As filed with the Securities and Exchange Commission on _________, 2006
Registration No. 333-135434
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
AMENDMENT NO. 4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
TIAN'AN PHARMACEUTICAL CO., LTD.
------------------ ---------------------------------
(Name of small business issuer in its charter)
Nevada 2834 None
----------------------- --------------------- ------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) I.D. Number)
Level 11, International Trade Centre
No.196 Xiaozhai East Road, Xi'an, China
0086-29-85381586
------------------- -----------------
(Address and telephone number of principal executive offices)
Level 11, International Trade Centre
No.196 Xiaozhai East Road
Xi'an, China
--------------------------- -------------
(Address of principal place of business or intended principal place of business)
Incorp Services, Inc.
3155 East Patrick Lane, Suite #1
Las Vegas, Nevada 89120
(800) 246-2677
-----------------------------------------------
(Name, address and telephone number of agent for service)
Copies to:
William T. Hart
1624 Washington Street
Denver, CO 80203
(303) 839-0061
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this registration statement.
If any securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box: [x]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum
Title of Each Class of Amount to Offering Aggregate Amount of
Securities to be Be Price Offering Registration
Registered Registered Per Share (1) Price Fee
- ------------------------------------------------------------------------------
Common stock 400,000 Shares $1.00 $400,000 $43.00
- ------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457. The per share offering price was calculated based upon
a price of $1.00 per share, which is the price that the shares will be
offered prior to the time that a market develops for the Company's common
stock.
The Company hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until it shall file a further
amendment which specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the registration statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
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400,000 shares of common stock
TIAN'AN PHARMACEUTICAL CO., LTD.
This prospectus covers the resale of 400,000 shares of our common stock
held by our selling stockholders for whom information is provided under the
"Selling Shareholder" section of this prospectus. The shares will be offered by
the selling stockholders initially at $1.00 per share and thereafter, if the
shares are listed for quotation on the OTC Bulletin Board, at prevailing market
prices at privately negotiated prices. The offering will terminate on the
earlier of the date all of the shares are sold or one year from the date of this
prospectus. We will not receive any proceeds from the sale of shares offered by
the selling stockholders.
There is no market for our common stock and a market may never develop in
the future.
INVESTING IN OUR COMMON STOCK INVOLVES SUBSTANTIAL RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus is ________, 2006.
3
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus as
we have not authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not making an offer to sell these securities
in any jurisdiction where an offer or sale is not permitted.
SUMMARY
This summary highlights material information regarding us and the
offering described in this prospectus. You should read the entire prospectus
carefully, including the financial information and related notes, before making
an investment decision.
History
Tian'an Pharmaceutical Co., Ltd. was organized as a Nevada corporation
on August 15, 2005. On August 18, 2005 we issued 100 shares of our common stock
to Jianjun Weng, our president, for $1.00. In September 2005 we issued
13,994,750 shares of our common stock to acquire all outstanding shares of
Tian'an Pharmaceutical Co., which we refer to as "Tian Pharma," a PRC company
located in Xi'an, China. Unless otherwise indicated, all references to us
throughout this prospectus includes the operations of Tian Pharma. The purpose
of the merger was to redomicile us as a U.S. corporation.
Our principal executive offices are located at 2/F, No. 18 Building,
Huoju Road, East Development Zone, Xi'an, China. Our telephone number is
0086-29-85381586.
Business
We develop, manufacture and sell Traditional Chinese Medicine herbal
products for the treatment and prevention of diseases and to improve the
functions of the human body.
As of the date of this prospectus we were selling two products, one of
which treats prostate gland proliferation and one of which treats blood vessel
problems. We expect that sales of our third product, which treats gastritis,
will begin in November 2006.
Our website is www.Xatazy.com.
The Offering
Securities offered by selling stockholders: 400,000 shares of common stock.
Price per share $1.00
Securities outstanding prior to and after 13,994,850 shares of common
the offering: stock.
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Use of proceeds: We will not receive any proceeds
from the sale of the common
stock offered by the selling
stockholders.
Through this prospectus, we are registering the resale of 400,000 shares
of our common stock which are held by four selling shareholders, all of whom
exchanged their shares of Tian Pharma for the 400,000 shares we issued to them.
