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EX-31.2 - CERTIFICATION - TIANYIN PHARMACEUTICAL CO., INC.f10k2014ex31ii_tianyinpharma.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-K

 

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

 

FOR THE FISCAL YEAR ENDED JUNE 30, 2014

 

 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)

 

Delaware    
(State or other jurisdiction
of incorporation)
 

(I.R.S. Employer Identification
or Organization No.)

 

23rd Floor, UnionsunYangkuo Plaza No.2, Block 3, Renmin Road South

Chengdu, Sichuan, 610041 P. R. China

+86 028 8551 6696

(Address and telephone number of principal executive offices

and principal place of business)

 

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

 

Securities registered under Section 12 (g) of the Exchange Act:

COMMON STOCK WITH $.001 PAR VALUE

(Title of Class)

 

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

 

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

 

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 ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒    No ☐

 

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.  ☒

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated Filer ☐
Non-accelerated filer ☐ Smaller reporting company ☒

 

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

 

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of December 31, 2013 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $16 million.

 

As of December 9, 2014, the Registrant has 29,546,276 shares of common stock issued and 29,432,791 shares of common stock outstanding, and -0- shares of Series A Preferred Stock outstanding.

 

 

 

 

 
 

 

TIANYIN PHARMACEUTICAL CO., INC

FORM 10-K

INDEX

 

    Page
  PART I  
     
Item 1 Description of Business 3
     
Item 1A Risk Factors 14
     
Item 1B Unresolved Staff Comments 25
     
Item 2 Description of Property 26
     
Item 3 Legal Proceedings 26
     
Item 4 Removed and Reserved 26
     
  PART II  
     
Item 5 Market for Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Security 26
     
Item 6 Selected Financial Data 28
     
Item 7 Management’s Discussion and Analysis of Financial Conditions and Results of Operations 29
     
Item 7A Quantitative and Qualitative Disclosure about Market Risk 39
     
Item 8 Financial Statements and Supplementary Data 40
     
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 41
     
Item 9A Controls and Procedures 41
     
Item 9B Other Information 44
     
  PART III  
     
Item 10 Directors,  Executive Officers and Corporate Governance 44
     
Item 11 Executive Compensation 49
     
Item 12 Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters 51
     
Item 13 Certain Relationships and Related Transactions and Director Independence 52
     
Item 14 Principal Accounting Fees and Services 54
     
  PART IV  
     
Item 15 Exhibits, Financial Statements Schedules and Reports 55
     
  Signatures 56

 

 
 

 

PART I

 

ITEM 1.  DESCRIPTION OF BUSINESS

 

GENERAL OVERVIEW

 

Tianyin Pharmaceutical Co., Inc (“TPI” or the “Company”, together with its subsidiaries, herein referred to as “we” “us” and “our”) is a pharmaceutical company incorporated in the State of Delaware. Through our indirect wholly-owned subsidiary Chengdu Tianyin Pharmaceutical Co., Ltd. (“Chengdu Tianyin”), a corporation organized and existing under the laws of the People’s Republic of China (“PRC”), TPI is engaged primarily in the development, manufacturing, marketing and sales of patented biopharmaceutical medicines, branded generics, modernized traditional Chinese medicines (TCM), and active pharmaceutical ingredients (API) in China. We currently manufacture a comprehensive portfolio of 58 products, 24 of which are listed in the highly selective National Medical Reimbursement List (“NMRL”) and 10 are listed in the national Essential Drug List (“EDL”) of China.

 

TPI, previously called Viscorp, Inc., was originally formed as a limited liability company under the laws of the State of Delaware on August 20, 2002. In March 2006, Viscorp changed its status from an LLC to a corporation registered in the State of Delaware. Prior to the Share Exchange transaction described below, Viscorp operated as a developer and retailer of software for optometrists but did not generate any significant revenue. Immediately prior to the Share Exchange under which we acquired Chengdu Tianyin, Viscorp sold all of its assets (consisting solely of the software it had developed) to Charles Driscoll for $100.00.

 

The common stock of the Company currently trades on the NYSE Mkt under the symbol “TPI.”

 

CHENGDU TIANYIN

 

Chengdu Tianyin, located in Chengdu, Sichuan Province of China, was established in 1994 and acquired by the current management of the Company in 2003. Chengdu Tianyin delivered total revenue of $46.6 million with a net loss of $(0.8) million for the fiscal year ended June 30, 2014, a decrease of 31.0% from revenue of $67.5 million, and compared with a net income of $6.7 million respectively for the fiscal year ended June 30, 2013.

 

ACQUISITION OF OUR OPERATING BUSINESS

 

On January 16, 2008, we entered into and consummated the transactions (the “Share Exchange”) contemplated under a Securities Exchange Agreement (the “Share Exchange Agreement”) by and among us, Raygere Limited (“Raygere”), a company organized under the laws of the British Virgin Islands (“BVI”) and Time Poly Management Limited (“Time Poly”), Happyvale Limited (“Happyvale”) and Fartop Management Limited (“Fartop”), each a BVI company, and Cmark Holding Co., Ltd. (“Cmark”), an exempted company organized under the laws of the Cayman Islands.  At the time of the Share Exchange, Time Poly, Happyvale, Fartop and Cmark owned collectively 100% of the capital stock of Raygere.  Under the terms of the Share Exchange Agreement, the Raygere stockholders transferred to the Company all the shares of Raygere and Raygere became a wholly-owned subsidiary of the Company. As part of the Share Exchange, the shareholders of Raygere were issued 12,790,800 shares of the Company’s common stock, which represented 87.7% of the 14,587,200 issued and outstanding shares of the Company’s common stock immediately following the Share Exchange.

 

Raygere was incorporated in the BVI on January 26, 2007 and formed a Hong Kong subsidiary, Grandway Group Holdings Ltd. (“Grandway”) in May 2007. On October 30, 2007, Grandway acquired 100% of the equity interests of Chengdu Tianyin Pharmaceutical Co., Ltd., our indirect wholly-owned subsidiary, that operates our current business, pursuant to a sales and purchase agreement with the three of the then shareholders (“Original Shareholders”) of Chengdu Tianyin, pursuant to which Grandway purchased 100% of the equity interest in Chengdu Tianyin. This transfer was approved by the Bureau of Foreign Trade and Economic Cooperation of Chengdu Economic Technology Development Administration Committee on October 30, 2007, and the registration with the Chengdu Administration of Industry and Commerce was completed on November 5, 2007. As a result of this transfer, Grandway acquired 100% of the equity of Chengdu Tianyin.

 

As a result of the Company’s acquisition of Raygere, Chengdu Tianyin became our indirect wholly-owned subsidiary. Substantially all of our operations are conducted in China through Chengdu Tianyin. The transaction was regarded as a reverse merger whereby Raygere was considered to be the accounting acquirer of the Company after the exchange.  Although the Company is the legal parent company, Raygere is the continuing entity for financial reporting purposes. In addition, the Company ceased being a shell corporation as that term is defined in Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act.

 

3
 

 

In accordance with the terms of the Share Exchange Agreement, Charles Driscoll resigned as the Company’s Chief Executive Officer, Chief Financial Officer and President, and tendered his resignation as our sole director, which became effective on February 15, 2008. Dr. Guoqing Jiang was appointed to serve as the Chairman of our board and our Chief Executive Officer, effective as of the close of the Share Exchange, and Mr. Stewart Lor was nominated to serve as one of our directors effective on February 15, 2008. As of February 29, 2008, our board was expanded by three persons to include Professor Zunjian Zhang, Professor Jianping Hou and Mr. Jim McCubbin. On April 1, 2010, Mr. Lor resigned from his position as one of our directors, and on the same day we appointed Dr. James J. Tong as our director. On June 4, 2012, Mr. McCubbin resigned from our board as an independent director and continued to be a capital market and internal control advisor to the Company till 2013. We concurrently appointed Mr. Bo Tan as an independent director. As of the date of this filing, our directors are Dr. Guoqing Jiang, Dr. James J. Tong, Mr. Bo Tan, Prof. Zunjian Zhang and Prof. Jianping Hou.

 

POST-ACQUISTIION

 

On January 14, 2008, a majority of our shareholders approved, via written consent, the following actions, as set forth in our Information Statement on Schedule 14C, which was filed on February 11, 2008:

 

  1. To change our corporate name to TIANYIN PHARMACEUTICAL CO., INC; and
     
  2. To authorize 25,000,000 shares of preferred stock with a par value of $0.001.

 

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

 

THE FINANCINGS

 

2008 FINANCING

 

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

 

4
 

 

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

 

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

 

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

 

In March 2011, all preferred shares were converted to TPI common stock and no preferred shares remain outstanding. As of the date of this filing, all Class A Warrants expired in January 2013 and there are 4,257,814 shares of Class B Warrants remaining with the expiration date of January 25, 2015.

 

2009 FINANCING

 

On October 27, 2009, the Company completed a private equity financing of $4,987,500, with eight accredited investors (the “2009 Financing”). Net proceeds from the offering were approximately $4,490,000. Pursuant to the financing, we issued, for $4,987,500, a total of 1,534,570 units of our securities at $3.25 per unit. Each unit consisted of: 1) one share of the Company's common stock, par value $0.001 per share (the "Common Stock"); 2) a Class C Warrant (the "Class C Warrant", together with Class A Warrant and Class B Warrant, are referred sometimes herein below as “Warrants” or “Warrant”), with each Class C Warrant exercisable at $4.50 to purchase one-fifth of a share of Common Stock, such that the total amount of warrants issued to each investor shall be equal to twenty percent (20%) of the number of units purchased by each purchaser. Each of the warrants had a term of three (3) years and expired on October 27, 2012.

 

In connection with this financing, the Company paid cash compensation to the placement agent, Tripoint Global Equities, in the amount of $495,250. In connection with this financing, the Company granted warrants to purchase 122,766 shares of common stock at $3.25 and 24,553 shares at $4.50 to the placement agent or its designees. These warrants have the same terms as the warrants issued to investors and are included in the units. These warrants expired on October 27, 2012.

 

CURRENT CORPORATE STRUCTURE

 

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 (“Sichuan Mingxin”) 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 $3.2 million (equivalent of RMB 20 million), of which Chengdu Tianyin accounts for 87%, after increasing its stake in JCM from 77% at the inception of JCM by purchasing another 10% ownership from Sichuan Mingxin in the fiscal year 2012. JCM is designed as a broader strategy to establish the Company’s presence in the API industry in China. By June 30, 2014, Chengdu Tianyin initiated the process of acquiring the remaining 13% of the ownership of JCM from the Sichuan Mingxin and the individual investors for approximately $2.4 million (RMB 15 million). The transaction has been completed at the time of this filing which made JCM a fully owned subsidiary of Chengdu Tianyin.

 

5
 

 

Under the governmental planning of designated industrial locations in Sichuan province, Chengdu Tianyin needed to relocate its facility to Qionglai County, south of Chengdu. During the process of construction while all operating subsidiaries of Chengdu Tianyin are registered outside of Qionglai, as part of the governmental contingency, Chengdu Tianyin is required to establish presence in Qionglai County. The Company decided to acquire a pharmaceutical distribution company and registered it at Qionglai County as a subsidiary of Chengdu Tianyin. On August 29, 2012, Chengdu Tianyin entered into a Share Transfer Agreement with the shareholders of Sichuan Hengshuo Pharmaceutical Co., Ltd (“Sichuan Hengshuo” or “HSP”), a PRC pharmaceutical trading company, to acquire 100% ownership of HSP for a total consideration of approximately $0.2 million (RMB 1.3 million). The share transfer was closed on November 30, 2012, pursuant to which Chengdu Tianyin now owns 100% of HSP and Dr. Guoqing Jiang is the legal representative of HSP.

  

The following chart describes the Company’s current corporate structure:

 

6
 

 

PRODUCT PORTFOLIO

 

As of June 30, 2014, we had a comprehensive portfolio of 58 products approved by the China Food and Drug Administration (“CFDA”, previously known as the State Food and Drug Administration, “SFDA”) comprised of patented biopharmaceutical products, branded generics, modernized Chinese medicines and other pharmaceuticals. 41% of our products are reimbursed under the government medical reimbursement program. Our flagship patented product Ginkgo Mihuan Oral Liquid (GMOL, patent number: 20061007800225, which expires on April 30, 2026) contributed to approximately 35.3% of our fiscal 2014 revenue. Our products are listed and described as follows,

  

NO.  PRODUCT  CATEGORY  CFDA NO.  INDICATIONS
1  Ginkgo Mihuan Oral Liquid  Internal Medicine  H20013079  Coronary heart diseases, myocardiac infarction stroke
2  Apu Shuangxin, Benorylate Granules  Internal Medicine  H10970068  Rheumatoid arthritis
3  Xuelian Chongcao Oral Liquid  Internal Medicine  B20020680  Boost of body energy, immunity enhancer
4  Fukangbao Oral Liquid  Gynecology  Z10983056  Anemia, irregular menstrual cycle
5  Xiaoyan Lidan Tablets  Hepatology  Z20093681  Acute cholangitis and cholecystitis
6  Qiju Dihuang Mixture  Internal Medicine  Z20023391  Improve liver function
7  Yupingfeng Oral Liquid  Internal Medicine  Z20023352  Immune system enhancement
8  Sanqi Tablets  Internal Medicine  Z20093512  Anti-inflammatory, stop bleeding
9  Qianggan Syrup  Hepatology  Z20054224  Hepatitis, cirrhosis, fatty liver disease
10  Kangjun Xiaoyan capsule  Gynecology  Z20090855  Menstrual cramps, vaginal bleeding
11  Yinqiao Jiedu Tablets  Internal Medicine  Z20093555  Anti-inflammation, fever, cold symptoms
12  Duyiwei Dispersible Tablets  Internal Medicine  Z20090239  Pain management, stop bleeding,  fracture
13  Baotailing Tablets  Gynecology  Z20093087  Recurrent spontaneous miscarriage
14  Yiqing Capsules  Internal Medicine  Z20093084  Pharyngitis and tonsillitis
15  Xiaoer Qingre Zhike Oral Liquid  Internal Medicine  Z20093060  Anti-cough, anti-asthma in children
16  Tongqiao Biyan Tablets  Otolaryngology  Z20093063  Chronic and allergic rhinitis, sinusitis
17  Hugan tablet  Hepatology  Z20063054  Chronic hepatitis, early liver cirrhosis
18  Compound Dantong Capsules  Internal Medicine  Z20093012  Acute and chronic cholecystitis, cholangitis and concurrent infection of Biliary Calculi
19  Fuke Zhidai Tablets  Gynecology  Z20083375  Chronic cervicitis, blennometritis
20  Yanyan Tablets  Otolaryngology  Z20064406  Relieve symptoms of chronic pharyngitis
21  Danqi Tablets  Gynecology  Z20064032  Relieve menstrual cramps and other symptoms
22  Yanlixiao Capsules  Internal Medicine  Z20064158  Anti-inflammatory, bacterial infectious diseases
23  Kudancao Tablets  Otolaryngology  Z20064050  Relieve inflammatory symptoms of laryngopharyngitis
24  Weikangling Capsules  Gastroenterology  Z20064060  Gastric and duodenal ulcer, acute and chronic gastritis
25  Baoxinning Capsules  Internal Medicine  Z20063957  Angina, coronary heart diseases, arrhythmia
26  Jiangtangning Capsules  Internal Medicine  Z20063813  Relieve symptoms of diabetes
27  Yankening Tablets  Internal Medicine  Z20063847  Acute tonsillitis, bacterial pneumonia, urinary tract infections

 

7
 

  

NO.  PRODUCT  CATEGORY  CFDA NO.  INDICATIONS
28  Gano derma Lucidum Capsules  Neurology  Z20063833   Insomnia, neurasthenia,amnesia
29  Qianbo Biyan Tablets  Otolaryngology  Z20063837  Inflammation, chronic and acute rhinitis
30  Yishengling Granules  Internal Medicine  Z20063841  Improvement of kidney function and sperm counts, impotence
31  Xiaoyanlidan Tablets I  Hepatology  Z20063864  Relieve symptoms of acute cholangtis and cholecystitis.
32  Kang Guzengsheng Tablets  Orthopedics  Z20063875  Bone hyperplasia, neck pain, ankylosing spondylitis
33  Tianqi Tongjing Capsules  Gynecology  Z20063645  Relieve symptoms of menstrual cramps
34  Yinhuang Capsules  Otolaryngology  Z20063462  Upper respiratory tract infection, tonsillitis, pharyngitis
35  Chuanxinlian Capsules  Internal Medicine  Z20063437  Anti-inflammation, fever, cough, diarrhea, mouth ulcers
36  Qianlie Shule Capsules  Urology  Z20060030  Relieve symptoms of chronic prostatitis
37  Huangbo Capsules  Internal Medicine  Z20063156  Anti-inflammatory, diarrhea, jaundice, nocturnal emission
38  Qiangli Pipa Oral Liquid  Otolaryngology  Z20063046  Suppress cough, mucus clearance, bronchitis
39  Dabaidu Capsules  Urology  Z20055092  Inflammatory symptoms of sexually transmitted diseases, e.g. syphilis
40  Huganning Tablets  Hepatology  Z20054697  Chronic and acute hepatitis
41  Tongbianling Capsule  Internal Medicine  Z20083424  Bedridden constipation and elderly chronic constipation
42  Laonian Kechuan Tablets  Internal Medicine  Z20083360  Improve immune function, chronic bronchitis in elders
43  Shushenling Capsules  Neurology  Z20063557  Neurasthenia, menopause syndrome
44  Qijudihuang Oral Liquid  Internal Medicine  Z20003098  Liver function improvement
45  Qingre Jiedu Oral Liquid  Internal Medicine  Z51020066  Fever, cold, upper respiratory infection
46  Yupingfeng Oral Liquid  Internal Medicine  Z20003099  Immune system enhancement
47  Yinqiao Shangfeng Capsules  Internal Medicine  Z20003100  Relieve inflammatory symptoms of laryngopharyngitis and fever
48  Radix Sophorae Flavescentis Vaginal Effervescent Tablets  Gynecology  Z20050176  Cervical erosion
49  Levofloxacin Hydrochloride  Tablets  Internal Medicine  H20066521  Anti bacterial infection
50  Azithromycin Dispersible  Tablets  Internal Medicine  H20074143  Upper and lower respiratory tract infections and other bacterial infections in skins and reproductive system
51  Azithromycin Dispersible  Tablets  Internal Medicine  H20074145  Upper and lower respiratory tract infections and other bacterial infections in skins and reproductive system
52  Simvastatin Tablets  Internal Medicine  H20083478  Hypercholesterolemia, Coronary Heart Disease.
53  Mycophenolate Mofetil Capsules  Internal Medicine  H20080819  Suppress graft rejection after transplantations
54  Fleroxacin Tablets  Internal Medicine  H20094057  Acute and chronic bronchitis, pneumonia, urogenital, respiratory, gastrointestinal infections
55  Ofloxacin Tablets  Urology  H20094038  Infections in urogenital, respiratory, gastrointestinal systems
56  Clindamycin Hydrochloride Capsules  Internal Medicine  H20103200  Various bacterial infections
57  Clindamycin Hydrochloride Capsules  Internal Medicine  H20103274  Various bacterial infections
58  Gliclazide Tablets  Internal Medicine  H20113233  Diabetic Mellitus

 

(Source: www.sfda.gov.cn, Chinese version or www.tianyinpharma.com)

 

8
 

 

CHINA HEALTHCARE INDUSTRY AND MARKET

 

The growth of China’s healthcare market is based upon the country’s per capita GDP, government-backed healthcare reimbursement system, countryside urbanization plans, along with the growing aging population, which has been driving an overall increase in healthcare spending. 

