ended June 30, 2012 totaled $(0.13) million which is restricted cash of $(3.5) million offset by the short term bank loan of $3.2 million, as compared with $1.1 million cash flow in fiscal year ended June 30, 2011 due to the $1.2 million short-term bank loans.
Borrowings and Credit Facilities
The short-term bank borrowings outstanding as of June 30, 2012 and 2011 were $6.0 million and $2.8 million, respectively. The increase of short term bank borrowing is due to the QLF relocation and the operation of JCM. We paid an average interest rate of 7.755% and 6.383% per annum, respectively. These loans were made from CITIC bank and secured by the property and equipment of Chengdu Tianyin. They do not contain any additional financial covenants or restrictions. The borrowings have one year terms and contain no specific renewal terms.
Stock Repurchase Program
On October 27, 2008, the Board of Directors authorized the Company to repurchase up to $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 did not repurchase the full amount and in late 2011, resumed the stock repurchase program. As of June 30, 2012, a total of 113,485 shares had been bought back at prevailing market prices. Shares purchased were retired to treasury. Due to various regulatory restrictions in China and costs incurred during the conversion from Chinese RMB into US Dollars, the repurchase of stocks was limited by both the availability of US Dollars as well as the various requirements for our ongoing capital expenditure projects.
Cash dividend
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 $0.025 per common share 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 paid to shares owned by the management, advisors or other inside shareholders, all of whom have agreed to waive receipt of the dividend. The majority of the Company's Preferred Shareholders had approved the cash dividend as of April 14, 2009.
On July 8, 2009, October 5, 2009, and January 11, 2010, respectively, the Company declared quarterly cash dividends to be paid to its common stock shareholders. The dividend of $0.025 per common share, with total amount of $172,023, $344,322 and $403,085, were paid to shareholders of record as of July 31, 2009, October 30, 2009 and February 25, 2010, respectively.
In May 2010, we announced the suspension of our dividend to our common stock shareholders. The China health care industry, through the ongoing reform, is currently evolving and realizing an ever changing and dynamic competitive landscape. As a result of the reform, opportunities exist for TPI to capture a greater market share by investing the internal capital resources in our strategic growth plan. We believe by utilizing the capital in our strategic growth plan, we should be able to generate greater long-term returns for our shareholders. Given these opportunities, we have 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.
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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.
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, 2012 and 2011 was $113,862 and $510,903, respectively.
Accounts receivable was $11.3 million for the year ended June 30, 2012 as compared to $9.0 million for the year ended June 30, 2011, an increase of approximately $2.3 million. During the year ended June 30, 2012, sales revenue was $69.6 million as compared to $95.2 million for fiscal year ended June 30, 2011. 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. There were no inventory reserves at June 30, 2012 or 2011, respectively.
As a result of the ongoing healthcare reforms taking place in our marketplace, the restrictive pricing policies resulted in a slowdown in the growth of the revenue, which was not offset completely by a corresponding reduction in the pace of manufacturing of our products and the build in our inventory. We continue to attempt to optimize our product turnover by managing our sales pipeline and we are working at shortening our business cycle between the time we accept orders and the time we deliver those same products. We believe that as we continue to work at managing our inventory turnover under the healthcare reforms currently occurring, we should witness a stabilization of the ratio between the inventory and the revenue .
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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, 2012.
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, 2012 and year ended June 30, 2011 was $15,968 and $67,081 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.
Advertising Costs
We expense the cost of advertising as incurred. Advertising costs for the years ended June 30, 2012 and 2011 was $-0- and $4,693,636, respectively.
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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, 2012, we had no impairment losses.
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. 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 25%.
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 TPI 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.
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.
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CONTROLS AND PROCEDURES
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(a)
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Evaluation of disclosure controls and procedures
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We maintain disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded as of June 30, 2012, due to the material weaknesses, that our disclosure controls and procedures were not effective in ensuring that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission, and were not effective in providing reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
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(b)
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Changes in internal control over financial reporting
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In connection with our review of our internal controls and procedures over financial reporting as of our fiscal year, ended June 30, 2011, and based on certain comments that we received from the staff of the SEC regarding the accounting treatment and subsequently the non-cash/non-operational financial charges of Series A and B Warrants, which resulted in our having to amend and restate financial statements from July 1, 2009 till December 31, 2010, our management concluded in our Form 10-K for the year ended June 30, 2011 that the Company had material weaknesses in its internal control over financial reporting. As of June 30, 2012, the management concluded that the Company’s internal control over financial reporting was improving but not yet sufficiently effective due to the existence of the material weaknesses mentioned below. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.
As of the end of our fiscal year ended June 30, 2012, our management identified the following material weaknesses:
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Insufficient knowledge regarding U.S. GAAP reporting by our existing accounting staff;
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Insufficient accounting staff which results in a lack of segregation of duties necessary for an efficient internal control system; and
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Insufficient documentation with our existing financial processes, risk assessment and internal controls.