The selling shareholders are all controlled by our management. All selling
shareholders are residents and citizens of China
See the section of the prospectus captioned "Business - Conventions Which
Apply to this Prospectus" for the definitions of terms used in this prospectus.
Forward Looking Statements
- --------------------------
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations about future events.
These forward-looking statements are subject to risks, uncertainties and
assumptions about us which are discussed in the Risk Factors section above as
well as throughout this prospectus. In light of these risks, uncertainties and
assumptions, any forward-looking events discussed in this prospectus might not
occur.
RISK FACTORS
The shares of common stock offered by this prospectus involve a high
degree of risk and represent a highly speculative investment. You should not
purchase these shares if you cannot afford the loss of your entire investment.
In addition to the other information contained in this prospectus, you should
carefully consider the following risk factors in evaluating an investment in our
common stock. The value of our common stock could decline if any of the risks
discussed below should occur.
5
Intense Competition may adversely affect our revenues and profitability
We compete with other companies, many of whom are developing or can be
expected to develop products similar to ours. Our market is a large market with
many competitors. There are no substantial entry barriers to the TCM market.
Many of our competitors are more established than we are, and have significantly
greater financial, technical, marketing and other resources than we presently
possess. Some of our competitors have greater name recognition and a larger
customer base. These competitors may be able to respond more quickly to new or
changing opportunities and customer requirements and may be able to undertake
more extensive promotional activities, offer more attractive terms to customers,
and adopt more aggressive pricing policies. We may not be able to compete
effectively with current or future competitors or that the competitive
pressures.
The products and the processes we use could expose us to substantial liability.
We face exposure to product liability claims in the event that the use
of our products is alleged to have resulted in 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. We do not carry
product liability insurance. The lack of product liability insurance may expose
us to potential product liability claims.
Our bank accounts are not insured or protected against loss.
We maintain our cash with various banks and trust companies located in
China. Our cash accounts are not insured or otherwise protected. Should any bank
or trust company holding our cash deposits become insolvent, or if we are
otherwise unable to withdraw funds, we would lose the cash on deposit with that
particular bank or trust company.
We have limited business insurance coverage in China, any loss which we suffer
may not be insured or may be insured to only a limited extent.
The insurance industry is China is still in an early state of development
and PRC insurance companies offer limited business insurance products. In the
event of damage or loss to our properties, our insurance may not provide as much
coverage as if we were insured by insurance companies in the United States.
We are subject to international economic and political risks over which we have
little or no control and may be unable to alter our business practice in time to
avoid the possibility of reduced revenues.
All of our business is conducted in the PRC. Doing business outside the
United States, particularly in the PRC, subjects us to various risks, including
changing economic and political conditions, major work stoppages, exchange
controls, currency fluctuations, armed conflicts and unexpected changes in U.S.
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and foreign laws relating to tariffs, trade restrictions, transportation
regulations, foreign investments and taxation. We have no control over most of
these risks and may be unable to anticipate changes in international economic
and political conditions and, therefore, unable to alter out business practice
in time to avoid the possibility of reduced revenues.
If relations between the United States and the PRC worsen, investors may be
unwilling to hold or buy our stock and if our securities become qualified for
quotation on an exchange, our stock price may decrease.
At various times during recent years, the U.S. and the PRC have had
significant disagreements over political and economic issues. Controversies may
arise in the future between these two countries. Any political or trade
controversies between the United States and the PRC, whether or not directly
related to our business, could reduce the price of our common stock if our stock
is publicly traded.
The PRC government could change its policies toward private enterprise or even
nationalize or expropriate private enterprises, which could result in the total
loss of our and your investment.
Our business is subject to significant political and economic
uncertainties and may be affected by political, economic and social developments
in the PRC. Over the past several years, the PRC government has pursued economic
reform policies including the encouragement of private economic activity and
greater economic decentralization. The PRC government may not continue to pursue
these policies or may significantly alter them to our detriment from time to
time with little, if any, prior notice.
Changes in policies, laws and regulations or in their interpretation or
the imposition of confiscatory taxation, restrictions on currency conversion,
restrictions or prohibitions on dividend payments to stockholders, or
devaluations of currency could cause a decline in the price of our common stock,
should a market for our common stock ever develop. Nationalization or
expropriation could even result in the total loss of our investment in the PRC
and in the total loss of your investment.