 

National Medical Insurance Program

 

The National Medical Insurance Program (the “Program”), introduced in 1999, provides the guidance on which prescription and over-the-counter (OTC) medicines are included in the program and to what extent the purchases of these medicines are reimbursable. The implementation of the Program is delegated to the provincial governments, who established their own medicine catalogs. For purchases of provincial catalog medicines to be reimbursable under the program, these medicines must be purchased from hospitals or retail pharmacies authorized under the Program. The inclusion of a medicine on a provincial reimbursement list can enhance its sale by improving the affordability of the medicine. Moreover, the inclusion endorses the safety and the reliability of the medicine based on the stringent tests required during the application. As stated above, we have 24 products currently listed in the national medicine catalog of the Program.

 

Prescription Medicine and Hospitals

 

Most people in China seek healthcare services at state-owned hospitals, where doctors may only prescribe medicines that are listed on the hospital’s formulary. Hospital administrators decide whether to include a particular medicine in their formulary based on factors such as efficacy, affordability and the hospital’s budget. Unlike in the US, where patients typically fill their prescriptions at pharmacies unaffiliated with hospitals, out-patients in China typically fill their prescriptions at hospital pharmacies. Hospitals in China are classified under the Ministry of Health (MOH)’s administered hospital classification system into three classes, the best and largest hospitals being designated as “Class 3” hospitals, with the second and third tiers described as “Class 2” and “Class 1” hospitals, respectively. The classification system is based upon factors such as the hospital’s reputation, the number of doctors and nurses on staff, the total number of in-patient beds contained within the hospital, along with the extent of the hospital’s equipment on premise and the level of expertise resident within the hospital.

 

OTC Medicines and Retail Pharmacies

 

While out-patients in China generally fill their prescriptions at hospital pharmacies, they primarily purchase over the counter (OTC) medicines from retail pharmacies. To the extent that a medical condition can be treated with an OTC medicine, many Chinese people prefer to purchase the OTC medicine from retail pharmacies. The retail pharmacy sector in China is highly fragmented, which includes pharmacy chain stores, individual stores, retail chain stores with OTC counters, and OTC counters in supermarkets. While they are expanding quickly, neither pharmacy chain stores nor retail chain stores with OTC counters have currently developed a nationwide presence within China. As a result, retail pharmacies tend to have less bargaining power than hospitals in procuring medicines from pharmaceutical companies. It should be noted that currently a portion of retail pharmacies within China are authorized under the National Medical Insurance Program to be reimbursed for the cost of a medicine included in the provincial medicine catalog. The Chinese government authorities prohibit advertisement of prescription medicines through the mass media while OTC medicines can be advertized using mass media. Chinese consumers normally purchase OTC medicines based upon brand name recognition and price. Consumers gain familiarity with OTC medicines through advertising, word-of-mouth and recommendations by pharmacy salespeople.

 

SALES AND MARKETING

 

We sell our products via regional distributors as well as directly to the hospitals, clinics, and pharmacies in China.  We are expanding our sales force and our coverage with regional distributors across China.

 

RAW MATERIALS

 

Our geographical location at Sichuan province facilitates an efficient access to high-grade raw pharmaceutical ingredients for both chemical medicine and Chinese medicines. For greater purchasing power we utilize a limited number of suppliers for most of our pharmaceutical raw materials.

 

For the fiscal years ended June 30, 2014, two major raw vendors accounted for approximately 25% or $3.9 million and 13% or $2.0 million, respectively, of the Company’s total inventory purchases. For the fiscal year ended June 30, 2013, three major vendors accounted for approximately 18% or $4.0 million, 14% or $3.2 million and 14% or $3.1 million, respectively, of the Company’s total inventory purchases.

 

None of the above-mentioned major vendors are related parties to the Company.

 

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CUSTOMERS

 

Five major customers accounted for 21% and 22% of the net revenue for the fiscal years ended June 30, 2014 and 2013, respectively with no customers accounted for more than 10% of sales. Total sales to these customers were $11.1 million and $15.1 million for the years ended June 30, 2014 and 2013, respectively. The loss of any one major customer could have a material adverse effect on our business and operations. None of the major customers are related parties to the Company.

 

INTELLECTUAL PROPERTY

 

We rely primarily on a combination of patent, trademark, trade secrets and administrative protections, as well as employee and third-party confidentiality agreements to safeguard our intellectual property. Currently, we have a design patent granted and a formulation patent pending for our flagship product: Ginkgo Mihuan Oral Liquid (“GMOL”). The patent number is 20061007800225 with a protection period of 20 years starting from April 30, 2006 and expiring on April 30, 2026.  Although our other products are not subject to patent protection, they are Good Manufacturing Practice (“GMP”)-certified and approved by the CFDA, which is valid for a term of 5 years and renewable at the expiration thereof. The new CFDA product filing and registration policy provides, so long as no other company within our immediate pharmaceutical industry produces a product superior to ours in terms of current advances and major product breakthroughs, protection to formulas and production techniques of approved products, and prohibits producing and selling similar products without the CFDA’s approval. The type of major breakthroughs that the CFDA considers in determining whether another product, similar to one already approved can be produced would be significant improvements to existing products in the following areas: synthesis, extraction methods, physical and chemical nature and purity, dosage, prescription screening, preparation technology, testing methods, quality indicators, stability, pharmacology, toxicology, processing methods, active ingredients, route of administration, etc. As a result of this policy, the government encourages innovation in TCM research and development (“R&D”).  Other pharmaceutical companies cannot produce products similar to ours without the CFDA’s approval, unless they have achieved such major breakthroughs and received approval from the CFDA. As of June 30, 2014, we had 58 products registered at the CFDA, including patent-protected GMOL.

 

In addition, elements of our pharmaceutical composition, formulation and manufacturing processes involve proprietary technologies, technical know-how or un-patentable data, for which we rely on administrative protection, trade secret and confidentiality agreements rather than patents to sustain our competitive advantages. We have also secured our rights in the intellectual properties with confidentiality, non-competition and proprietary information agreements signed by our R&D personnel.

 

COMPETITION

 

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

 

Our competitive strengths include:

 

1) A portfolio of 58 products that cover both TCM and generics.

2) Twenty four of our products are listed in the National Reimbursement List, which ensures affordability and accessibility to users of our products.

3) Several proprietary products including our core product GMOL with sizable market potential.

4) A cooperative partnership R&D model that offers a cost effectiveness and time efficiency.

5) A well-established national distribution sales network tailored to different market segments.

6) A management team consisting of industry veterans with a meaningful track record.

 

GOVERNMENT REGULATION

 

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

 

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Medicine approval and registration

 

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

 

New Medicine When a medicine is approved by the CFDA as a new medicine, the CFDA will issue a new medicine certificate to the manufacturer and impose a monitoring period of as long as five years. The length of the monitoring period is specified in the new medicine certificate. During the monitoring period, the CFDA will monitor the safety of the new medicine, and will neither accept new medicine certificate applications for an identical medicine by another pharmaceutical company, nor approve the production or import of an identical medicine by other pharmaceutical companies. The holder of a new medicine certificate effectively has the exclusive right to manufacture the new medicine during the monitoring period.

 

Provisional National Production Standard   In connection with the CFDA’s approval of a new medicine, the CFDA will normally direct the manufacturer to produce the medicine according to a provisional national production standard, or a provisional standard.  A provisional standard is valid for two years, during which the CFDA closely monitors the production process and quality consistency of the medicine to develop a national final production standard for the medicine, or a final standard. Three months before the expiration of the two-year period, the manufacturer is required to apply to the CFDA to convert the provisional standard to a final standard.  Upon approval, the CFDA will publish the final standard for the production of this medicine. There is no statutory timeline for the CFDA to complete its review and grant approval for the conversion. In practice, the approval for conversion to a final standard is time-consuming and could take a few years. However, during the CFDA’s review period, the manufacturer may continue to produce the medicine according to the provisional standard.  Although all of our current products have received the final production standard, any new products we produce will need to apply for the standard.  We do not anticipate any difficulty in obtaining these approvals from the CFDA, but no assurances can be given as to when or if the approval will be obtained.

 

Transitional Period Prior to the latter of (1) the expiration of a new medicine’s monitoring period or (2) the date when the CFDA grants a final standard for a new medicine after the expiration of the provisional standard, the CFDA will not accept applications for an identical medicine nor will it approve the production of an identical medicine by other pharmaceutical companies.  Accordingly, the manufacturer will continue to have an exclusive production right for the new medicine during this transitional period.

 

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

 

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

 

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

 

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In preparation for the new 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. We received our current GMP certificate for both of our pre-extraction plant and formulate facilities on August 27, 2013 for the next three years until the end of 2015. In addition, under the guidance by provincial government, our facility is scheduled to be relocated to Qionglai County, south of Chengdu, which is designated for the pharmaceutical industry. The Qionglai facility (QLF) post-relocation 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 currently located near the center of the city of Chengdu surrounded by a rapidly expanding residential area. Both the pre-extraction plant and the formulation plant will subsequently be relocated to Qionglai County to become a combined QLF plant, which is estimated to be 80 mu or approximately 13 acres. 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 phase I construction along with GMP preparation has been completed in August 2014. By September 3, 2014, the GMP documentation has been submitted to the CFDA for scheduling of GMP inspection by the official examination team. TPI expects the start of the production at QLF immediately following the GMP certification.

 

As an effort to expand generic market amid the pricing pressure of its generic division, TPI has explored the strategic reduction of the tendering price of its Hugan Tablets (for liver conditions, approximately $0.6 million sales per year) in order to compete in Zhejiang province of China. The competitive tender price has helped TPI to successfully secure the sales right of Hugan Tablets in Zhejiang province. However, as a part of the government’s regulatory procedure, the CFDA conducted examination on the production process and the cost for competitive (low) tendering price bidders. During the examination period in April 2014, the Company’s GMP certificate granted by the CFDA on August 27, 2013 was administrated by Sichuan provincial CFDA and the production and sale of our Hugan Tablets were temporarily halted, pending the results of quality and pricing tests. The results have shown the Company’s production has followed the proper procedure for almost all of its products, although more stringent quality and ingredients requirement imposed on the TCM tablets production process resulted in product recalls of Hugan tablets and systematic disposal of certain items in the inventory.

 

On May 9, 2014, the Company received its renewed GMP certificate for both its Chengdu Tianyin’s pre-extraction facility at the city of Chengdu and formulation facility at Longquan County of Chengdu, valid until the end of 2015, under certificate numbers of “Chuan J0461” and “Chuan K0592”. Manufacturing and the sale of most of our products resumed in early May, except for our tablet formulation division which was further inspected for its production process by the provincial CFDA staff on May 24, 2014, which was immediately followed by the re-certification of Company’s tablet formulation division. Therefore, the GMP certificates for all of our products have been re-issued to us as of the date of this filing.

 

The above-mentioned Hugan incidence resulted in production interruption for more than 50 days, causing significant impact on sales that lasted longer in time due to the time required for the recovery of production and regaining of market share lost during the fourth quarter. By August 2014, the production capacity has been restored near pre-incidence level. With the imminent start of our new QLF, we expected the sales to be restored by the end of calendar year 2014. We recognized that the impact on sales of Hugan Tablets along with other products by TPI was significant, and we expect the start of the new QLF to facilitate our sales recovery from the Hugan incidence.

 

Pharmaceutical Distribution

 

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

 

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Price Control

 

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

 

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

 

Other Regulations

 

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

 

Foreign Currency Exchange

 

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

 

Regulation on Overseas Listing

 

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

 

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RESEARCH AND DEVELOPMENT

 

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

 

EMPLOYEES

 

Currently, we have approximately 1,000 employees, consisting of 400 in manufacturing and operation, 500 in sales and marketing and 100 in general, administrative and R&D. We consider our relations with our employees to be good.

  

FOR ADDITIONAL INFORMATION

 

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

 

Copies of the Company’s Annual Reports on Form 10K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are all available on our website ( http://www.tianyinpharma.com ) free of charge, within a week after we file same with the SEC or by sending a request for a paper copy to our outside securities counsel: Hunter Taubman Weiss LLP, 130 w 42nd Street, Suite 1050, New York, NY 10036.

 

ITEM 1A.  RISK FACTORS

 

Risks Related To Our Business

 

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

 

Our growth is supported by continuous investment in time, resources and capital to identify and develop new products or new formulations for the market via geographic expansion and market penetration. If we are unable to either develop new products on our own or acquire licenses for new products from third parties, our ability to grow revenues and market share will be adversely affected. In addition, we may not be able to recover our investment in the development of new drugs, given that projects may be interrupted, unsuccessful, not as profitable as initially contemplated or we may not be able to obtain necessary financing for such development. Similarly, there is no assurance that we can successfully secure such rights from third parties on an economically feasible basis.

 

We may not be able to secure financing needed for future operating needs on acceptable terms, or on any terms at all.

 

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

 

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

 

Our business plan is to grow our operations to meet increasing demand for our products. Growth in our business may place a significant strain on our personnel, management, financial systems and other resources. The evolution of our business also presents numerous risks and challenges that include continued acceptance of our products, sales and market share expansion, costs for expansion, technological evolvement and industrial dynamics. 

 

If we are successful in obtaining rapid market growth of our products, we will be required to deliver large volumes of quality products and services on a timely basis at a reasonable cost to the customers. Meeting any such increased demands will require us to expand our manufacturing facilities, to increase our ability to purchase raw materials, to expand our work force, to expand our quality control capabilities and to increase the scale upon which we provide our products and services.  Such demands would require more capital and working capital than we currently have available and we may be unable to meet the needs of our customers, which could adversely affect our relationship with our customers and reduce our revenues.

 

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

 

Unexpected situations, expenses, and delays are frequently encountered in developing and marketing products. These include, but are not limited to, competition, the need to develop customers and market expertise, market conditions, sales, marketing, increases in the cost of raw materials, and governmental regulations and any other factors that may cause significant impact to various aspects of business operation. Our failure to meet any of these conditions would have a materially adverse effect upon us and may force us to reduce or curtail our operations. We may not achieve our business growth objectives and the failure to achieve such goals would have an adverse impact on our business and results of operations.  

 

Our growth strategy includes the pursuit of acquisitions, maintenance of GMP certifications and new product development, which could have a materially adverse effect on our business, financial condition, results of operations and growth prospects.

 

Our business strategy includes growth through strategic acquisitions, maintenance of GMP certifications for our products and the development of new products and technologies, which will involve significant capital expenditure and risks. Innovative pharmaceutical development involves R&D costs, but it may achieve no tangible results and instead may adversely affect our future profitability. In addition, any acquisition or combination that we consummate will likely involve, among other things, the payment of cash, the incurrence of contingent liabilities and the amortization of expenses related to goodwill and other intangible assets, and transaction costs, which may adversely affect our business, financial condition, results of operations and growth prospects. Our ability to integrate and organize any new businesses and/or products, whether internally developed or obtained by acquisition or combination, will likely require significant expansion of our operations. There is no assurance that we will be able to obtain the necessary resources for such expansion, and the failure to do so could have a materially adverse effect on our business, financial condition, results of operations and growth prospects.  In addition, future acquisitions or combinations by the company involve risks of, among other things, entering markets or segments in which we have no or limited prior experience, the potential loss of key employees or difficulty, delay or failure in the integration of the operations of any such new business with our current business and operating and financial difficulties of any new or newly combined operations, any of which could have a materially adverse effect on our business, financial condition, results of operations and growth prospects.  Moreover, there can be no assurance that the anticipated benefits of any internally developed new business segment or business combination will be realized.