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During our last fiscal year ended June 30, 2012, in order to address the above-mentioned material weaknesses identified in fiscal years 2011 and 2012, the Company formulated and is implementing the following remediation plan, which includes:
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Setting up an internal control committee that consists of Dr. Guoqing Jiang (CEO), Mr. Tao Yang (COO), Dr. James J. Tong (CFO) and Ms. Liying Wang (Financial Controller) to monitor the internal controls process and oversee the completion of the remediation process;
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Developing training and educational content for select members of the Company’s operational and financial staff that addresses the issue of insufficient knowledge regarding U.S GAAP reporting by the current accounting staff. To date, the Company has arranged regular training and education programs for its staff to improve their knowledge of U.S. GAAP. In addition, financial consultants and U.S GAAP experts were sought after and engaged to facilitate the process. The training and education programs consist of lectures, consultation sessions, as well as brochures and articles;
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Recruiting experienced professionals with knowledge of US GAAP to augment the Company’s financial staff and to assist the staff in improving the Company’s controls and procedures with regard to financial reporting. This measure will help address the issue of insufficient accounting staff until such time as full time employees with knowledge of US GAAP can be recruited and/or our current staff can receive sufficient training in US GAAP. The Company has retained Mr. Jim McCubbin as an outside consultant to assist the Company with various compliance and regulatory matters, particularly with the preparation of financial statements. Mr. McCubbin was the Company’s former Independent Director and Chairman of the Company’s Audit, Compensation and Nominating Committees, and was deemed to be our Audit Committee Financial Expert, as that term is defined in Item 407 of Regulation S-K. In addition, Mr. Hongcai Li, the Company’s former financial controller of the operating subsidiary, has been retained by the Company as an accounting consultant for the quarterly and annual financial reporting of the Company. Mr. Li is a Certified Public Accountant with over 10 years of experience in financial and accounting management, and over 6 years of experience of working as the Company’s financial controller;
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Reviewing, editing and updating the Company’s financial policies and procedures to address the issue of insufficient documentation. Since 2009, the Company has adopted a “Checklist of Internal Controls and Procedures,” suggested by our independent auditor. The checklist lays out various aspects of internal controls and procedures that the Company needs to consider when assessing the effectiveness of its current internal controls and procedures. Additionally, in March 2009, the Company’s former financial consultant, Kvalue Financial Services Co., Ltd gave presentations and presented a report to management and employees regarding Section 404 of Sarbanes-Oxley Act. The materials were prepared in Chinese in order to assist the Chinese staff to better comprehend the topic. During these trainings on internal controls and procedures for the Company’s management and employees, especially since June 30, 2011, we reviewed the existing materials with the staff;
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The Company’s Board approved the amendment of an Insider Trading Policy to include policies regarding related party transactions on September 14, 2012;
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Due to the nature of our business as a pharmaceutical company, we are also required to comply with the Good Supply Practice Standards (“GSP Standards”) promulgated by the State Food and Drug Administration (“SFDA”), which 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;
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As part of the Company’s internal controls and procedures, we apply strict scrutiny when reviewing and approving contracts and agreements. Normally, the Company requires verification and approval from different levels of management before executing an agreement; and
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Adopting an extensive policy of internal controls and procedures, and set up of a general framework as a guideline.
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We continue to implement and maintain the above-mentioned remediation plan. However, it is not yet resolved as to the time when the remediation plan will be fully implemented and the material weaknesses can be eliminated.
There have been no major changes in our internal controls over financial reporting that occurred during the fourth quarter of fiscal year ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
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EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
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(1) AND (2) Financial Statements and Financial Statement Schedules See “Index to Consolidated Financial Statements” on page F-1
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(3) EXHIBITS
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3.1
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Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to our Annual Report on Form 10-K filed on September 29, 2008)
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3.2
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Bylaws (Incorporated by reference to Exhibit 3.2 to our Annual Report on Form 10-K filed on September 29, 2008)
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31.1
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Certifications of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
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31.2
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Certifications of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
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32.1
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Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
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32.2
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Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
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14
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant duly caused this Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized.
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Tianyin Pharmaceutical Co., Inc
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By:
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/s/ Guoqing Jiang
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Guoqing Jiang
PRESIDENT AND CHIEF EXECUTIVE OFFICER,
CHIEF ACCOUNTING OFFICER
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By:
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/s/ James Jiayuan Tong
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James Jiayuan Tong
CHIEF FINANCIAL OFFICER
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Date: March 15, 2013
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Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Date:
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March 15, 2013
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By:
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/s/ Guoqing Jiang
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Guoqing Jiang
PRESIDENT, CHIEF EXECUTIVE OFFICER, CHIEF ACCOUNTING OFFICER, DIRECTOR
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||||
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Date:
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March 15, 2013
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By:
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/s/ Zunjian Zhang
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Zunjian Zhang
DIRECTOR
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Date:
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March 15, 2013
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By:
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/s/ Jianping Hou
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Jianping Hou
DIRECTOR
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Date:
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March 15, 2013
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By:
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/s/ Bo Tan
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Bo Tan
DIRECTOR
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Date:
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March 15, 2013
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By:
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/s/ James Jiayuan Tong
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James Jiayuan Tong
CHIEF FINANCIAL OFFICER, DIRECTOR
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15