The nature and application of many PRC laws create an uncertain environment for
business operations and they could have a negative effect on us.
The PRC legal system is a civil law system. Unlike the common law system,
the civil law system is based on written statutes in which decided legal cases
have little value as precedents. In 1979, the PRC began to promulgate a
comprehensive system of laws and has since introduced many laws and regulations
to provide general guidance on economic and business practices in the PRC and to
regulate foreign investment. Progress has been made in the promulgation of laws
and regulations dealing with economic matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade. The promulgation
of new laws, changes of existing laws and the abrogation of local regulations by
national laws could could cause a decline in the price of our common stock,
should a market for our common stock ever develop. In addition, as these laws,
7
regulations and legal requirements are relatively recent, their interpretation
and enforcement involve significant uncertainty.
Fluctuations in exchange rates could reduce our revenues.
Although we use the United States dollar for financial reporting purposes,
all of the transactions effected by our operating subsidiary are denominated in
the PRC's RMB. The exchange rate of the RMB may fluctuate wildly against the
U.S. dollar. We do not currently engage in hedging activities to protect against
foreign currency risks. Even if we chose to engage in such hedging activates, we
may not be able to do so effectively. Future movements in the exchange rate of
the RMB could reduce our revenues.
You may experience difficulties in attempting to enforce liabilities based upon
U.S. federal securities laws against our non-u.s operating subsidiary and its
non-u.s. resident directors and officers
Our operating subsidiary and its assets are located in the PRC. Our
directors and executive officers are foreign citizens and do not reside in the
U.S. It may be difficult for courts in the U.S. to obtain jurisdiction over
these foreign assets or persons, and it may be very difficult or impossible for
you to enforce judgments rendered against us or our directors or executive
officers in U.S. courts. In addition, the courts in China may not permit the
enforcement of judgments arising out of the U.S. and state securities or similar
laws.
Sales of our common stock could reduce the price of our stock.
There are 13,994,850 shares of our common stock outstanding. Once this
registration statement is effective, all of our shares of outstanding shares
will be freely tradable, either by virtue of this prospectus or by Rule 144 of
the Securities and Exchange Commission.
The availability for sale of substantial amounts of common stock under
this prospectus or under Rule 144 could reduce prevailing prices for our common
stock.
Investors in this offering may have difficulty selling our shares since there is
no current market for our common stock and a market may never develop.
There is no public market for our common stock an active public market may never
develop in the future. Trades of our common stock, should a market ever develop,
will be subject to Rule 15g-9 of the Securities Exchange Act of 1934, which rule
imposes certain requirements on broker/dealers who sell securities subject to
the rule to persons other than established customers and accredited investors.
For transactions covered by the rule, brokers/dealers must make a special
suitability determination for purchasers of the securities and receive the
purchaser's written agreement to the transaction prior to sale. The Securities
and Exchange Commission also has rules that regulate broker/dealer practices in
connection with transactions in "penny stocks". Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
system, provided that current price and volume information with respect to
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transactions in that security is provided by the exchange or system). The penny
stock rules require a broker/ dealer, prior to a transaction in a penny stock
not otherwise exempt from the rules, to deliver a standardized risk disclosure
document prepared by the Commission that provides information about penny stocks
and the nature and level of risks in the penny stock market. The broker/dealer
also must provide the customer with current bid and offer quotations for the
penny stock, the compensation of the broker/dealer and its salesperson in the
transaction, and monthly account statements showing the market value of each
penny stock held in the customer's account. The bid and offer quotations, and
the broker/dealer and salesperson compensation information, must be given to the
customer orally or in writing prior to effecting the transaction and must be
given to the customer in writing before or with the customer's confirmation.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for our common stock. As a result of
these rules, investors in this offering, should a market for our shares ever
develop, may find it difficult to sell their shares.
MARKET FOR COMMON STOCK.
As of the date of this prospectus our common stock was not quoted on any
exchange and there was no public trading market. As of September 30, 2006 we had
approximately 2,800 record shareholders.
As of September 30, 2006, we had 13,994,850 outstanding shares of common
stock, of which 400,000 shares are being registered by this prospectus and will
be freely tradable shares upon the effective date of this prospectus. In
February 2007 these 400,000 shares, as well as the other shares owned by the
selling shareholders, are eligible for sale under Rule 144.