 

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Our current products have certain side effects.  If the side effects associated with our current or future products are not identified prior to their marketing and sale, we may be required to withdraw such products from the market, perform lengthy additional clinical trials or change the labeling of our products, any of which could adversely impact our growth.

 

Our current products have certain side effects.  If significant side effects of our medicines are identified after they are marketed and sold: 

 

1)those medicines listed in the national and provincial medicine catalogs may be removed from the catalogs or downgraded to a lower tier;
2)regulatory authorities may withdraw or modify their approvals of such medicines;
3)we may be required to reformulate these medicines, change the ways in which they are marketed, conduct additional clinical trials, change the labeling of these medicines or implement changes to obtain new approvals for our manufacturing facilities;
4)we may be less successful in tendering processes used by state-owned hospitals for medicine purchases;
5)we may have to recall these medicines from the market and may not be able to re-launch them;
6)we may experience a significant decline in sales of the affected products;
7)our reputation may suffer; and
8)We may become a target of lawsuits. 

 

The occurrence of any of these events would harm our sales of these medicines and substantially increase the costs and expenses of marketing these medicines, which in turn could cause our revenues and net income to decline. In addition, the reputation and sales of our medicines could be adversely affected due to the severe side effects discovered.

 

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

 

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

 

We may not be able to obtain manufacturing or marketing approval for our future products, failure to do so could materially harm our business prospects.

 

All medicines must be approved by the China Food and Drug Administration (“CFDA”, previously known as State Food and Drug Administration, “SFDA”), before they can be manufactured, marketed or sold in China.  The CFDA requires a pharmaceutical manufacturer to have successfully completed clinical trials of a new medicine and demonstrated its manufacturing capability before approval to be granted. Clinical trials are costly and their results are uncertain.  In addition, the CFDA and other regulatory authorities may apply new standards for safety, manufacturing, labeling, marketing and distribution of future products. Compliance with these standards may be time-consuming and expensive. Our future products may not be efficacious or may have undesirable or unintended side effects, toxicities or other characteristics that may preclude us from obtaining approval or may prevent or limit their commercial use. As a result, we may not be able to obtain CFDA or other governmental approvals for our future products on a timely basis or at all. Even if we do obtain approvals, such approvals may be subject to limitations on the indicated uses for which we may market a product, which may limit the size of the market for such a product. In addition, CFDA along with other departments of the government that directly or indirectly regulate the healthcare industry in China may undergo periodic review and revisions of their policies which may impact the pharmaceutical market in a way that results in uncertainty for our business operation.

 

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

 

After the CFDA approves a new medicine, it directs the manufacturer to produce that medicine according to a provisional standard which is valid for two years, during which the CFDA closely monitors the production process and quality consistency of the medicine for developing a national final production standard. Three months before a medicine’s provisional standard expires, the manufacturer of that medicine is required to apply to the CFDA to convert its provisional standard to a final standard. In practice, the CFDA’s approval process could take a few years. However, during the CFDA’s review period (including after the expiration of the two-year provisional standard period), the manufacturer may continue to produce the medicine according to the provisional standard. 

 

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The retail prices of our principal products are subject to price controls administered by the government authorities which may limit the pricings of our products. It is also possible that we may be required to lower the wholesale prices of our products as a result of any government-mandated price reductions.

 

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

 

In response to rapid increases in the market prices of medicines from 2006 through to today, the NDRC has been actively administrating price ceilings on more than 400 medicines in China. These continuous efforts to administer and reduce medicine market prices have resulted on average in a 30% price reduction in prices of retail medicines. These price reductions have not been offset by corresponding cost reductions, but have been worsened by corresponding increasing raw material and other costs of production during the same period. If this current market trend continues and we are required to further lower the prices of our principal products in the future as a result of any government-mandated reduction in the price ceilings, our future revenue and profitability would be adversely affected.

 

Our products that have been included in national and provincial medicine catalogs of the National Medical Insurance Program may be removed from the national or provincial medicine catalogs or downgraded to a lower tier, and our new products may encounter difficulty in seeking inclusion in these catalogs.

 

The Ministry of Labor and Social Security (the “MLSS”), together with other government authorities, determines which medicines are to be included in or removed from the national medicine catalog for the National Medical Insurance Program, and under which tier a medicine should fall, both of which affect the amounts reimbursable to program participants for their purchases of those medicines.  These determinations are based on a number of factors, including price and efficacy.  Provincial governments are required to include all Tier 1 medicines listed in the national medicine catalog in their provincial medicine catalogs, but can use their discretion to add other medicines to, or exclude the Tier 2 medicines listed in the national medicine catalog from, their provincial medicine catalogs, as long as the combined total numbers of medicines added and excluded do not exceed 15% of the number of the Tier 2 medicines.  In addition, provincial governments may use their discretion to upgrade a nationally classified Tier 2 medicine to Tier 1 in their provincial medicine catalogs, but may not downgrade a nationally classified Tier 1 medicine to Tier 2. Depending on which tier a medicine is classified in the provincial medicine catalog, a National Medical Insurance Program participant residing in that province can be reimbursed for the full cost of a Tier 1 medicine and for 80-90% of the cost of a Tier 2 medicine.  24 of our products are currently included in the National Reimbursement List. If the relevant government authorities decide to remove our products from the national or provincial medicine catalogs, or downgrade our products currently in Tier 1 to Tier 2, such removal or downgrading would reduce the affordability of our products and change the public perception regarding our products as being efficacious, safe and reliable, which in turn would adversely affect the sales of these products and reduce our net revenues.  Furthermore, if we are unable to obtain approval from the relevant government authorities to include our new products in the national or provincial medicine catalogs, sales of our new products may be materially and adversely affected.

 

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

 

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

 

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We rely on a limited number of suppliers and the loss of any of our suppliers, or delays or problems in the supply of materials used in our products, could materially and adversely affect our operations and growth.

 

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

 

We may not be able to adequately protect our intellectual property, which could cause us to be less competitive.

 

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

 

Our existing indebtedness may adversely affect our ability to obtain additional funds and may increase our vulnerability to economic or business downturns.

 

We are subject to a number of risks associated with our indebtedness, including: 1) we must dedicate a portion of our cash flows from operations to pay debt service costs, and therefore we have less funds available for operations and other purposes; 2) it may be more difficult and expensive to obtain additional funds through financings, if available at all; 3) we are more vulnerable to economic downturns and fluctuations in interest rates, less able to withstand competitive pressures and less flexible in reacting to changes in our industry and general economic conditions; and 4) if we default under any of our existing credit facilities or if our creditors demand payment of a portion or all of our indebtedness, we may not have sufficient funds to make such payments.

  

If we are unable to attract, train, retain and motivate our salespeople, our revenues may be materially and adversely affected.

 

We rely on our prescription medicine and OTC medicine salespeople, who are dispersed across China, to market our products to the regional distributors as well as hospitals and retail pharmacies. We believe that our current sales have resulted, to a significant extent, from the dedication, efforts and performance of our salespeople. We believe that our future success will depend on those same factors. If we are unable to attract, train, retain and motivate our prescription medicine and OTC medicine salespeople, sales of our products may be materially and adversely affected.

 

Our future success depends in part on our ability to make strategic acquisitions and investments.

 

Although up till now, we have achieved the compounded annual growth with pure organic growth, as part of our plan to expand our manufacturing capacity and product offerings, we may make strategic acquisitions in the highly-fragmented traditional Chinese medicine sector. Strategic acquisitions could subject us to uncertainties and risks, including:1) high acquisition and financing costs; 2) potential ongoing financial obligations and unforeseen or hidden liabilities; 3) failure to achieve the intended objectives, benefits or revenue-enhancing opportunities; 4) cost of and difficulties in integrating acquired businesses and managing a larger business; and 5) diversion of our resources and management attention. Our failure to consummate or handle the risks associated with these acquisitions and investments could have a material adverse effect on our market penetration and revenues growth.

 

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The failure to optimize our current manufacturing capacity as the market demand for our products grow could materially and adversely affect our business, financial condition, results of operations and growth prospects.

 

We currently have one pre-extraction plant, one formulated pharmaceutical manufacturing plant and one active pharmaceutical ingredient production plant in operation. 

 

In case of fire, earthquake or other disasters, we would have to resort to alternative sources of manufacturing, which may cause significant delays. Any increase in costs, slowdowns or shutdowns could have a material adverse affect on our business, financial condition, results of operations and growth prospects.

 

According to the market demand, management may add facilities, use high-efficiency equipment, increase employees’ working hours or extend hours of operation. We believe that we can adjust the existing capacity and future production capacity in a very short period of time to meet the market needs. We intend to expand our manufacturing operations by adding production lines, but there is no assurance that we will have the financial resources required for this planned expansion or that any such expansion will be successful or completed in a timely fashion or within budget. Additionally, although we could quickly adjust our capacity, we may encounter difficulties and significant unexpected costs and delays in scaling up our manufacturing operations. The failure to scale-up manufacturing operations in a timely and cost-effective way may adversely affect our income. Our formulated pharmaceutical facility is running at 90% saturation. If our manufacturing capacity could not meet the market demand for our products, our business operation, financial condition, and growth prospects would be adversely affected.

 

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

 

Our future growth depends on the continued service of our management team and other key employees. If one or more members of our management or other key employees were unable to serve as our employees, our revenue growth, business and future prospects would be affected. In addition, our ability to execute our business plan is dependent on our ability to attract and retain additional highly skilled personnel.

  

If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our Common Stock.

 

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

 

As a public company, we will have significant additional requirements for enhanced financial reporting and internal controls.  We will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.

 

We cannot assure you that we will not, in the future, identify areas requiring improvement in our internal control over financial reporting.  We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth.  If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our Common Stock.

 

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Risks Related To Our Industry

 

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

 

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

 

The production of pharmaceuticals depends on the supply of quality medicinal raw materials.

 

The supply and market prices of pharmaceutical raw materials may be influenced by various factors such as weather conditions and the occurrence of natural disasters or sudden increases in demand that would impact our costs of production. There is no assurance that we would be able to pass on any resulting increase in costs to our customers and therefore any substantial fluctuation in supply or the market prices of raw materials may adversely affect our results of operations and profitability.

 

If we do not keep pace with rapid technological change, we will be unable to sustain a meaningful market position.

 

The pharmaceutical industry in China is characterized by rapid changes in technology, constant enhancement of industrial know-how and the frequent emergence of new products.  Future technological improvements and continued product developments in the pharmaceutical market may render our existing products obsolete or affect their viability and competitiveness. Failure to respond to frequent technological advances by improving our existing products or developing new products in a timely manner and achieving desirable level of market acceptance may adversely affect our business and profitability.

 

Pharmaceutical companies in China are required to hold a number of permits and licenses to carry on their business.  Our ability to obtain and maintain these regulatory approvals is uncertain.

 

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

 

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

 

The Chinese government has recently launched a nationwide campaign against corrupt practices that have been frequently engaged by state-owned hospitals in China, including their acceptance of kickbacks or other illegal gains and benefits in connection with their providing medical services and purchasing medical equipment and medicines. As early as mid 2006, the China’s Ministry of Health (“MOH”) ordered all state-owned hospitals to review, among other things, their procurement policies and procedures and rectify problems and deficiencies. As a result of this campaign, many state-owned hospitals have since diverted a significant portion of their attention and resources to their internal inspection and rectification activities and are reviewing their procurement policies. These initiatives have been further reinforced by the new 2013 anti-corruption campaign led by China’s new president Jingping Xi. If the anti-corruption campaign becomes more intensified, causing a significant change to the hospitals’ procurement policies and procedures or otherwise resulting in a further delay for state-owned hospitals to resume their normal procurement of our products, our sales designated for hospitals, which account for a very substantial portion of our total sales, could be adversely affected.

 

Risks Related To Doing Business in China

 

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

 

Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the government could change these economic reforms or any of the legal systems at any time. The influencing factors include level of government involvement in the economy, control of foreign exchange, methods of allocating resources, balance of payments position, international trade restrictions and conflict. 

 

Our business is largely subject to the uncertain legal environment in China and your legal protection could be limited.

 

The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which precedents set in earlier legal cases are not generally used. The overall effect of legislation enacted over the past 20 years has been to enhance the protections afforded to foreign invested enterprises in China. However, these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and their interpretation and enforcement involve uncertainties.  These uncertainties could limit the legal protections available to foreign shareholders, such as the right of foreign invested enterprises to hold licenses and permits such as requisite business licenses. Because most of our officers and directors, after the Share Exchange, will reside outside of the United States, it may be difficult, if not impossible, to acquire jurisdiction over those persons if a lawsuit is initiated against us and/or our officers and directors by a shareholder or group of shareholders in the United States. Also, because our officers will likely be residing in China when a suit is initiated, achieving service of process against such persons would be extremely difficult. Furthermore, because the majority of our assets are located in China it would also be extremely difficult to access those assets to satisfy an award entered against us in United States court. Moreover, we have been advised that the PRC does not have treaties with the United States providing the reciprocal recognition and enforcement of judgments of courts.

 

Recent PRC regulations relating to the establishment of offshore companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to distribute profits to us or otherwise adversely affect us.

 

China State Administration of Foreign Exchange (the “SAFE”), has promulgated several regulations, including the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or Notice 75, effective on November 1, 2005 and its implementation rules. These regulations require that a PRC resident shall register with a local branch of the SAFE in connection with their direct or indirect shareholding in an overseas special purpose vehicle, or SPV, established for the purpose of overseas equity financing (including convertible debt financing). In addition, any PRC resident who is a direct or indirect shareholder of a SPV, is required to update its filed registration with the local branch of SAFE with respect to that SPV, to reflect any material change. If any PRC shareholder fails to make the required registration or to update the previously filed registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contribution into its subsidiary in China.

 

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PRC residents who directly or indirectly hold our shares, including those who may indirectly hold our shares through the participation and exercise of stock options or to purchase shares of Time Poly Management Limited (one of our shareholders), are required to file in accordance with Notice 75 or its implementation rules. We required all our shareholders who are PRC residents to comply with any SAFE registration requirements, if required by Notice 75 or other applicable PRC laws and regulations, although we have no control over either our shareholders or the outcome of such registration procedures. Any failure or inability by such individuals to comply with the SAFE regulations may subject us to fines or legal sanctions, such as restrictions on our cross-border investment activities or Chengdu TPI’s ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, our company or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected. 

 

The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with our acquisition of Chengdu Tianyin under the PRC laws and regulations.

 

On August 8, 2006, six PRC regulatory agencies: the PRC Ministry of Commerce, or MOFCOM, the State Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or CSRC, and the SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or new M&A Rule, which became effective on September 8, 2006 and was amended on June 22, 2009. The new M&A Rule purports, among other things, to require offshore special purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.

 

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

 

Recently enacted regulations in China may make it more difficult for us to pursue growth through acquisitions.

 

The new M&A Rule also established additional procedures and requirements that are expected to make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise that owns well-known trademarks for China’s traditional brands.  Besides, the Notice of the General Office of the State Council regarding the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors issued by the General Office of the State Council on February 3, 2011 and took effect on March 5, 2011 and the Regulations on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors which was issued by the Ministry of the Commerce on August 25, 2011 and took effect on September 1, 2011 provide that takeovers by foreign investors of local companies engaged in industries related to military or crucial to national security shall be subject to prior security review by the government.  We may grow our business in part by acquiring other traditional Chinese medicine businesses. Complying with the requirements of the new M&A Rule and other regulations in completing this type of transaction could be time-consuming, and any required approval processes, including Ministry of Commerce approval, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

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We may not be guaranteed a continuance to receive the preferential tax treatment we currently enjoy, and dividends paid to us from our operations in China may become subject to income tax.

 

The PRC Enterprise Income Law (“EIT”) Law and its implementing rules, both of which became effective on January 1, 2008, have adopted a uniform statutory enterprise income tax rate of 25% to all enterprises in China. The EIT Law and its implementation rules also permit qualified ‘‘high and new technology enterprises’’ (“HNTEs”), to enjoy a preferential enterprise income tax rate of 15% upon filing with competent tax authorities. The qualification as a HNTE generally has a valid term of three years and the renewal of such qualification is subject to review by the relevant authorities in China. Pursuant to the Notice of Tax Preferences Policies for the Development of Western Regions (Caishui [2001] No.202), promulgated on December 30, 2001, or the Tax Notice 202, both domestic companies and FIEs, which are established in the western regions (including Sichuan Province) and were engaged in the encouraged industries (including the TCM manufacture business), shall be entitled to a 15% national enterprise income tax rate for a period commencing from January 2001 to December 2010. Chengdu Tianyin has been entitled to the preferential tax treatment until December 31, 2010. After the preferential tax treatment period was ended, Chengdu Tianyin is currently subject to 25% income taxes. Chengdu Tianyin has submitted application for the renewal of its HNTE status in Chengdu, Sichuan Province of China. The successful renewal of the High Tech status would reduce the current enterprise income tax to 15% for another three years from the beginning of 2013 calendar year. However, there is no assurance that Chengdu Tianyin would successfully obtain the approval for the renewal.

 

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

 

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

 

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

 

In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. During the past ten years, the rate of inflation in China has been as high as 20.7% and as low as (2.2)%. The inflation is reflected in an increase of raw material prices which directly impacted the margins of pharmaceutical sales. To curtail inflation, the Chinese government may adopt various corrective measures to restrict the availability of credit or regulate growth. The high inflation may in the future cause Chinese government to impose credit controls or price ceilings or other actions which could inhibit economic activity in China, and thereby limit the market for our products.

 

Government regulations regarding environmental matters in China may adversely impact our business.

 

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

 

23
 

  

We have obtained all permits and approvals and filed all registrations required for the conduct of our business, except where the failure to obtain any permit or approval or file any registration would not have a material adverse effect on our business. The PRC governmental authorities have not revealed any material environmental liability that would have a material adverse effect on us.  We have not been notified by any governmental authority, of any continuing noncompliance, liability or other claims in connection with any of our properties or business operations, nor are we aware of any other material environmental condition with respect to any of our properties or arising out of our business operations at any other location.  However, in connection with the ownership and operation of our properties (including locations where we may have sent waste in the past) and the conduct of our business, we potentially may be liable for damages or cleanup, investigation or remediation costs.

 

No assurance can be given that all potential environmental liabilities have been identified or properly quantified or that any prior owner, operator, or tenant has not created an environmental condition unknown to us.  Moreover, no assurance can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the properties will not be affected by the condition of land or operations in the vicinity of the properties (such as the presence of underground storage tanks), or by third parties unrelated to us.  State and local environmental regulatory requirements change often. It is possible that compliance with a new regulatory requirement could impose significant compliance costs on us.  Such costs could have a material adverse effect on our business, financial condition and results of operations.

 

We may have difficulty establishing adequate management, legal and financial controls in the PRC.

 

The PRC has been historically deficient in Western style management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.

  

Changes in foreign exchange regulations in the PRC may affect our ability to pay dividends in foreign currency or conduct other foreign exchange business.

 

Renminbi, or RMB, is not a freely convertible currency at the moment. The restrictions on currency exchange imposed by PRC government may limit our ability to use revenues generated in RMB to fund our business activities outside the PRC or to make dividends or other payments in U.S. dollars. The PRC government strictly regulates conversion of RMB into foreign currencies. In the PRC, the State Administration for Foreign Exchange the “SAFE”), regulates the conversion of the RMB into foreign currencies. Pursuant to applicable PRC laws and regulations, foreign invested enterprises incorporated in the PRC are required to apply for “Foreign Exchange Registration Certificates.”

 

Risks Relating to Our Securities

 

Insiders have substantial control over us, and they could delay or prevent a change in our corporate control even if our other stockholders wanted it to occur.

 

Our executive officers, directors, and principal stockholders own, in the aggregate, approximately 31.8% of our outstanding Common Stock. As a result of their stockholdings, these stockholders are able to assert substantial control over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could delay or prevent an outside party from acquiring or merging with us even if our other stockholders wanted it to occur.

 

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

 

During the past two years our Common Stock has had a trading price range between $0.25 per share to $1.75 per share. The market price of our Common Stock has been and will likely continue to be highly volatile, as is the stock market in general. Factors that may materially affect the market price of our Common Stock are beyond our control, these factors may materially adversely affect the market price of our Common Stock, regardless of our performance.  In addition, the public stock markets have experienced extreme price and trading volume volatility. These broad market fluctuations may influence the market price of our Common Stock. There is currently only a limited public market for our Common Stock, which is listed on the NYSE Mkt, and there can be no assurance that a trading market will develop further or be maintained in the future. As of December 8, 2014, the closing bid price of our Common Stock was $0.52 per share and we had approximately 261 shareholders of record of our Common Stock, not including shares held in street name.

 

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

 

There are currently 4,257,814 warrants outstanding as of the date of this filing, which are to expire in January 2015 unless otherwise exercised prior to the expiration date. The exercise price of the remaining warrants is $3.00 per share. Exercise of the warrants may cause dilution to the interests of our other shareholders as a result of the additional Common Stock that would be issued upon exercise. In addition, sales of our Common Stock issuable upon exercise of the warrants could have a depressive effect on the price of our stock, particularly if there is not a coinciding increase in demand by purchasers of our Common Stock. Further, the terms on which we may obtain additional financing during the period that any of the warrants remain outstanding may be adversely affected by the existence of these warrants as well.

 

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

 

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

 

The market for penny stocks has experienced numerous frauds and abuses which could adversely impact investors in our stock.

 

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

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

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ITEM 2.  DESCRIPTION OF PROPERTY

 

All land in China is owned by the State.  Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes.  In the case of land used for industrial purposes, the land use rights are granted for a period of 50 years.  This period may be renewed at the expiration of the initial and any subsequent terms.  Granted land use rights are transferable and may be used as security for borrowings and other obligations. Chengdu Tianyin currently owns land use rights to approximately 29,651 square meters of land and approximately 10,780 square meters of buildings consisting of manufacturing facilities, employee quarters and office buildings in Chengdu, China.  Chengdu Tianyin holds five State-owned Land Use Rights Certificates and eight Building Ownership Certificates for the land use rights and buildings owned by it, which include the:

 

1.State-owned Land Use Rights Certificate (No.: Qingyangguoyong [2007] No. 12133);
2.State-owned Land Use Rights Certificate (No.: Qingyangguoyong [2007] No. 12132);
3.State-owned Land Use Rights Certificate (No.: Longguoyong [2002] No. 17188);
4.State-owned Land Use Rights Certificate (No.: Longguoyong [2007] No. 76483);
5.State-owned Land Use Rights Certificate (No.: Qingguoyong [2007] No. 12575);
6.Building Ownership Certificate (No.: ChengfangquanjianzhengJianzhengZi No.1570035);
7.Building Ownership Certificate (No.: ChengfangquanjianzhengJianzhengZi No.1599930);
8.Building Ownership Certificate (No.: ChengfangquanzhengJianzhengZi No.1570039);
9.Building Ownership Certificate (No.: LongfangquanzhengJianzhengZi No.0119728);
10.Building Ownership Certificate (No.: LongfangquanzhengJianzhengZi No.0119727);
11.Building Ownership Certificate (No.: LongfangquanzhengJianzhengZi No.0119729);
12.Building Ownership Certificate (No.: Longfangguan No. 0070870); and
13.Building Ownership Certificate (No.: Longfangguan No. 0070869).

 

In April 2009, we entered into a land supply agreement with the Sichuan Xinjin County Government to acquire 100 mu (approximately 66,700 square meters) of land within the Xinjin Chemical Industrial Park.

 

We currently rent office space located at 23rd Floor, UnionsunYangkuo Plaza, No. 2, Block 3, Renmin Road South, Chengdu, Postal Code: 610041, China. The rental agreement is renewed annually and the rent, which is approximately $160,000 per annum, is paid quarterly.

 

ITEM 3.  LEGAL PROCEEDINGS

 

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

 

ITEM 4.  (REMOVED AND RESERVED)

 

PART II

 

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

 

The Company’s common stock is traded on the NYSE Mkt under the symbol “TPI” since October 1, 2008; our CUSIP number is 88630M104. We first began trading on August 14, 2007 on the Over the Counter Bulletin Board.   The following table sets forth the quarterly high and low bid prices for the common stock for the last two fiscal years.  The prices set forth below represent inter-dealer quotations, without retail markup, markdown or commission and may not be reflective of actual transactions.

 

   High   Low 
Quarter ended September 30, 2011  $1.75   $1.11 
Quarter ended December 31, 2011  $1.47   $0.56 
Quarter ended March 31, 2012  $0.89   $0.60 
Quarter ended June 30, 2012  $0.88   $0.25 
Quarter ended September 30, 2012  $0.61   $0.45 
Quarter ended December 31, 2012  $0.69   $0.58 
Quarter ended March 31, 2013  $0.86   $0.60 
Quarter ended June 30, 2013  $0.70   $0.48 
Quarter ended March 31, 2014  $0.86   $0.60 
Quarter ended June 30, 2014  $0.70   $0.48 

 

On December 8, 2014, the closing bid price of the common stock was $0.52 and we had approximately 261 record holders of our commons stock. This number excludes any estimate by us of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed.

 

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In 2008, we granted five (5) year Class A Warrants to purchase 4,757,814 shares of our Common Stock, $0.001 par value per share at an initial exercise price of $2.50 per share, and seven (7) year Class B Warrants to purchase 4,757,814 shares of our Common Stock at an initial exercise price of $3.00 per share. In 2009, we granted three (3) year warrants to purchase 306,914 shares of our Common Stock, at an initial exercise price of $4.50 per share, subject to adjustment. The exercise prices of the Warrants were subject to weighted average and other anti-dilution adjustments, which were later removed.  We also granted warrants to purchase 1,522,500 shares of Common Stock with an exercise price of US$1.60, $2.50 and $3.00 per share to TriPoint Global Equities, LLC, the placement agent in the 2008 Financing. In connection with the 2009 Financing, we granted warrants to purchase 122,766 shares of common stock at $3.25 and 24,553 shares at $4.50 to TriPoint Global Equities, LLC, the placement agent or its designees of such financing. Currently there are 4,257,814 warrants outstanding with exercise prices of $3.00 per warrant as of the date of this filing.

 

Dividend Policy

 

During the two most recent fiscal years and subsequent interim periods, the Company has not declared any dividends. We believe that, by investing our capital in our strategic growth plan instead of paying a dividend at the present time to our shareholders, we should be able to capture better long-term returns for our shareholders. As a policy, management believes that in the event that 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 underutilized and excess capital.

 

Description of Equity Compensation Plans

 

The Company adopted an Equity Incentive Plan in 2008 (the “2008 Equity Incentive Plan”). On July 15, 2010, the Company’s Compensation Committee recommended an incentive compensation schedule for certain Company employees pursuant to the 2008 Equity Incentive Plan, which the Company's Board approved. Pursuant thereto, the Company issued 614,500 shares of common stock to certain employees. One-fourth of the total number of shares vested immediately on July 15 2010; One-fourth of the total number of shares vested on October 15, 2010; and the remaining shares vested on January 15, 2011.

 

On March 28, 2013 and February 20, 2014, we issued 50,000 shares of our restricted common stock to Dr. James J. Tong as a part of the annual compensation for his service as the CFO in 2013 and 2014 calendar year, respectively.

 

Sales of Unregistered Securities

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

On March 31, 2009, we issued 216,610 shares of common stock to the investors of our 2009 financings as payment of the quarterly dividend per the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock.  The dividend shares were issued to these investors pursuant to the exemption from registration provided by Section 4(2) of the Securities Act for issuances not involving any public offering.

 

On May 5, 2009, we issued 45,000 shares of common stock to Chesapeake Group, Inc., for the investor relates services they will provide to us, The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering.

  

On October 27, 2009, we completed a private equity financing of $4,987,500, with eight accredited investors (the “2009 Financing”). Net proceeds from the offering are approximately $4,490,000. Pursuant to the financing, we issued, for $4,987,500, a total of 1,534,570 units of our securities at $3.25 per unit. Each unit consists of (i) one share of the Company's common stock, par value $0.001 per share (the "Common Stock"), and (ii) a Class C Warrant, with each Class C Warrant exercisable at $4.50 to purchase one-fifth of a share of Common Stock, such that the total amount of warrants issued to each investor as shall be equal to twenty percent (20%) of the number of units purchased by each purchaser. Each of the warrants has a term of three (3) years. In connection with this financing, we granted warrants to purchase 122,766 shares of common stock at $3.25 and 24,553 shares at $4.50 to TriPoint Global Equities, LLC, the placement agent or its designees.

 

On November 19, 2009, we issued five-year options to purchase 180,000 shares of common stock to Kinsley International Limited, with an exercise price of $3.28 per share, pursuant to a consulting agreement. The options vested ratably over a twelve-month period in equal portions each month. The options and the common shares underlying the options were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering.

 

ITEM 6.  SELECTED FINANCIAL DATA

 

Not applicable.

 

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

 

FORWARD-LOOKING INFORMATION

 

This report contains forward-looking statements regarding our plans, expectations, estimates and beliefs.  Actual results could differ materially from those discussed in, or implied by, these forward-looking statements.  Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” and other similar expressions.  In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.  We have based these forward-looking statements largely on our expectations.

 

Forward-looking statements are subject to risks and uncertainties, certain of which are beyond our control.  Actual results could differ materially from those anticipated as a result of the factors described in the “Risk Factors” and detailed in our other Securities and Exchange Commission filings.

 

Due to 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, 2014 and 2013 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 CFDA including the patented Gingko Mihuan Oral Liquid (“GMOL”), 24 of which are included in the National Reimbursement List. Furthermore, 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%, after increasing its stake in JCM from 77% at the inception of JCM by purchasing another 10% ownership from Sichuan Mingxin in the fiscal year 2012. 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. Starting June 2014, TPI initiated the process of acquiring the remaining minority stake of 13% of the JCM for the value of RMB 15 million (approximately $2.4 million). The transaction has been completed at the time of this filing which made JCM a fully owned subsidiary of Chengdu Tianyin.

 

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In order to facilitate the relocation of Chengdu Tianyin’s business operation to Qionglai County and to secure land use rights for the relocation of manufacturing facilities, Chengdu Tianyin needed to establish its presence at Qionglai County during the process of construction, while all operating subsidiaries of Chengdu Tianyin are registered outside of Qionglai. Therefore, the Company decided to acquire a pharmaceutical distribution company and registered it in Qionglai County as a subsidiary of Chengdu Tianyin. On August 29, 2012, Chengdu Tianyin entered into a Share Transfer Agreement with the shareholders of Sichuan Hengshuo Pharmaceutical Co., Ltd (“Sichuan Hengshuo” or “HSP”), a PRC pharmaceutical trading company, to acquire 100% ownership of HSP for a total consideration of approximately $0.2 million (RMB 1.3 million). The share transfer was closed on November 30, 2012, pursuant to which Chengdu Tianyin now owns 100% of HSP and Dr. Guoqing Jiang has become the legal representative of HSP.

 

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. TPI received our current GMP certificate for both of our pre-extraction plant and formulate facilities on August 27, 2013 for the next three years until the end of 2015. In addition, under the guidance by provincial government, our facility is scheduled to be relocated to Qionglai County, south of Chengdu, which is designated for the pharmaceutical industry. The Qionglai facility (QLF) post-relocation 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 currently located near the center of the city of Chengdu surrounded by a rapidly expanding residential area. Both the pre-extraction plant and the formulation plant will subsequently be relocated to Qionglai County to become a combined QLF plant, which is estimated to be 80 mu or approximately 13 acres. 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 for Phase I is estimated at $25 million, which, when completed, is expected to expand the current capacity by approximately 30%. If the Company decides to further expand the capacity, 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 phase I construction along with GMP preparation has been completed in August 2014. In early September 2014, the GMP documentation was submitted to the CFDA for scheduling of GMP inspection by the official examination team. In late September 2014, TPI successfully passed the site visit by the CFDA inspection team. TPI will start the production at QLF immediately following the issuance of GMP certification which is expected to be in late December 2014 or January 2015.

 

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 CFDA 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 half millions to several million dollars per candidate with increasing valuations in recent years, 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 CFDA approval. Since the projects are targeted for well defined marketable products and TPI will retain the full ownership of these CFDA-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 our key leading products and to increase the sales of other products by expanding our sales force and expanding our market segment coverage, while increasing our marketing and promotional activities.

 

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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 uncertainties in receiving the approval involve endpoint measurement in 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 CFDA approval. If some of these indices are unable to yield satisfactory results, we can either troubleshoot or terminate the development in the early stage, which will not significantly impact us financially.

 

We usually begin drug commercialization preparation within 6 months after the CFDA approval. However, factors that may lead to delays in this process include mass manufacturing capacity readiness, marketing network preparedness and the indication seasonality. On average, the material positive net cash flow is expected from new market entries 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.

 

R&D for additional indications of flagship product Gingko Mihuan (GMOL)

 

Our flagship product Gingko Mihuan Oral Liquid (GMOL, CFDA certification number: H20013079; patent number: 20061007800225) contributes approximately 35% to our total revenue in fiscal year 2014. Clinical application and information gathered from our physicians showed that in addition to our approved indication for GMOL: cardiovascular disorders, coronary heart disease and cerebral ischemic attack including strokes, off-label use of GMOL have been indicated in hepatic diseases and ophthalmological diseases. And preliminary data on the animal disease models indicated that the GMOL may have positive effect on age-related cognitive disorders. The validity of these observations is currently being investigated.

 

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.

 

In January 2012, JCM was approved for its GMP certification designated as "CHUAN M0799," which is valid for the period of December 31, 2011 until December 31, 2015. JCM has started producing macrolide API for TPI’s production of Azithromycin Dispersible Tablets (CFDA No: H20074145) since July 2012. Currently the monthly production capacity of JCM is 10 tons of Azithromycin macrolide API. Since September 2013, JCM has been in operation and mainly supporting TPI’s production of Azthromycin tablets. Following a series of tests on quality, purity, intermediates contents, stereochemistry, stability in comparison with the international standards of Azi API, JCM has received monthly orders for manufacturing one of the major intermediates of Azithromycin, Azithromycin amine (Azi Amine) at a competitive international price which varies from month to month according to the market demands and the foreign exchange rate. The monthly orders starting April this year for Azi Amine were estimated at 5-8 tons per month. The third party sales from our JCM for our fiscal year 2014 were approximately $2.7 million.

 

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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 with possible renewal for additional three years. The annual distribution revenue from TMT reached approximately $2.6 million for the fiscal year 2014.