The remaining outstanding shares are eligible for sale pursuant to Rule
144(k).
In general, under Rule 144 as currently in effect, a person, or
persons whose shares are aggregated, who owns shares that were purchased from
us, or any affiliate, at least one year previously, including a person who may
be deemed our affiliate, is entitled to sell within any three month period, a
number of shares that does not exceed the greater of:
o 1% of the then outstanding shares of our common stock; or
o The average weekly trading volume of our common stock during the four
calendar weeks preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us. Any
person who is not deemed to have been our affiliate at any time during the 90
days preceding a sale, and who owns shares within the definition of "restricted
securities" under Rule 144 under the Securities Act that were purchased from us,
or any affiliate, at least two years previously, is entitled to sell such shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
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Holders of common stock are entitled to receive dividends as may be
declared by our Board of Directors. The Board of Directors is not obligated to
declare a dividend and it is not anticipated that dividends will ever be paid.
Our Articles of Incorporation authorize our Board of Directors to issue up
to 20,000,000 shares of preferred stock. The provisions in the Articles of
Incorporation relating to the preferred stock allow our directors to issue
preferred stock with multiple votes per share and dividend rights which would
have priority over any dividends paid with respect to the holders of our common
stock. The issuance of preferred stock with these rights may make the removal of
management difficult even if the removal would be considered beneficial to
shareholders generally, and will have the effect of limiting shareholder
participation in certain transactions such as mergers or tender offers if these
transactions are not favored by our management.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with our financial statements
and the related notes included elsewhere in this prospectus. Our financial
statements have been prepared in accordance with U.S. GAAP. In addition, our
financial statements and the financial data included in this prospectus reflect
our reorganization and have been prepared as if our current corporate structure
had been in place throughout the relevant periods. The following discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements.
Overview
We were organized as a Nevada corporation on August 15, 2005. In September
2005 we issued 13,994,750 shares of our common stock to acquire all outstanding
shares of Tian'an Pharmaceutical Co., which we refer to as "Tian Pharma," a PRC
company which was formed in January 2003. The purpose of the transaction was to
redomicile us as a U.S. corporation. Unless otherwise indicated, all references
to us throughout this prospectus includes the operations of Tian Pharma.
We develop, manufacture and sell Traditional Chinese Medicine herbal
products for the treatment and prevention of diseases and to improve the
functions of the human body.
Statement of Operations Data (1)
Nine Months Ended Year Ended December 31,
September 30, 2005 2004
2006 2005 ---- ----
---- ---- (Restated) (Restated)
Operating Revenues $5,265,833 $1,956,472 $3,516,888 $ 612,288
Cost of Sales (1,857,688) (738,354) (1,270,347) (394,896)
----------- --------- ----------- ----------
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Gross Profit 3,408,145 1,218,118 2,246,541 217,392
Selling and Promotion:
Advertising and Promotion (1,287,349) (335,716) (497,088) (8,220)
Salaries and Bonuses (152,684) (83,966) (118,943) (37,024)
Travel and Entertainment (31,913) (18,035) (24,175) (6,196)
Other (71,087) (33,648) (48,499) (11,865)
----------- --------- ----------- ----------
Total Selling and Promotion (1,543,033) (471,365) (688,705) (63,305)
----------- --------- ----------- ----------
General and Administrative:
Salaries and Benefits (109,468) (62,296) (201,091) (52,098)
Travel and Entertainment (26,658) (1,593) (1,184) --
Accounting and Financial
Consulting (278,070) (57,398) (66,615) --
Other (24,578) (109,665) (16,580) (12,130)
----------- --------- ----------- ----------
Total General and
Administrative (438,774) (230,952) (285,470) (64,228)
----------- --------- ----------- ----------
Depreciation, Amortization
and Impairment (8,743) (12,970) (16,499) (2,409)
Rental Income 29,201 -- 3,372 --
Interest Income (net) 21,802 16,671 23,357 26,462
Other (1,403) -- (1,474) (1,525)
----------- --------- ----------- ----------
Net Income Before Taxes 1,476,195 519,502 1,281,122 112,387
Provision for Income Taxes (246,477) (87,162) (220,072) (--)
----------- --------- ----------- ----------
Net Income $1,229,718 $432,340 $1,061,050 $ 112,387
=========== ========= ========== ==========
(1) Although we were not incorporated in Nevada until August 15, 2005, our
acquisition of Tian Pharma, our Chinese subsidiary, has been treated as a
reverse acquisition for financial reporting purpose and the historical
stockholders' equity accounts have been retroactively restated to reflect
the issuance of our shares in connection with the acquisition of Tian
Pharma during the periods presented. See Note 1 to our financial statements
for more information.