 

Hugan Tablets Incidence

 

As an effort to expand generic market amid the pricing pressure of its generic division, TPI has explored the strategic reduction of the tendering price of its Hugan Tablets (for liver conditions, approximately $0.6 million sales per year) in order to compete in Zhejiang province of China. The competitive tender price has helped TPI to successfully secure the right of sales for Hugan Tablets in Zhejiang province. However, as a part of the government’s regulatory procedure, the CFDA conducted examination on the production process and the cost for competitive (low) tendering price bidders. During the examination period in April 2014, the Company’s Good Manufacturing Practice (GMP) certificate granted by the CFDA on August 27, 2013 has been administrated by Sichuan provincial CFDA and the production and sale of our Hugan Tablets were temporarily halted, pending the results of quality and pricing tests. The results have shown the Company’s production has followed the proper procedure for almost all of its products, although more stringent quality and ingredients requirement imposed on the TCM tablets production process resulted in product recalls of Hugan tablets and systematic disposal of certain items in the inventory.

 

On May 9, 2014, the Company received its renewed GMP certificate for both of its Chengdu Tianyin’s pre-extraction facility at the city of Chengdu and formulation facility at Longquan County of Chengdu, valid until the end of 2015, under certificate numbers of “Chuan J0461” and “Chuan K0592”. Manufacturing and the sale of most of the Company’s products have resumed, except for our tablets formulation division which was further inspected for its production process by the provincial CFDA staff on May 24, 2014. Following the successful completion of the inspection, all GMP certificates for all of our products have been re-issued as of the date of this filing.

 

The above-mentioned Hugan incidence resulted in production interruption for more than 50 days, causing a significant impact on sales that lasted further in time due to the time required for the recovery of production and regaining of market share lost during the fourth quarter. By August 2014, the production capacity has been restored near pre-incidence level. With the imminent start of our new QLF facility, we expected the sales to be significantly restored by the end of calendar year 2014. We recognized that the impact on sales of Hugan Tablets along with other products by TPI was significant and, and we expect the QLF will facilitate the recovery from the Hugan incidence.

 

Guidance

 

Our revenue of approximately $46.6 million came significantly below our previously estimated modest 0-5% projection year over year mainly due to the production interruption and sales and marketing impact as a result of the Hugan incidence. The situation was also related to the prevailing pricing control of generic medicines in China and the government’s channeling sales toward low margined essential drugs on the EDL through various policies that adversely affected generic sales. Though our JCM’s Azithromycin API sales have gained momentum towards the end of fiscal year 2014, it was not sufficient to offset the sales and profit margin impact from the Hugan incidence. In addition, the challenges remain at JCM’s growth trajectory due to the price competition of Azithromycin APIs combined with existing excessive production capacity.

 

Due to the aforementioned event, we have also missed our net margin guidance of 10% in comparison with our fiscal year 2013 net income of $6.8 million.

 

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The following factors, in our opinion, will influence the Company’s growth perspectives for fiscal year 2015:

 

  1) Market expansion and revenue growth of TPI’s core product portfolio led by flagship product Gingko Mihuan Oral Liquid (GMOL) and other major products;

 

  2) JCM revenue at both domestic and international markets in the fiscal year 2015;

 

  3) Generic sale stablization following the Hugan incidence and our strategy to cope with pricing restrictions and market competition under the ongoing healthcare reform; and

  

  4) QLF GMP certification (ongoing)/relocation and smooth transition of production capacity.  

 

We forecast that the revenue growth for TPI may range from 5-10% for the coming year, along with a net margin of 8-10% based on our assessment of production and sales recovery during the first half of fiscal 2015 and sales forecast of TPI’s core products and JCM sales. The net income guidance excluded any non-cash expenses associated with stock compensation plans or stock option expenses. 

 

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, 2014 and 2013

 

Years Ended June 30  2014   2013 
Sales  $46.6   $67.5 
Cost of Sales  $30.7   $41.5 
Gross profit  $15.9   $26.0 
Selling, general and administrative and R&D expenses  $13.2   $16.7 
Other income (expenses)  $(3.3)  $(0.3)
Income taxes  $0.2   $2.4 
Net income attributable to TPI  $(0.8)  $6.6 

 

Sales for the fiscal year ended June 30, 2014 was $46.6 million, decreased by 31% from $67.5 million for the fiscal year 2013, mainly due to the Hugan incidence, along with generic pricing pressure, sales volume decrease and prolonged JCM production ramp up. We witnessed a 43% reduction of total revenue of TPI’s organic portfolio which excludes the distribution revenue, from $51.0 million for the fiscal year ended June 30, 2013 to $29.3 million for the fiscal year ended June 30, 2014. With the recovery of production capacity and sales, we are implementing various strategies to stabilize our generic sales.

 

Cost of Sales for the fiscal year ended June 30, 2014 was approximately $30.7 million or 66% of the revenue, compared with $41.5 million or 62% of the revenue for the fiscal year ended June 30, 2013. 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 slight increase of our cost of sales percentage from the previous year was mainly due to a margin decrease of our products amid the healthcare reform and intensified market competition and written off of obsolete inventory in the year ended June 30, 2014, which was further discussed in the following “Gross profit” segment.

 

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Gross profit for fiscal year ended June 30, 2014 was approximately $15.9 million with 34% gross margin, compared with $26.0 million with 39% gross margin for fiscal year ended June 30, 2013. The sales of GMOL were $16.0 million compared with $26.1 million in fiscal year 2013, along with other core products revenue growth that totaled $23.0 million. During the fiscal year 2014, our organic product portfolio delivered approximately 46% gross margin, a decrease from 52% in fiscal year 2013 mainly due to the pricing controls and fierce competition amid the current healthcare market compounded by the interruption by GMP recertification. Provided the blend of core product sales growth along with TMT lower margin distribution revenue and lower margin generic sales as the current pricing trend continues, we anticipate our overall gross margin in the near term to stabilize above 36% for the fiscal 2015, influenced by JCM macrolide API revenue as compared to the core product portfolio 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 $14.6 million in fiscal year ended June 30, 2014, compared with $16.7 million in fiscal year ended June 30, 2013. The decrease of $2.1 million operating and R&D expenses is proportional to the sales compression. As a result of the sales impact caused by the Hugan incidence, our operating margin was compressed to 6% compared with 14% a year earlier. We expect the operating expenses percentage to stabilize above 12% of the revenue for fiscal year 2015. The income from operation of $3.0 million compared with $9.3 million in the previous year was mainly the result of decrease of sales and gross margins.

 

Other income (expenses) included interest income, interest expense and other expense. Other expense of $3.1 million were related to penalty fees that was a result of the Hugan incidence.

 

Net loss attributable to TPI was $0.8 million for the fiscal year ended June 30, 2014, compared with a net income of $6.6 million in fiscal year ended June 30, 2013. The loss was mainly caused by the production interruption, sales decrease and related costs that resulted from GMP re-certification.

 

Income Taxes for the year ended June 30, 2014 and 2013 were $0.20 million and $2.4 million. The decrease in provision for income tax was mainly due to the decrease of pre-tax income due to decrease of income from operation and non-operational expenses.

 

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. 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, equity accounts are translated at historical exchange rate.  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 $10.4 million as of June 30, 2014 compared with $10.2 million as of June 30, 2013. The balance sheet amounts with the exception of equity as of June 30, 2014 were translated at 6.1463 RMB to 1.00 US dollars as compared with 6.1728 RMB to 1.00 US dollars as of June 30, 2013. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the years ended June 30, 2014 and 2013 were the average exchange rates during the years.

  

Comprehensive loss was $0.6 million in fiscal year ended June 30, 2014, compared with comprehensive income of $8.7 million in fiscal year ended June 30, 2013.

 

Liquidity and Capital Resources

 

Discussion of cash flow

 

In $ millions  For the fiscal years
ended June 30,
 
   2014   2013 
Cash flow from operating activities  $2.5   $12.9 
Cash flow from investing activities  $(15.4)  $(16.1)
Cash flow from financing activities  $2.2   $(5.8)

 

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Operating activities

 

As of June 30, 2014, we had working capital totaling $24.5 million, including cash and cash equivalents of $16.1 million. Net cash generated from operating activities was $2.5 million for fiscal year ended June 30, 2014 as compared with $12.9 million for fiscal year ended June 30, 2013. The decrease was mainly due to the decrease of the net income. At the end of fiscal year 2014, the accounts receivable was $9.1 million, 19% of the total revenue, compared with $10.1 million, or 15% of the total revenue for fiscal 2013, mainly due to the decreased annual sales. We believe that TPI is adequately funded to meet all of our working capital and capital expenditure needs for fiscal year 2015.

 

Investing activities

 

Net cash used in investing activities for the fiscal year ended June 30, 2014 totaled $15.4 million compared with $16.1 million in the fiscal year ended June 30, 2013 which are mainly related to the construction and equipment purchase of the Qionglai Facility (QLF) project. We anticipate that in fiscal year 2015, the capital expenditure will be approximately $5.0 million as a result of the QLF relocation.

 

Financing activities

 

Net cash provided by financing activities for fiscal year ended June 30, 2014 totaled $2.2 million compared with $5.8 million used for fiscal year 2013 which were related to a net result from the proceeds, repayments of short-term bank loans and payment of trade note payables.

 

Borrowings and Credit Facilities

 

The short-term bank borrowings outstanding as of June 30, 2014 and 2013 were $4.6 million and $5.9 million, respectively. We paid an average interest rate of 7.2% and 6.8% per annum in the years ended June 30, 2014 and 2013, respectively. These loans were made from CITIC bank and China Huaxia Bank and secured by the property and equipment or certificate deposit of Chengdu Tianyin and Jiangchuan. They do not contain any additional financial covenants or restrictions. The borrowings have one year or half year terms and contain no specific renewal terms.

 

35
 

 

Critical Accounting Policies and Estimates

 

Use of Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation reserves for accounts receivable, inventory, estimated useful life and residual value of property, plant and equipment, recognition and measurement of deferred income tax and valuation allowance for deferred tax assets. Although these estimates are based on management’s knowledge of current events and actions management may undertake in the future, actual results could differ from those estimates.

 

Accounts Receivable and Bad Debt Reserve

 

Accounts receivable are recognized and carried at the original invoice amount less an allowance for any uncollectible amount. We have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. We extend credit to our customers based on an evaluation of their financial condition and other factors. We generally do not require collateral or other security to support accounts receivable. We perform ongoing credit evaluations of our customers and maintain an allowance for potential bad debts if required.

 

We determine whether an allowance for doubtful accounts is required by evaluating specific accounts where information indicates the customers may have an inability to meet financial obligations. In these cases, we use assumptions and judgment, based on the best available facts and circumstances, to record a specific allowance for those customers against amounts due to reduce the receivable to the amount expected to be collected. These specific allowances are re-evaluated and adjusted as additional information is received. The amounts calculated are analyzed to determine the total amount of the allowance. We may also record a general allowance as necessary

 

Direct write-offs are taken in the period when we have exhausted our efforts to collect overdue and unpaid receivables or otherwise evaluate other circumstances that indicate that we should abandon such efforts.

 

The Company has not experienced any significant difficulty in collecting its accounts receivable in the past and is not aware of any financial difficulties being experienced by its major customers.

 

36
 

 

Inventory

 

Inventories consist of raw materials, packaging materials (which include ingredients and supplies) and finished goods. Inventory is stated at the lower of cost or market. Cost is determined using the weighted-average cost method. Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. Management continually evaluates the recoverability based on assumptions about customer demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves or write-downs may be required that could negatively impact the Company’s gross margin and operating results. Inventory markdown allowance of $79,601 and zero were recorded at June 30, 2014 and 2013. Obsolete inventory of $1,447,735 and $159,123 were written-off in the year ended June 30, 2014 and 2013, respectively.

 

Impairment of Long-lived Assets

 

In accordance with ASC Topic 360-10-35 “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, or it is reasonably possible that these assets could become impaired as a result of technological or other industrial changes. The determination of recoverability of assets to be held and used is made by comparing the carrying amount of an asset to future undiscounted cash flows to be generated by the assets. The Company reviews the recoverability of its long-lived assets on a periodic basis in order to identify business conditions, which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future undiscounted cash flows. If the total of the expected future undiscounted cash flows is less than the total carrying value of the assets, a loss is recognized for the difference between the fair value (computed based upon the expected future discounted cash flows) and the carrying value of the assets.

 

Intangible Assets

 

Intangible assets comprised of approved drugs and rights to use land. Intangible asset is carried at cost, less related accumulated amortization. Approved drugs are separated into two groups: Traditional Chinese Medicine (TCM) and Non Traditional Chinese Medicine (NTCM). TCM which has an indefinite life are not being amortized and are subject to impairment test at least annually to determine if the carrying value of the asset is impaired. NTCM drugs are amortized on a straight-line basis over their estimated useful life of 10 years.

 

Rights to use land with a finite useful life is being amortized on a straight line basis over its estimated useful life of 48 years.

 

37
 

 

Goodwill

 

The Company accounts for business acquisitions in accordance with ASC 805-10, which may result in the recognition of goodwill. Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for under the purchase method.

 

Goodwill is not subject to amortization but will be subject to periodic evaluation for impairment. Goodwill is stated in the consolidated balance sheet at cost less accumulated impairment loss, if any. The Company reviews its goodwill for impairment annually or more frequently if indicators of impairment exist. The Company adopted an accounting standard update, commonly referred to as the step zero approach that allows it to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. For reporting units in which the qualitative assessment concludes it is more likely than not that the fair value is more than its carrying value, the amended guidance eliminates the requirement to perform further goodwill impairment test. For those reporting units where a significant change or event occurs, and where potential impairment indicators exist, the Company continues to utilize a two-step quantitative assessment to testing goodwill for impairment. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others (a) a significant decline in expected future cash flows; (b) a sustained, significant decline in stock price and market capitalization; (c) a significant adverse change in legal factors or in the business climate; (d) unanticipated competition; (e) the testing for recoverability of a significant asset group within a reporting unit; and (f) slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on the consolidated financial statements. The goodwill test impairment consists of two steps. First, the identification of potential impairment is performed by comparing the fair value of the reporting unit to its carrying amount, including goodwill. Second, if there is impairment identified in the first step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of goodwill. The Company has assessed its goodwill for impairment for the periods presented. There are no impairment charges related to goodwill for any of the fiscal periods presented.

 

Impairment of Intangible Assets

 

The Company applies the provisions of ASC Topic 350 which addresses how goodwill and other acquired intangible assets should be accounted for in financial statements. In this regard, the Company tests these intangible assets for impairment annually or more frequently if indicators of potential impairment are present. Such circumstances could include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying 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 the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. During the year ended June 30, 2014, the Company applied a benchmark borrowing interest rate of 7.0% as the discount rate and recorded the impairment loss of $-0- related to intangible assets for the years ended June 30, 2014 and 2013, respectively.

 

Revenue Recognition

 

The Company derives its revenues primarily from sale of pharmaceutical products. In accordance with ASC Topic 605 “Revenue Recognition”, revenue should not be recognized until it is realized or realizable and earned. Revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. In this regard, the Company’s revenue is recognized when merchandise is received by customers or shipped by the Company pursuant to contractual terms of sales, title and risk of loss passes to the customers, sales amounts are fixed and determinable and the collectability is reasonably assured.

 

Income Taxes

 

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

 

A valuation allowance is provided to reduce the carrying amount of deferred tax assets if it is considered more likely than not that some portion, or all, of the deferred tax assets will not be realized. 

 

38
 

 

Value Added Taxes

 

Under the Provisional Regulations of the PRC on Value Added Tax, the Company is responsible for collecting value added taxes on sales of products and to pay value added taxes on purchases of raw materials, which is then remitted to the central government. Sales and cost of sales are reported on a net basis excluding value added taxes.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments include cash equivalents, accounts receivable, notes receivable, accounts payable, short-term debt and other financial instruments associated with the issuance of the common stock. The carrying values of cash equivalents, accounts receivable, notes receivable, and accounts payable approximate their fair value because of the short maturity of these instruments. The carrying amounts of the Company’s bank borrowings under its credit facility approximate fair value because the interest rates are reset periodically to reflect current market rates.

 

The Company adopted ASC 820-10, “Fair Value Measurements.” ASC 820-10, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

 

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

 

Level 1: Observable inputs such as quoted prices in active markets;

 

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

We have no financial assets or liabilities measured at fair value on a recurring basis

 

Share-Based Payment

 

The Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards, the Company calculates the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of common stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. For non-employee stock-based awards, the fair value of the award on the date of grant is calculated in the same manner as employee awards, however, the awards are revalued at the end of each reporting period and the pro rata compensation expense is adjusted accordingly until such time the nonemployee award is fully vested, at which time the total compensation recognized to date equals the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award recipient’s performance is complete. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.

 

Recent Accounting Pronouncements

 

In April 2014, the FASB issued amendments to ASC Topic 205 “Presentation of Financial Statements” and ASC Topic 360 “Property, Plant and Equipment”. The amendments change the current requirements for reporting discontinued operations in Subtopic 205-20. It requires an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability section, respectively, of the statement of financial position. This topic is effective for public entities for reporting periods beginning after December 15, 2014. An entity should not apply the amendments to a component classified as held for sale before the effective date even if the component of an entity is disposed of after the effective date. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued. The Company does not believe the adoption of the amendments to ASC 205 and ASC 360 will have a material effect on its consolidated financial statements.

 

There are no other new accounting pronouncements adopted or enacted during the year ended June 30, 2014 that had, or are expected to have, a material impact on the Company’s financial statements.

 

Off-Balance Sheet Arrangements

 

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

 

Other

 

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

 

ITEM 7A  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Not Applicable.

 

39
 

 

ITEM 8. FINANCIAL STATEMENTS

 

TIANYIN PHARMACEUTICAL CO., INC.

CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND 2013

 

Table of Contents  Page 
     
Report of Independent Registered Public Accounting Firm   F-1
Consolidated Balance Sheets   F-2 
Consolidated Statements of Operations   F-3 
Consolidated Statements of Comprehensive Income   F-4 
Consolidated Statements of Stockholders’ Equity   F-5 
Consolidated Statements of Cash Flows   F-6 
Notes to Consolidated Financial Statements   F-7 

 

40
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Tianyin Pharmaceutical Co., Inc.

 

We have audited the accompanying consolidated balance sheets of Tianyin Pharmaceutical Co., Inc. as of June 30, 2014 and 2013 and the related consolidated statement of operations, comprehensive income, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

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

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tianyin Pharmaceutical Co., Inc. as of June 30, 2014 and 2013 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Paritz & Company, P.A.

 

Hackensack, New Jersey

December 4, 2014

 

F-1
 

 

TIANYIN PHARMACEUTICAL CO., INC.
Consolidated Balance Sheets
        

 

   June 30,   June 30, 
   2014   2013 
Assets        
Current assets:        
Cash and cash equivalents  $16,120,041   $26,827,008 
Restricted cash   994,017    4,536,000 
Accounts receivable, net of allowance for doubtful accounts of $102,401 and $102,149 at June 30, 2014 and 2013, respectively   9,074,576    10,112,718 
Inventory   3,841,712    6,036,014 
Loan receivable   1,981,280    - 
Deferred tax assets   1,180,510    - 
Other current assets   376,504    313,320 
Total current assets   33,568,640    47,825,060 
           
Property and equipment, net   45,378,356    40,603,232 
           
Intangibles, net   27,699,733    21,505,012 
           
Goodwill   211,120    210,600 
           
Total assets  $106,857,849   $110,143,904 
           
Liabilities and Equity          
Current liabilities:          
Accounts payable and accrued expenses  $1,592,459   $1,352,560 
Accounts payable – construction related   2,238,927    2,723,290 
Short-term bank loans   4,547,200    5,929,200 
Income tax payable   35,832    701,311 
Other taxes payable   179,610    740,800 
Other current liabilities   522,995    449,062 
Total current liabilities   9,117,023    11,896,223 
           
Total liabilities   9,117,023    11,896,223 
           
Equity          
Stockholders’ equity:          
Preferred stock, $0.001 par value, 25,000,000 shares authorized, no shares issued and outstanding at June 30, 2014 and 2013   -    - 
Common stock, $0.001 par value, 50,000,000 shares authorized, 29,546,276 shares issued, 29,432,791 shares outstanding at June 30, 2014 and 29,496,276 shares issued, 29,382,791 shares outstanding at June 30, 2013   29,546    29,496 
Additional paid-in capital   30,189,802    30,134,852 
Treasury stock, 113,485 shares at cost   (135,925)   (135,925)
Statutory reserve   6,976,412    6,847,315 
Retained earnings   50,193,258    50,967,308 
Accumulated other comprehensive income   10,423,712    10,178,358 
Total stockholders’ equity   97,676,805    98,021,404 
           
Noncontrolling interest   64,021    226,277 
           
Total equity   97,740,826    98,247,681 
           
Total liabilities and equity  $106,857,849   $110,143,904 

  

F-2
 

 

TIANYIN PHARMACEUTICAL CO., INC.
Consolidated Statements of Operations
        

 

   For the Years Ended
June 30,
 
   2014   2013 
         
Sales  $46,555,021   $67,500,476 
           
Cost of sales   30,674,098    41,496,812 
           
Gross profit   15,880,923    26,003,664 
           
Operating expenses          
Selling expenses   7,800,507    11,442,664 
General and administrative expenses   4,449,587    4,351,592 
Research and development   946,300    894,995 
Total operating expenses   13,196,394    16,689,251 
           
Income from operations   2,684,529    9,314,413 
           
Other income (expenses):          
Interest income   165,533    162,563 
Interest expense   (392,010)   (437,897)
Other expense   (3,070,795)   - 
Total other income (expenses)   (3,297,272)   (275,334)
           
Income (loss) before provision for income tax   (612,743)   9,039,079 
           
Provision for income tax   195,325    2,423,906 
           
Net income (loss)   (808,068)   6,615,173 
           
Less: Net income (loss) attributable to noncontrolling interest   (163,115)   (56,978)
           
Net income attributable to Tianyin Pharmaceutical Co., Inc.  $(644,952)  $6,672,151 
           
Basic and diluted earnings per share  ($0.03)  $0.23 
           
Weighted average number of common shares outstanding:          
Basic and diluted   29,400,599    29,345,668 

 

F-3
 

 

TIANYIN PHARMACEUTICAL CO., INC.
Consolidated Statements of Comprehensive Income
        

 

   For the Years Ended
June 30,
 
   2014   2013 
         
Net income (loss)  $(808,068)  $6,615,173 
           
Other comprehensive income          
Foreign currency translation adjustment   246,213    2,083,061 
           
Total other comprehensive income   246,213    2,083,061 
           
Total Comprehensive income (loss)   (561,855)   8,698,234 
           
Less: Comprehensive income (loss) attributable to the noncontrolling interest   (162,256)   (51,749)
           
Comprehensive income (loss) attributable to Tianyin Pharmaceutical Co., Inc.  $(399,599)  $8,749,983 

 

F-4
 

 

TIANYIN PHARMACEUTICAL CO., INC.
Consolidated Statements of Cash Flows
        

 

   For the Years Ended
June 30,
 
   2014   2013 
Cash flows from operating activities:        
Net Income (loss)  ($808,068)  $6,615,173 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   2,587,565    2,435,138 
Deferred tax assets   (1,180,510)   - 
Provision for inventory obsolescence and markdown   1,527,483    159,123 
Provision for bad debts   -    (14,004)
Share-based payment   55,000    30,000 
Changes in current assets and current liabilities:          
Accounts receivable   1,065,075    1,400,397 
Inventory   685,804    (201,972)
Advance payments   -    645,923 
Other current assets   (62,525)   130,893 
Accounts payable and accrued expenses   236,997    (264,388)
Accounts payable – construction related   (491,994)   1,935,150 
Income tax payable   (668,443)   (119,146)
Other taxes payable   (564,060)   225,356 
Other current liabilities   72,959    (27,787)
           
Net cash provided by operating activities   2,455,283    12,949,856 
           
Cash flows from investing activities:          
Addition to property and equipment   -    (1,704,154)
Addition of Construction in progress   (6,450,737)   (13,274,213)
Additions to intangible assets – land use right   (6,973,301)   (886,611)
Loans receivable   (1,984,940)   - 
Acquisition of subsidiary   -    (207,285)
           
Net cash used in investing activities   (15,408,978)   (16,072,263)
           
Cash flows from financing activities:          
Trade notes payable   -    (4,703,775)
Restricted cash   3,559,747    (908,865)
Proceeds from short-term bank loans   4,555,600    10,300,470 
Repayments of short-term bank loans   (5,954,820)   (10,523,700)
           
Net cash provided by (used in) financing activities   2,160,527    (5,835,870)
           
Effect of foreign currency translation on cash   86,201    632,990 
           
Net decrease in cash and cash equivalents   (10,706,967)   (8,325,287)
           
Cash and cash equivalents – beginning of year   26,827,008    35,152,295 
           
Cash and cash equivalents – ending of year  $16,120,041   $26,827,008 
           
Supplemental cash flow disclosure          
           
Cash paid for interest  $391,942   $437,605 
Income tax paid  $2,421,477   $2,543,053 

 

F-5
 

 

TIANYIN PHARMACEUTICAL CO., INC.
Consolidated Statements of Stockholders’ Equity

   Common Stock   Treasury   Preferred Stock   Additional Paid in   Statutory   Retained   Accumulated other Comprehensive   Total Stockholders'   Noncontrolling   Total 
   Number   Par Value   stock   Number   Par Value   Capital   Reserve   Earnings   Income   Equity   interest   Equity 
Balance at June 30, 2012   29,446,276   $29,446   $(135,925)   0   $-   $30,104,902   $6,120,143   $45,022,329   $8,100,526   $89,241,421   $278,026   $89,519,447 
Net income                                      6,672,151         6,672,151    (56,978)   6,615,173 
Other comprehensive income:                                                            
Foreign currency translation adjustment                                           2,077,832    2,077,832    5,229    2,083,061 
Comprehensive income                                                8,749,983    (51,749)   8,698,234 
Common shares issued   50,000    50                   29,950                   30,000         30,000 
Statutory reserve                                 727,172    (727,172)        -         - 
Balance at June 30, 2013   29,496,276    29,496    (135,925)   0    0    30,134,852    6,847,315    50,967,308    10,178,358    98,021,404    226,277    98,247,681 
Net income                                      (644,953)        (644,953)   (163,115)   (808,068)
Other comprehensive income:                                                            
Foreign currency translation adjustment                                           245,354    245,354    859    246,213 
Comprehensive income                                                (399,599)   (162,256)   (561,855)
Common shares issued for services  50,000    50                   54,950                   55,000         55,000 
Statutory reserve                                 129,097    (129,097)        -         - 
Balance at June 30, 2014   29,546,276   $29,546   $(135,925)   0   $-   $30,189,802   $6,976,412   $50,193,258   $10,423,712   $97,676,805   $64,021   $97,740,826 

 

F-6
 

 

Note 1 – Organization and Nature of Business

 

Tianyin Pharmaceutical Co., Inc. (the “Company” or “Tianyin”) was established under the laws of Delaware on August 20, 2002. The Company’s primary business is to research, manufacture, and sell pharmaceutical products through its subsidiaries in China. The accompanying consolidated financial statements include the financial statements of Tianyin Pharmaceutical Co., Inc. and its subsidiaries. The Company’s operating subsidiaries include Chengdu Tianyin Pharmaceutical., Tianyin Medicine Trading (TMT), Hengshuo Pharmaceutical (HSP) and Jiangchuan Pharmaceutical (JCM).

 

In order to facilitate the relocation of Chengdu Tianyin’s business operation to Qionglai County and to secure land use rights for the relocation of manufacturing facilities as Qionglai Facility (QLF), Chengdu Tianyin needs to establish its presence at Qionglai County during the process of construction, while all operating subsidiaries of Chengdu Tianyin are registered outside of Qionglai. Therefore, the Company decided to acquire a pharmaceutical distribution company and registered it at Qionglai County as a subsidiary of Chengdu Tianyin. On August 29, 2012, Chengdu Tianyin entered into a Share Transfer Agreement (the "Agreement") with the two existing shareholders of Sichuan Hengshuo Pharmaceutical Co., Ltd (“Sichuan Hengshuo” or “HSP”). The share transfer was completed on November 30, 2012 by which Chengdu Tianyin acquired 100% ownership of HSP, a PRC company for a total consideration of $210,600 (RMB 1.3 million). As of June 30, 2014, the financial results of HSP are consolidated into the consolidated financial statements presented herein. The purchase price of $210,600 was assigned to goodwill as the net assets and operations of HSP were minimum at the date of acquisition (See Note 6).

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation and Consolidation

 

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

 

Certain prior year amounts were reclassified to conform with current year presentation. 

 

Use of Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation reserves for accounts receivable, inventory, estimated useful life and residual value of property, plant and equipment, recognition and measurement of deferred income tax and valuation allowance for deferred tax assets. Although these estimates are based on management’s knowledge of current events and actions management may undertake in the future, actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments with original maturities of three months or less to be “cash equivalents”.

 

Restricted Cash

 

Restricted cash consists of cash equivalents used as collateral to secure short-term notes payable.

 

F-7
 

 

Note 2 – Summary of Significant Accounting Policies (continued)

 

Accounts Receivable

 

Accounts receivable are recognized and carried at the original invoice amount less an allowance for any uncollectible amount. We have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. We extend credit to our customers based on an evaluation of their financial condition and other factors. We generally do not require collateral or other security to support accounts receivable. We perform ongoing credit evaluations of our customers and maintain an allowance for potential bad debts if required.

 

We determine whether an allowance for doubtful accounts is required by evaluating specific accounts where information indicates the customers may have an inability to meet financial obligations. In these cases, we use assumptions and judgment, based on the best available facts and circumstances, to record a specific allowance for those customers against amounts due to reduce the receivable to the amount expected to be collected. These specific allowances are re-evaluated and adjusted as additional information is received. The amounts calculated are analyzed to determine the total amount of the allowance. We may also record a general allowance as necessary

 

Direct write-offs are taken in the period when we have exhausted our efforts to collect overdue and unpaid receivables or otherwise evaluate other circumstances that indicate that we should abandon such efforts.

 

The Company has not experienced any significant difficulty in collecting its accounts receivable in the past and is not aware of any financial difficulties being experienced by its major customers.

 

Inventory

 

Inventories consist of raw materials, packaging materials (which include ingredients and supplies) and finished goods. Inventory is stated at the lower of cost or market. Cost is determined using the weighted-average cost method. Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. Management continually evaluates the recoverability based on assumptions about customer demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves or write-downs may be required that could negatively impact the Company’s gross margin and operating results. Inventory markdown allowance of $79,748 and zero were recorded at June 30, 2014 and 2013. Obsolete inventory of $1,447,735 and $159,123 were written-off in the year ended June 30, 2014 and 2013, respectively.

 

F-8
 

 

Note 2 – Summary of Significant Accounting Policies (continued)

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation is calculated based on the straight-line method over the estimated useful lives of the assets as follows:

 

Vehicles  5 to 10 years
Furniture, machinery and equipment  5 to 10 years
Buildings and improvements  10 to 50 years

 

Construction in progress primarily represents the renovation costs of plant, machinery and equipment and stated at cost less any accumulated impairment loss. Costs incurred are capitalized and transferred to property and equipment upon completion, at which time depreciation commences.

 

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

 

Impairment of Long-lived Assets

 

In accordance with ASC Topic 360-10-35 “Accounting for the Impairment or Disposal of Long-Lived Assets,”, long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, or it is reasonably possible that these assets could become impaired as a result of technological or other industrial changes. The determination of recoverability of assets to be held and used is made by comparing the carrying amount of an asset to future undiscounted cash flows to be generated by the assets. The Company reviews the recoverability of its long-lived assets on a periodic basis in order to identify business conditions, which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future undiscounted cash flows. If the total of the expected future undiscounted cash flows is less than the total carrying value of the assets, a loss is recognized for the difference between the fair value (computed based upon the expected future discounted cash flows) and the carrying value of the assets.

 

Intangible Assets

 

Intangible assets comprised of approved drugs and rights to use land. Intangible asset is carried at cost, less related accumulated amortization. Approved drugs are separated into two groups: Traditional Chinese Medicine (TCM) and Non Traditional Chinese Medicine (NTCM). TCM which has an indefinite life are not being amortized and are subject to impairment test at least annually to determine if the carrying value of the asset is impaired. NTCM drugs are amortized on a straight-line basis over their estimated useful life of 10 years.

 

Rights to use land with a finite useful life is being amortized on a straight line basis over its estimated useful life of 48 years.

 

F-9
 

 

Note 2 – Summary of Significant Accounting Policies (continued)

 

Goodwill

 

The Company accounts for business acquisitions in accordance with ASC 805-10, which may result in the recognition of goodwill. Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for under the purchase method.

 

Goodwill is not subject to amortization but will be subject to periodic evaluation for impairment. Goodwill is stated in the consolidated balance sheet at cost less accumulated impairment loss, if any. The Company reviews its goodwill for impairment annually or more frequently if indicators of impairment exist. The Company adopted an accounting standard update, commonly referred to as the step zero approach that allows it to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. For reporting units in which the qualitative assessment concludes it is more likely than not that the fair value is more than its carrying value, the amended guidance eliminates the requirement to perform further goodwill impairment test. For those reporting units where a significant change or event occurs, and where potential impairment indicators exist, the Company continues to utilize a two-step quantitative assessment to testing goodwill for impairment. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others (a) a significant decline in expected future cash flows; (b) a sustained, significant decline in stock price and market capitalization; (c) a significant adverse change in legal factors or in the business climate; (d) unanticipated competition; (e) the testing for recoverability of a significant asset group within a reporting unit; and (f) slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on the consolidated financial statements. The goodwill test impairment consists of two steps. First, the identification of potential impairment is performed by comparing the fair value of the reporting unit to its carrying amount, including goodwill. Second, if there is impairment identified in the first step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of goodwill. The Company has assessed its goodwill for impairment for the periods presented. There are no impairment charges related to goodwill for any of the fiscal periods presented.

 

Impairment of Intangible Assets

 

The Company applies the provisions of ASC Topic 350 which addresses how goodwill and other acquired intangible assets should be accounted for in financial statements. In this regard, the Company tests these intangible assets for impairment annually or more frequently if indicators of potential impairment are present. Such circumstances could include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying 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 the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. During the year ended June 30, 2014, the Company applied a benchmark borrowing interest rate of 7.0% as the discount rate and recorded the impairment loss of $-0- related to intangible assets for the years ended June 30, 2014 and 2013, respectively.

 

Revenue Recognition

 

The Company derives its revenues primarily from sale of pharmaceutical products. In accordance with ASC Topic 605 “Revenue Recognition”, revenue should not be recognized until it is realized or realizable and earned. Revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. In this regard, the Company’s revenue is recognized when merchandise is received by customers or shipped by the Company pursuant to contractual terms of sales, title and risk of loss passes to the customers, sales amounts are fixed and determinable and the collectability is reasonably assured.

 

Shipping and Handling Costs

 

Shipping and handling costs billed to customers in related sales transactions are included in sales revenues and shipping expenses incurred by the Company are reported as a component of selling expenses. The shipping and handling expenses of $615,925 and $1,307,921 for the year ended June 30, 2014 and 2013, respectively, are reported in the Consolidated Statements of Operations as a component of selling expenses.

 

F-10
 

 

Note 2 – Summary of Significant Accounting Policies (continued)

 

Research and Development

 

Research and development costs are expensed when incurred. Research and development costs for the years ended June 30, 2014 and 2013 were $949,300 and $894,995, respectively.

 

Income Taxes

 

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

 

A valuation allowance is provided to reduce the carrying amount of deferred tax assets if it is considered more likely than not that some portion, or all, of the deferred tax assets will not be realized.

 

Value Added Taxes

 

Under the Provisional Regulations of the PRC on Value Added Tax, the Company is responsible for collecting value added taxes on sales of products and to pay value added taxes on purchases of raw materials, which is then remitted to the central government. Sales and cost of sales are reported on a net basis excluding value added taxes.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments include cash equivalents, accounts receivable, notes receivable, accounts payable, short-term debt and other financial instruments associated with the issuance of the common stock. The carrying values of cash equivalents, accounts receivable, notes receivable, and accounts payable approximate their fair value because of the short maturity of these instruments. The carrying amounts of the Company’s bank borrowings under its credit facility approximate fair value because the interest rates are reset periodically to reflect current market rates.

 

The Company adopted ASC 820-10, “Fair Value Measurements.” ASC 820-10, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

 

F-11
 

 

Note 2 – Summary of Significant Accounting Policies (continued)

 

Fair Value of Financial Instruments (continued)

 

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

 

Level 1: Observable inputs such as quoted prices in active markets;

 

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

We have no financial assets or liabilities measured at fair value on a recurring basis

 

Foreign Currency Translation and Transactions

 

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

 

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

 

The Company uses the United States dollar (“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.

 

The exchange rates used to translate amounts in RMB into US Dollars for the purposes of preparing the condensed combined financial statements were as follows:

 

      June 30,
2014
  June 30,
2013
  Balance sheet items, except for shareholders’ equity items   RMB 1: US$0.1624   RMB 1: US$0.16200
  Amounts included in the statements of operations, comprehensive income, and cash flows for the years then ended   RMB 1: US$0.1627   RMB 1: US$0. 15945
           
  Shareholders’ equity items   Historical rate   Historical rate

 

Comprehensive Income

 

The Company has adopted ASC Topic 220-10, Reporting Comprehensive Income, which establishes rules for the reporting and display of comprehensive income, its components and accumulated balances. ASC 220-10 defines comprehensive income to include all changes in equity, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on available-for-sale marketable securities, except those resulting from investments by stockholders and distributions to stockholders. Comprehensive income includes net income and the foreign currency translation gain, net of tax.

 

F-12
 

 

Note 2 – Summary of Significant Accounting Policies (continued)

 

Share-Based Payment

 

The Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards, the Company calculates the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of common stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. For non-employee stock-based awards, the fair value of the award on the date of grant is calculated in the same manner as employee awards, however, the awards are revalued at the end of each reporting period and the pro rata compensation expense is adjusted accordingly until such time the nonemployee award is fully vested, at which time the total compensation recognized to date equals the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award recipient’s performance is complete. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.

 

Earnings Per Share

 

In accordance with ASC 260, “Computation of Earnings Per Share” and EITF No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128” (“EITF No. 03-6”), basic earnings per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. The Company’s Series A redeemable convertible preferred shares are participating securities. Diluted earnings per share is calculated by dividing net income attributable to ordinary shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the year. Ordinary equivalent shares consist of the ordinary shares issuable upon the conversion of the convertible preferred shares (using the if-converted method) and ordinary shares issuable upon the exercise of outstanding share options (using the treasury stock method).

 

Recent Accounting Pronouncements

 

In April 2014, the FASB issued amendments to ASC Topic 205 “Presentation of Financial Statements” and ASC Topic 360 “Property, Plant and Equipment”. The amendments change the current requirements for reporting discontinued operations in Subtopic 205-20. It requires an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability section, respectively, of the statement of financial position. This topic is effective for public entities for reporting periods beginning after December 15, 2014. An entity should not apply the amendments to a component classified as held for sale before the effective date even if the component of an entity is disposed of after the effective date. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued. The Company does not believe the adoption of the amendments to ASC 205 and ASC 360 will have a material effect on its consolidated financial statements.

 

There are no other new accounting pronouncements adopted or enacted during the year ended June 30, 2014 that had, or are expected to have, a material impact on the Company’s financial statements.

 

F-13
 

 

Note 3 – Inventory

 

Inventory at June 30, 2014 and 2013 consists of the following:

 

     June 30,
2014
   June 30,
2013
 
           
  Raw materials  $690,355   $748,296 
  Packaging supplies   387,599    369,143 
  Work in process   1,088,880    1,871,093 
  Finished goods   1,674,878    3,047,482 
  Total  $3,841,712   $6,036,014 

 

Note 4 – Property and Equipment

 

Property and equipment at June 30, 2014 and 2013 consists of the following:

 

     June 30,
2014
   June 30,
2013
 
           
  Buildings  $15,188,962   $15,151,551 
  Machinery and equipment   14,588,168    14,552,237 
  Office equipment and furniture   102,236    101,984 
  Vehicles   69,508    69,337 
  Subtotal   29,948,874    29,875,109 
  Less: Accumulated depreciation   7,127,561    5,350,377 
      22,821,313    24,524,732 
  Add: Construction in progress   22,557,043    16,078,500 
             
  Total  $45,378,356   $40,603,232 

 

Depreciation expense for the fiscal years ended June 30, 2014 and 2013 was $1,767,232 and $1,631,191, respectively.

 

F-14
 

 

Note 5 – Intangible Assets

 

Intangible assets at June 30, 2014 and 2013 consist of the following:

 

     June 30,
2014
   June 30,
2013
 
  Rights to use land  $14,770,400   $7,790,720 
  Approved drugs   17,060,652    17,018,631 
  Intangible assets   31,831,052    24,809,351 
  Less: accumulated amortization   4,131,319    3,304,339 
  Total  $27,699,733   $21,505,012 

 

Amortization expense for the fiscal years ended June 30, 2014 and 2013 was $820,333 and $803,947, respectively. The estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows:

 

Note 6 – Goodwill

 

On November 30, 2012, Chengdu Tianyin completed its acquisition of 100% equity interest in Sichuan Hengshuo for RMB 1.3 million, equivalent to $210,600. Goodwill, which is equal to the excess of cost over the fair value of assets acquired, has been recorded in conjunction with the acquisition. Goodwill is accounted for in accordance with ASC 350. The purchase price of $210,600 was assigned to goodwill as the net assets and operations of HSP were minimum at the date of acquisition.

 

Note 7 – LOAN RECEIVABLE

 

Loan receivable consists of following:

 

  Loan to an individual and guaranteed by a third party, collateralized by third party's machinery and equipment, bear interest at 50% above the bank standard rate and due on September 16, 2014. The loan was fully collected in September 19, 2014  $812,000 
  Loan to an unrelated company, bear interest at 50% above the bank standard rate and due on September 8, 2014. The loan was collateralized by the machinery and equipment of the company. The loan was fully collected in September 15, 2014.   1,169,280 
  Total  $1,981,280 

 

 

Note 8 – Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consist of the following:

 

     June 30,
2014
   June 30,
2013
 
  Accounts payable  $1,476,830   $1,206,760 
  Accrued expenses   115,629    145,800 
  Total  $1,592,459   $1,352,560 

 

Note 9 – Accounts Payable – Construction Related

 

Accounts payable – construction related consist of the following:

 

     June 30,
2014
   June 30,
2013
 
  Construction in progress payable  $2,238,927   $1,822,500 
  Land use rights payable   -    900,790 
  Total  $2,238,927   $2,723,790 

 

F-15
 

 

Note 10 – Short-Term Bank Loans

 

Short-term bank loans consist of the following:

 

     June 30,   June 30, 
     2014   2013 
  On September 19, 2012, the Company obtained a loan from China Huaxia Bank, the principal balance was paid in full on September 27, 2013. The interest is calculated using an annual fixed interest rate of 7.257% and paid monthly. The loan was guaranteed by a third party and the Company’s CEO, Dr. Jiang.   -   $1,620,000 
             
  On June 21, 2013, the Company obtained a loan from China CITIC Bank, which matures on December 21, 2013. The interest is calculated using an annual fixed interest rate of 6.44% and paid monthly. The loan was secured by the Company’s certificates of deposit, which included in the restricted cash on the Company’s balance sheet. The loan was paid in full in December 2013.   -   $4,309,200 
             
  On October 30, 2013, the Company obtained a loan from China CITIC Bank, which matures on October 30, 2014. The interest is calculated using an annual fixed interest rate of 7.20% and paid monthly. The loan was guaranteed by the Company’s CEO, Dr. Jiang.  $4,547,200    - 
             
  Total short-term bank loans  $4,547,200   $5,929,200 

 

F-16
 

 

Note 11 – Income Taxes

 

The Company's subsidiary, Raygere, is incorporated in the British Virgin Islands. Under the corporate tax laws of British Virgin Islands, it is not subject to tax on income or capital gain.

 

The operating subsidiaries, Chengdu Tianyin, Tianyin Medicine Trading (TMT), HSP and JCM are all subject to 25% income tax rate. The tax write- offs and loss profit credit could only be applied to the individual subsidiaries of TPI.

 

In July 2006, the FASB issued ASC 740 that clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Company did not recognize any benefits in the financial statements for the fiscal year ended June 30, 2014 and 2013.

 

The comparison of income tax expense at the U.S. statutory rate of 35% in 2014 and 2013, to the Company’s effective tax is as follows:

 

     Fiscal Years ended
June 30,
 
     2014   2013 
           
  U.S. Statutory rate of 35%  $(214,460)  $3,163,678 
  Tax rate difference between China and U.S.   76,080   (903,778)
  Change in valuation allowance   333,705    164,007 
  Effective tax  $195,325   $2,423,907 

 

The provisions for income taxes are summarized as follows:

 

     Fiscal Years ended
June 30,
 
     2014   2013 
           
  Current  $1,375,835   $2,423,907 
  Deferred   (1,678,222)   (164,007)
  Valuation allowance   497,712    164,007 
  Total  $195,325   $2,423,907 

 

The tax effects of temporary differences that give rise to the Company’s net deferred tax asset as of June 30, 2014 and 2013 are as follows:

 

     June 30,
2014
   June 30,
2013
 
           
  Net operating loss carryforward  $1,607,835   $164,007 
  Inventory markdown   19,937    - 
  Accrued expenses   31,420    - 
  Others   19,030    - 
     1,678,222    164,007 
  Less valuation allowance   (497,712)    (164,007) 
  Deferred tax assets   1,180,510    - 

 

Note 12 – Stockholders’ Equity

 

The Company issued 50,000 shares of common stock incentive to the Company’s Chief Financial Officer each year during the year ended June 30, 2014 and 2013, respectively. These shares were valued at $55,000 and $30,000 for the shares issued during the year ended June 30, 2014 and 2013, respectively, and recorded in the statement of operations as compensation expense.

 

Note 13 – Statuary Reserve

 

In accordance with the Companies Law of PRC, the Company is required to transfer 10% of its profit after tax, as determined in accordance with accounting standards and regulations of the PRC, to the statutory surplus reserve. The statutory surplus reserve is non-distributable. The Company transferred $129,097 and $727,172 to statutory reserve during the year ended June 30, 2014 and 2013.

 

F-17
 

 

Note 14 – Employee Welfare Plan

 

The Company has established an employee welfare plan in accordance with Chinese laws and regulations. Full-time employees of the Group in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance and other welfare benefits are provided to employees. PRC labor regulations require the Group to accrue for these benefits based on a certain percentage of the employees’ salaries. The total contribution for such employee benefits was $942,452 and $867,175 for the fiscal years ended June 30, 2014 and 2013, respectively.

 

Note 15 – Risk Factors

 

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 as well as by the general state of the PRC’s economy. The Company's business may be influenced by changes 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.

 

Note 16 – Risk of Concentrations and Credit Risk

 

Concentrations

 

For the years ended June 30, 2014 and 2013, no single customer accounted for more than 10% of the Company’s sales. In terms of individual product sales, our major product Gingko Mihuan Oral Liquid (GMOL) contributes 47% or $22 million of total annual sales of fiscal year 2014 compared with GMOL’s contribution of 39% of total annual sales or $26.1 million from fiscal year 2013. No other products achieve more than 10% contribution for both fiscal years.

 

For the fiscal years ended June 30, 2014, two major vendors accounted for approximately 25% or $3.9 million and 13% or $2.0 million, respectively, of the Company’s total inventory purchases. For the fiscal years ended June 30, 2013, three major vendors accounted for approximately 18% or $4.0 million, 14% or $3.2 million and 14% or $3.1 million, respectively, of the Company’s total inventory purchases.

 

Credit Risk

 

Financial instruments, which potentially subject the Company to credit risk consist principally of cash on deposit with financial institutions. Management believes that the financial institutions that hold the Company’s cash and cash equivalents are financially sound and minimal credit risk exists with respect to these investments.

  

Note 17 – Other Expenses

 

Other expenses represented penalty fees charged by CFDA resulting from their inspection in 2014.

  

Note 18 - SUBSEQUENT EVENT

 

On September 30, 2014, the Company’s subsidiary, Chengdu Tianyin, acquired the remaining 13% of the JCM for RMB 15 million (approximately $2.4 million). Total payment of RMB 15 million was made on October 8, 2014.

 

F-18
 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

 

As of October 8, 2013, our Audit Committee and the Board of Directors both unanimously approved the termination of the Company’s independent auditor, Patrizio and Zhao LLC (“P&Z”), due to the fact that P&Z agreed to a cease-and-desist order and prohibition from practicing before the SEC on September 30, 2013, with the right to apply for reinstatement after three years.

 

From January 25, 2008 when P&Z was engaged, through the termination of the engagement with P&Z on October 8, 2013, there were no: (1) disagreements with P&Z on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to their satisfaction, would have caused them to make reference in connection with their opinion to the subject matter of the disagreements, or (2) reportable events.

 

The audit reports of P&Z on the consolidated financial statements of the Company as of and for the two most recent fiscal years ended June 30, 2013 and 2012 and in the subsequent interim periods did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.

 

On November 4, 2013, we engaged Paritz & Company, P.A. (“Paritz”) as the independent accountants to audit the Company’s financial statements for the years ended June 30, 2014 and 2013, effective immediately. Our Audit Committee and the Board of Directors have both unanimously approved the engagement of Paritz.

 

During the Company’s two most recent fiscal year and through any subsequent interim periods preceding the engagement of Paritz, the Company (a) has not engaged Paritz as either the principal accountant to audit the Company’s financial statements, or as an independent accountant to audit a significant subsidiary of the Company and on whom the principal accountant is expected to express reliance in its report; and (b) has not consulted with Paritz regarding (i) the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, and no written report or oral advice was provided to the Company by Paritz concluding there was an important factor to be considered by the Company in reaching a decision as to an accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K or a reportable event, as that term is described in Item 304(a)(1)(v) of Regulation S-K.

 

ITEM 9A.  CONTROLS AND PROCEDURES

 

(a) Evaluation of disclosure controls and procedures

 

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, Chief Operating Officer, Chief Financial Officer and Controller, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation, under the supervision and with the participation of our management, 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 management have concluded as of June 30, 2014 that our disclosure controls and procedures are 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 are 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 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) Changes in internal control over financial reporting

 

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, in, our Management’s Report on Internal Control Over Financial Reporting included in our Form 10-K for the year ended June 30, 2011, management concluded that the Company had material weaknesses. 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 2011, our management identified the following material weaknesses:

 

Insufficient knowledge regarding U.S. GAAP reporting by our existing accounting staff;
   
Insufficient accounting staff which results in a lack of segregation of duties necessary for an efficient internal control system; and
   
Insufficient documentation with our existing financial processes, risk assessment and internal controls.

 

During our fiscal year ended June 30, 2012, in order to address the above-mentioned material weaknesses identified in the prior year, the Company formulated and was implementing the following remediation plan, which includes:

 

Setting up an Internal Control Committee that consists of Dr. Jiang, Guoqing (CEO), Mr. Tao Yang (COO), Dr. James J. Tong (CFO), Ms. Liying Wang (Financial Controller) and Ms. Ying Zhang (HR Director) to monitor the internal controls process and oversee the completion of the remediation process;

   
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.  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;
   
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.  From 2012 till 2013, the Company 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, from 2011 till early 2014, Mr. Hongcai Li, the Company’s former financial controller of the operating subsidiary, was retained by the Company as an accounting consultant for the quarterly and annual financial reporting of the Company.
   
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;
   
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 China Food and Drug Administration (“CFDA”), 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;
   
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
   
Adopting an extensive policy of internal controls and procedures, and set up of a general framework as a guideline.