Balance Sheet Data
September 30, December 31,
2006 2005
---- ----
Current assets $7,754,203 $5,840,192
Total assets 10,754,790 9,192,706
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Current liabilities 616,824 510,394
Total liabilities 616,824 510,394
Working Capital 7,137,379 5,329,798
Minority Interest 98,754 99,022
Stockholders' equity 10,039,212 8,583,290
Results of Operation
- --------------------
Year Ended December 31, 2005
Material changes of items in our Statement of Operations for the year
ended December 31, 2005, as compared to the year ended December 31, 2004, are
discussed below:
Operating revenue: We began commercial sales of our first product, the
Compound Ginseng capsule, in January 2003. At first, sales of this product were
slow since, until May 2005, we had to use a third party to manufacture this
product. In November 2004 we leased a manufacturing plant in Xi'an. The
manufacturing plant obtained GMP certification in May 2005 and sales increased
substantially during 2005. As a result of the foregoing, operating results for
2005 are not comparable to 2004.
Gross profit: Our gross profit percentage was 64% in 2005 as compared to
36% in 2004. The use of our own manufacturing facility reduced our cost of sales
since manufacturing our products is less expensive than paying third parties to
manufacture the products. Operating efficiencies (due to higher sales) also
resulted in a lower cost per each unit manufactured.
Selling and Promotion Expenses include advertising, promotion, salaries,
bonuses, travel and entertainment. The major components of expenses in this
category were advertising, related promotion, salaries and bonuses, all which
increased during the year in line with increased sales activity.
General and Administrative Expenses include salaries, benefits, travel,
entertainment, accounting and financial consulting. Salaries, benefits, travel
and entertainment increased as the result of higher sales activity. Accounting
and financial consulting expenses increased as we began, during the latter part
of fiscal 2005, to prepare our financial statements for 2005 and 2004 which are
included as part of this prospectus.
Net income: Higher sales and a higher gross profit margin were the
contributing factors to the increase in net income.
Nine Months Ended September 30, 2006
Material changes of items in our Statement of Operations for the nine
months ended September 30, 2006, as compared to the nine months ended September
30, 2005, are discussed below:
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Operating Revenue: Our second product, the Tianan Soft capsule, came to
market in January 2006. During the first quarter of 2005 we discontinued sales
as we were concentrating on obtaining GMP certification, which we obtained in
May 2005. During the remainder of the nine-month period ended September 30,
2005, we were only selling our Compound Ginseng capsule. As a result of these
factors, operating results for the nine month period ended September 30, 2005
are not comparable to the nine months ended September 30, 2006.
Gross Profit: Our gross profit percentage was 65% during this period,
which was comparable to our gross profit percentage of 64% in fiscal 2005.
Although we did not have any sales for the three months ended March 31, 2005 we
nevertheless expensed cost of sales of $51,047 during the period due to the
depreciation and amortization of our manufacturing equipment and facility.
Selling and Promotion Expenses: The major components of expenses in this
category were advertising and related promotion, which increased during the
period in line with increased sales activity.
General and Administrative Expenses: Salaries, benefits, travel and
entertainment increased as the result of higher sales activity. Accounting and
financial consulting expenses increased as we completed the preparation and
auditing of our 2005 and 2004 financial statements, which are included as part
of this prospectus, and the preparation of our interim financial statements.
Net Income: Net income during the first nine months of 2006 was 23% of our
Operating Revenues. In comparison, our net income was 30% of our Operating
Revenues during the year ended December 31, 2005. The decline, from a percentage
standpoint, was due to the increase in Operating Expenses.
Trends, Events and Uncertainties
We anticipate that revenues will increase once we receive government
approval to sell our Nizhuanle soft capsule and to market all of our products
through Xian Tianan Pharmacy Marketing Co., Ltd., the subsidiary we formed in
December 2005.