 

During our past few fiscal years, the Company continued to improve its internal controls and procedures by further implementing the remediation plan set up in the fiscal year of 2012 by taking the following steps:

 

Internal Control Committee frequently discusses and provides periodic updates on the progress of internal control improvement with our board of directors, auditors and our legal counsels;
   
The effectiveness of our internal control has been tested and verified by the regulatory bodies of the government in China. Based on the pharmaceutical manufacturing business nature of the Company, we are periodically being examined by the government in China for the compliance of procedures for manufacturing, quality assurance and control, and internal control effectiveness. As an update, the Company’s GMP certification at both of our pre-extraction plant and formulation plant was renewed in August 2013 according to the latest standards for the next three years until the end of 2015. The new GMP standards, issued in 2011 (Guidelines in English: http://eng.sfda.gov.cn/WS03/CL0768/65113.html), which provide the specification for pharmaceutical manufacturing facility in the criteria such as quality assurance, quality control and quality risk management, organization and personnel regulations, premises and facilities guidelines, equipment, materials and production criteria, qualification and validation procedure, documentation management, contract manufacture and analysis, product distribution and recalls, self inspections, along with general and supplementary provisions. After the inspection by the CFDA officials, the Company was awarded GMP renewal status;
   
Following the receipt of the new GMP certification, the Company has been continuously revising the training program for the Company’s operational, financial staff and new employees to improve their knowledge regarding U.S GAAP reporting. In addition, financial consultants and U.S GAAP experts were also sought after and engaged to facilitate the process. These training programs consist of lectures, consultation sessions, as well as brochures and articles. The management concludes that the existing operational and accounting staff have gained efficient knowledge of GAAP and basic English communication skills to further improve their knowledge with continuous training, while new employees will still need further training and education for the following fiscal year;
   
We have been in the process of 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. Due to the uneven economic growth in different parts of China, it has not been an easy task to recruit capable bilingual individuals with adequate experience and have them relocate to inland areas such as Sichuan Province from the coastal areas. But we believe that with the steady growth of economy in China, we will be able to move along with this recruitment process more successfully in the future. Until such time as full time employees with knowledge of US GAAP can be recruited, the Company will continue to consult with advisors to improve its internal control system;

 

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Through 2012 and 2013, we further updated the Checklist of Internal Controls and Procedures adopted in 2009. The management has also done periodic review of the Checklist to further improve the internal control procedure. We also review the existing materials of internal controls and procedures in Chinese with our Chinese staff from time to time to help them remain familiar with the materials; and
   
We are in the process of adopting an extensive policy of internal controls and procedures tailored to our individual departments, and set up of a general framework as a guideline based on guidelines that were already in place at difference departments of the Company such as Sales, Manufacturing, Finance, Marketing, Investor Relations, Business and Development.

 

We have implemented and maintained the above-mentioned remediation plan through fiscal year 2013 and 2014. We conclude that the internal control of the Company has improved from the initiation of the plan in 2012. We believe that the remediation process requires continuous education and progress. As of June 30, 2014, our management determined that our internal control over financial reporting was not yet effective; however, our reassessment shows that we have corrected and improved most of the above-mentioned material weaknesses and we expect to complete the remediation by the end of fiscal year 2015.

 

Except as described above, there have been no changes in our internal controls over financial reporting that occurred during the fiscal year to which this Annual Report on Form 10-K relates that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

 

Item 9B. OTHER INFORMATION.

 

None.

  

PART III

 

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES

 

The following table and text set forth the names and ages of all directors and executive officers as of June 30, 2014. The Board of Directors is comprised of only one class. All of the directors will serve until the next annual meeting of shareholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. There are no family relationships among our directors and executive officers. Also provided herein are brief descriptions of the business experience of each director, executive officer and advisor during the past five years and an indication of directorships held by each director in other companies subject to the reporting requirements under the Federal securities laws.

 

None of our directors hold directorship in any other public companies. Additionally, during the past 10 years, none of our directors have been involved in any of the following types of legal proceedings: (a) any judicial or administrative proceedings resulting from involvement in mail or wire fraud or fraud in connection with any business entity; (b) any judicial or administrative proceedings based on violations of federal or state securities, commodities, banking or insurance laws or regulations, or any settlement to such actions; or (c) any disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self regulatory organization.

 

Name   Age   Position
Guoqing Jiang   47   Chairman of the Board, Chief Executive Officer and President
James J. Tong M.D. Ph.D.   41   Director, Chief Financial Officer and Chief B&D Officer

Tao Yang

 

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Chief Operating Officer

Professor Zunjian Zhang, Ph.D.   54   Director
Professor Jianping Hou, Ph.D.   53   Director
Bo Tan   41   Director

 

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Guoqing Jiang, Chairman of the Board, Chief Executive Officer Dr. Jiang has led the current management to acquire Tianyin Pharmaceutical Co., Ltd. in 2003 and successfully transformed the Company from a regional player into one of the leading TCM manufacturers in China.  Prior to TPI, Dr. Jiang served as CEO at Kelun Pharmaceutical Group and has been involved in building Kelun to become the world’s leading producer of intravenous solution products. Dr. Jiang is an industry veteran with over 20 years of extensive experience in the pharmaceutical industry. Dr. Jiang once served as a lecturer and resident physician for over 5 years after graduating as a Medical Doctor from Jiangsu University Medical School.

 

James J. Tong, M.D. Ph.D. Director, Chief Financial Officer, Chief Business & Development Officer Dr. Tong joined TPI as our CFO, CBDO and Director since April 2010. Dr. Tong was the former Head of China Healthcare Investment Banking at ROTH Capital Partners, Newport Beach, CA. He initially joined ROTH as an equity research analyst, covering a series of U.S.-listed Chinese pharmaceutical, biotech, medical devices and drug retail businesses. Prior to that, Dr. Tong was a biotechnology analyst at Rodman & Renshaw, New York, covering biotech entities focusing on molecular diagnostics and cures for Alzheimer's disease, multiple sclerosis and cancer. Before his Wall Street career, Dr. Tong was Principal Investigator at Marine Biological Laboratory (MBL) sponsored by Grass Foundation at Woods Hole, MA and a Senior Research Fellow at University of California, Irvine (UCI). Dr. Tong was awarded Ph.D. in Neurobiology and Behavior from Cold Spring Harbor Laboratory / Stony Brook University Neuroscience program. He published three first-authored Nature articles and currently holds two patents. Dr. Tong received his medical degree from Peking University Health Science Center.

 

Tao Yang, Chief Operating Officer Dr. Yang has been a well-known certified pharmaceutical sale training specialist with more than 20 years of experience in sales and marketing. He was a former sales training specialist and marketing manager for Astra Zeneca and Bayer. He has been managing the training services of many well-known domestic and international pharmaceuticals during the past ten years, including Grünenthal- San Huan Pharmaceutical (China) Co., Ltd., Beaufour Ipsen Pharmaceutical Co., Ltd., and Yangtze River Pharmacy Group, etc. Dr. Yang has served as BPIP implementation consultant of CPDF launched by World Bank since 2001, and the executive advisor of the policy system program in 2007, which is a training system formed by the Chinese and British government to support the domestic small to medium size businesses.

 

Professor Zunjian Zhang, Ph.D., Director Professor Zhang is Executive Director at the Center for Instrument Analysis and the Deputy Director of the School of Pharmacy at China Pharmaceutical University. He is a member of the Chinese Pharmacopoeia Commission, a price evaluation expert of the State Commission of Development and Reform and a CFDA expert review committee member for new drugs and health food products. He also serves as an editor for Journal of China Pharmaceutical University and Journal of Chinese Traditional and Herbal Drugs etc. Professor Zhang is mainly engaged in the in vitro and in vivo quality evaluation of pharmaceuticals, specializing on the efficacy of in vivo pharmaceuticals and the chromatography / spectrometry / mass spectrometry analysis of the TCM active ingredients. Professor Zhang has published more than 150 peer-reviewed research papers in well recognized journals worldwide. Dr. Zhang provides scientific, drug development and healthcare policy expertise to the board of TPI.

 

Professor Jianping Hou, Ph.D., Director Professor Hou is currently a graduate school faculty advisor at Shaanxi University of Traditional Chinese Medicine. Professor Hou is a CFDA expert review committee member for new drugs and health food products. Professor Hou is Executive Director at Shaanxi Pharmacological Society and the Clinical Pharmacology Committee of Shaanxi Pharmaceutical Association.  He has also held various senior management positions at Sizhuang Research Institute of Nutraceutics, Xikang Pharmaceutical Co., Ltd. and Sizhuang Pharmaceutical Co., Ltd. Dr. Hou provides both scientific and drug development expertise to the board of TPI. He earned his Ph.D. degree in Pharmacology of Traditional Chinese Medicine from Beijing University, where he also completed an EMBA training program for top pharmaceutical executives at Beijing University.

 

Bo Tan, Director. Currently serving as 3SBio Chief Financial Officer since February 2009, Mr. Bo Tan has extensive experience within the financial and pharmaceutical industries, having worked across private equity, equity research and commercial practice. Previously, he served as the Executive Director and a member of Investment Committee for Bohai Industrial Fund Management Company, a private equity fund in China. Earlier in his career, he spent six years in the pharmaceutical industry with Eli Lilly & Company and EMD Pharmaceuticals, Inc. in North America and went on to serve as a China healthcare and consumer analyst at Lehman Brothers Asia and Macquarie Securities in Hong Kong. He received his MBA degree from Thunderbird School of International Management, an MA degree in economics from the University of Connecticut and a BA degree in economics from Renmin University of China. Mr. Tan is also a Chartered Financial Analyst.

 

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Significant Employees

 

The following are employees who are not executive officers, but who are expected to make significant contributions to our business:

 

Mr. Xintao You, Vice President of Operations. As one of the original founders of Chengdu Tianyin, Mr. You has over 20 years of industry experience.  Prior to Tianyin, Mr. You was a Research Scientist at Sichuan Industrial Institute of Antibiotics, Faculty Member at West China School of Pharmacy Sichuan University, Visiting Scholar at Osaka University and Director of quality system at the Sichuan Qili Pharmaceutical Co. Mr. You received his Bachelors degree and Masters degree in pharmacy, respectively from China Pharmaceutical University and Sichuan University-affiliated West China Center of Medical Sciences.

 

Daqiao Zhang, Vice President of Marketing and Sales. Dr. Zhang is an innovative pharmaceutical and TCM industry as an innovative marketing and sales expert with over 15 years of experience. Dr. Zhang served in various senior marketing and sales positions at Simcere Pharmaceutical Group and Nanjing Medical Company (SHSE: 600713). Dr. Zhang graduated from Jiangsu University Medical School and he also received an MBA degree from Macau University of Sciences and Technology.

  

Corporate Governance

 

Corporate governance is the system that allocates duties and authority among a company’s stockholders, board of directors and management. The stockholders elect the board of directors and vote on extraordinary matters; the board of directors is a company’s governing body, responsible for hiring, overseeing, and evaluating management, particularly the chief executive officer; and management runs a company’s day-to-day operations. Our Board of Directors currently consists of five seats.

 

Board Leadership Structure and the Board’s Role in Risk Oversight.

 

Our Board of Directors utilizes a leadership structure that has the Chief Executive Officer (who is the Company’s principal executive officer, principle accounting officer and a director) who also acts in the capacity as Chairman of the Board of Directors. This structure creates efficiency in the preparation of the meeting agenda and related Board material as the Company’s Chief Executive Officer is more connected to the overall daily operations of the Company. Agenda are also prepared with the permitted input of the full Board of Directors allowing for any concerns or risks of any individual director to be discussed as deemed appropriate. The Company also believes that this structure is appropriate and allows for efficient and effective oversight, given the Company’s relatively small size (both in terms of number of employees and in scope of operational activities directly conducted by the Company), its corporate strategy and its focus on research and development. The Board does not currently have a policy regarding the separation of the roles of Chief Executive Officer and Chairman of the Board. The Board views that at the current period of the Company’s development stage, there is no one best leadership structure model that is most effective in all circumstances and retains the authority to separate the position of Chairman and Chief Executive Officer in the future if such change is determined to be in our best interests and the best interests of our shareholders.

 

The Board of Directors does not have a specific role in risk oversight of the Company. The Chairman, President and Chief Executive Officer and, as needed, other executive officers and employees of the Company provides the Board of Directors with information regarding the Company’s risks.

 

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Compliance with Section 16(a) of the Exchange Act

 

Section 16(a) of the Exchange Act requires our officers, directors and persons who own more than 10% of any class of our securities registered under Section 12(g) of the Exchange Act to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.

 

Based on our review of copies of such reports, we believe that there was compliance with all filing requirements of Section 16(a) applicable to our officers, directors and 10% stockholders during fiscal year 2014.

 

Code of ethics

 

We have always encouraged our employees, including officers and directors, to conduct business in an honest and ethical manner.  Additionally, it has always been our policy to comply with all applicable laws and provide accurate and timely disclosure.  Due to our lack of operations and small employee base prior to the Share Exchange, we did not maintain a formal written code of ethics.  However, as a result of the Share Exchange, we decided to adopt formal written codes of ethics for our executive officers, our directors and our employees.

 

Our codes of ethics are designed to deter wrongdoing and promote honest and ethical conduct and compliance with applicable laws and regulations.  These codes also incorporate our expectations of our executives that enable us to provide accurate and timely disclosure in our filings with the Securities and Exchange Commission and other public communications.  Our codes of ethics were filed as Exhibits 14.1, 14.2 and 14.3 to the Current Report on Form 8-K that we filed with the SEC on March 4, 2008 and are available on our website, http://www.tianyinpharma.com/company_governance.html. Any future changes or amendments to our code of ethics, and any waiver of our codes of ethics will also be posted on our website when applicable.

 

Board Independence and Committees

 

Presently, we are required to comply with the director independence requirements of the NYSE MKT. We make determination of whether our directors are independent pursuant to rules of the NYSE MKT.  The board of directors will also consult with counsel to ensure that the boards of director’s determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence of directors, including those adopted under the Sarbanes-Oxley Act of 2002 with respect to the independence of audit committee members.  The NYSE Mkt listing standards define an “independent director” generally as a person, other than an officer of a company, who does not have a relationship with the company that would interfere with the director’s exercise of independent judgment. Professor Zhang, Professor Hou and Mr. Tan are “independent” as that term is defined by Section 803A of the NYSE MKT Listing Standards; accordingly, we satisfy the “independent director” requirements of the NYSE MKT, which requires that a majority of a company’s directors be independent.

 

  Audit Committee, comprised of Mr. Tan (Chair), Professor Hou and Professor Zhang.  The Board has determined that all of these members are independent, as that term is defined in Section 803A of the NYSE Mkt Listing Standards.
     
  Compensation Committee, comprised of Mr. Tan (Chair), Professor Hou and Professor Zhang. The Board has determined that all of these members are independent, as that term is defined in Section 803A of the NYSE Mkt Listing Standards.
     
  Nominating Committee, comprised of Mr. Tan (Chair), Professor Hou and Professor Zhang.  The Board has determined that all of these members are independent, as that term is defined in Section 803A of the NYSE Mkt Listing Standards.

 

Audit Committee and Financial Expert

 

Our Audit Committee focuses its efforts on assisting our Board of Directors to fulfill its oversight responsibilities with respect to our:

 

  Quarterly and annual consolidated financial statements and financial information filed with the Securities and Exchange Commission;

 

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  System of internal controls;
     
  Financial accounting principles and policies;
     
  Internal and external audit processes; and
     
  Regulatory compliance programs.

 

The committee will meet periodically with management to consider the adequacy of our internal controls and financial reporting process.  It will also discuss these matters with our independent auditors and with appropriate financial personnel that we employ.  The committee will review our financial statements and discusses them with management and our independent auditors before those financial statements are filed with the Securities and Exchange Commission.

 

The committee has the sole authority to retain and dismiss our independent auditors and periodically reviews their performance and independence from management.  The independent auditors have unrestricted access and report directly to the committee.  The committee intends to meet as often as is necessary throughout the year to carry out its duties.

 

Mr. Bo Tan is our Audit Committee Financial Expert, as that term is defined in Item 407 of Regulation S-K and the Board has determined that Mr. Tan is independent, as that term is defined in Section 803A of the NYSE Mkt Listing Standards and Section 10A(m)(3) of the Securities Exchange Act of 1934.  Mr. Tan’s qualifications as an audit committee financial expert are described in his biography above.

 

Compensation Committee

 

The Compensation Committee is responsible for setting executive compensation, for making recommendations to the full Board concerning director compensation and for general oversight of the compensation and benefit programs for other employees.  The committee intends to meet as often as is necessary throughout the year to carry out its duties.

 

Our overall compensation policies are monitored by the Compensation Committee.  The duties and responsibilities of the Compensation Committee are to:

 

  administer the employee benefit plans of our company designated for such administration by the board;
     
  establish the compensation of our Chief Executive Officer (subject to the terms of any existing employment agreement);
     
  with input from our Chief Executive Officer, establish or recommend to the board the compensation of our other executive officers (subject to the terms of any existing employment agreements); and
     
  monitor our overall compensation policies and employment benefit plans.

 

The Compensation Committee may, in its sole discretion, retain or obtain the advice of compensation consultants, independent legal counsel or other advisors and shall be directly responsible for the appointment, compensation and oversight of the work of any such retained advisors. The Compensation Committee shall be provided with appropriate funding, as determined by the Compensation Committee, for payment of reasonable compensation to a compensation consultant, independent legal counsel or any other adviser retained by it.

 

The Committee shall consider the independence of its advisors as required by law, SEC rules and NYSE MKT Rules in effect from time to time from prior to the engagement of services from such advisors and periodically during such engagement and shall consider the following factors:

 

The provision of other services to the Company by the firm that employs the adviser;
   
The amount of fees received from the Company by the firm that employs the adviser, as a percentage of the total revenue of the firm that employs the adviser;
   
The policies and procedures of the firm that employs the adviser that are designed to prevent conflicts of interest;
   
Any business or personal relationship of the adviser with a member of the Compensation Committee;

 

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Any stock of the Company owned by the adviser or the adviser's immediate family members; and
   
Any business or personal relationship of the adviser or the firm employing the adviser with an executive officer of the Company.

 

Dr. Jiang, our Chief Executive Officer, participates in determinations of the compensation and design of our benefit programs for all employees, including our other executive officers.