The TCM market may not be as large as reported and expected growth in this
market may not continue. Market data and projections are inherently uncertain
and subject to change. In addition, underlying market conditions are subject to
change based on economic conditions, consumer references and other factors that
are beyond our control. A slow-down in sales of TCM products could have a
material adverse effect on our business.
Other than the factors listed above we do not know of any trends, events
or uncertainties that have had or are reasonably expected to have a material
impact on our net sales or revenues or income from continuing operations. Our
business is not seasonal in nature.
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Liquidity and Capital Resources
- -------------------------------
Future payments due on our contractual obligations as of September 30, 2006
are as follows:
Item Total 2006 2007 2008 2009
- ---- ----- ---- ---- ---- ----
Lease Payments $417,700 $143,800 $96,700 $96,700 $80,500
Except as shown in the foregoing table, as of September 30, 2006 we did not
have any material capital commitments.
If sufficient capital is available, during the next twelve months we plan
to spend approximately $1,300,000 to market our products through Xian Tianan
Pharmacy Marketing Co., Ltd., the subsidiary we formed in December 2005, and
approximately $3,700,000 to expand our product line and our manufacturing
facility.
If cash generated by or operations is not sufficient to fund any future
capital requirements, we will attempt to raise any capital which we may need
through the sale of our equity securities or borrowings from third parties.
Although we raised $1,856,445 from the sale of 1,856,445 shares of our
common stock in 2005, we do not have any commitments or arrangements from any
person to provide us with any additional capital. Additional capital may not be
available to us on a timely basis, or if available, on acceptable terms.
Our material sources and (uses) of cash during the years ended December
31, 2004 and 2005 were:
2005 2004
---- ----
Cash provided by (used in) operations $1,741,192 $(1,918,110) (1)
Purchase of manufacturing equipment (1,050,898) (298,941)
Acquisition of rights to Nizhuanle
Soft capsule (767,839) --
Sale of common stock 1,856,445 --
Cash on hand at beginning of year -- 2,217,051
Our material sources and (uses) of cash during the nine months ended
September 30, 2005 and 2006 were: 2006 2005 ---- ----
Cash provided by operations $ 1,054,590 $627,114
Purchase of manufacturing equipment (32,313) (320,956)
Sale of assets 28,118 --
Sale of common stock -- 1,815,000
(1) In 2004, our Chinese subsidiary, Tian Pharma, planned to acquire an
unrelated company. In connection with the contemplated acquisition Tian Pharma
paid a deposit of approximately $1,936,000. The acquisition was not completed
and the deposit was returned during the three months ended March 31, 2005. We
14
recorded the deposit as a receivable in current assets at December 31, 2004,
which, for purposes of our Statement of Cash Flows, was a "use" of cash. The
recovery of the deposit during the nine months ended September 30, 2005 was
considered "cash provided by operations" for purposes of our Statement of Cash
Flows.
Income from our operations has been, and is expected to be in the future,
our primary source of cash.
We anticipate that revenues will increase once we receive government
approval to sell our Nizhuanle soft capsule and to market all of our products
through our subsidiary, Xian Tianan Pharmacy Marketing Co., Ltd. Except for the
above, we do not know of any trends, events or uncertainties that are reasonably
likely to have an impact on our liquidity.
Off-Balance Sheet Arrangements
- ------------------------------
We do not have any off-balance sheet items reasonably likely to have a
material effect on our financial condition.
Accounting Policies
- -------------------
Our critical accounting policies, as well as recent accounting
pronouncements which apply to us, are described in Note 2 to our financial
statements which are included as part of this prospectus.
BUSINESS
We were incorporated in Nevada in August 2005. In September 2005 we
acquired Tian'an Pharmaceutical Co., which we refer to as "Tian Pharma," a PRC
company which was formed in January 2003. Unless otherwise indicated, all
references to us throughout this prospectus includes the operations of Tian
Pharma. The purpose of the transaction was to redomicile us as a U.S.
corporation.
We began commercial sales of our first product, the Compound Ginseng
capsule, in January 2003. In November 2004 we leased a manufacturing plant in
Xi'an. The manufacturing plant obtained GMP certification in May 2005. Our
second product, the Tianan Soft capsule, a a healthcare supplement which came to
market in January 2006.
Conventions Which Apply to This Prospectus
- ------------------------------------------
Except as otherwise indicated and for purposes of this prospectus only:
o "we", "us" and "our" refer to:
Our company - Tian'an Pharmaceutical Co., Ltd., as well as Tian
Pharma, a PRC company that was merged into us in September 2005,
15
o "China" or "PRC" refers to the People's Republic of China, excluding
Taiwan, Hong Kong and Macau; and
o all references to "RMB" or "Renminbi" are to the legal currency of
China and all references to "$", "U.S. dollars," "dollars" and "US$"
are to the legal currency of the United States.
o all financial information in this prospectus is in U.S. dollars.
Traditional Chinese Medicine
Traditional Chinese Medicine is based on the theory that the human body
has two energy channels representing organ systems in wood, earth, metal, fire
and water. Optimally, these all work in balance and harmony. TCM is based on a
complex system of diagnostic methods for the prevention and treatment of illness
and disease that take into consideration the person as a whole, not just
isolated symptoms. The aim of TCM is not necessarily to eliminate or alleviate
symptoms but, rather, to increase both the ability to function and the quality
of life.
TCM has a history that can be traced back more than 5000 years. While its
earliest roots lie in shamanism and naturalism, over the years, the degree of
sophistication with which it is applied in treating disease has continued to
increase. Its basic premise in treating disease is to restore the inherent
harmony of the various functioning aspects of a given individual.
One of the defining characteristics of TM is its use of multiple herbs to
create formulas that treat specific patterns of disharmony. For generations,
countless TCM herbal formulas have been developed, tested and refined for use in
combating mot known diseases. The synergistic effect of these herbs working
together has the beneficial result of enhancing the actions of some of the
herbs, while minimizing the toxic effects of others. The theory behind the
sophisticated matching of the herbs is complex.
Products
We develop both pharmaceutical and nutraceutical products.
Pharmaceuticals are composed of the leaves and roots of one or more herbs
and other plants and do not use synthetic chemicals. Each pharmaceutical has a
certain medicinal function and treats one or more illness or symptoms of
illness. Pharmaceuticals are both prescribed by doctors and available
over-the-counter. All pharmaceuticals require the approval of China's State Food
and Drug Administration before their sale.
Nutraceuticals, also known as dietary supplements or nutritional
supplements, are essentially prophylactic or preventive, in contrast to
pharmaceutical products which are used to treat an illness or symptoms of an
illness. Nutraceuticals represent a different approach to medicine, one based on
nutrition and the health or wellness of the whole body. Nutraceuticals are also
composed of the leaves and roots of one or more herbs and other plants. All
16
nutraceuticals are available over-the-counter, without a prescription and, in
China, only require approval of the local government before their manufacture.
Our principal products are:
o Compound Ginseng capsule is a pure Chinese medicine preparation
which is used to cure and treat prostate gland proliferation.
This product provides relief in 5-7 days and has no serious side
effects.
o Nizhuanle Yin granule is a pure Chinese medicine preparation
which treats the decomposition or inflammation of the stomach's
mucous membrane. This product has been approved by the China
Ministry of Health. We expect to receive the final approval for
this product in November 2006 from the Shaanxi Province Medicine
Supervisory Bureau.
o Tianan soft capsule is an energy resource product which is used
to adjust high amounts of fat in the blood stream, improve blood
vessel ventilation and soften blood vessels.
o Tianan Pain Relief Capsule is a pure Chinese medicine preparation
which is being developed to cure pain in joints, headache, pain
from muscle injury, cancer, and gynecological disorders, as well
as general pain.
Xi'an Gelin Healthy Production Research Institution developed our Compound
Ginseng capsule. Xi'an Gelin assigned the rights to the Compound Ginseng to us
in exchange for shares of Tian Pharma, our Chinese subsidiary, which we acquired
by merger in September 2005. Xi'an Gelin is controlled by Jia Ning, one of our
directors.
We purchased the rights for the Nizhuanle granule from an unrelated third
party for approximately $768,000.
We developed the Tianan Soft capsule with our employees.
In August 2005 we entered into a contract with Xi'an Gelin Healthy
Production Research Institution a to develop the Tianan pain relief capsule.
Xi'an Gelin, located in Xi'an, China specializes in the research and development
of Traditional Chinese Medicine. We paid Xi'an Gelin approximately $1,000,000
for their services to bring the Tianan pain relief capsule to market by December
2011 and have it licensed. If Xi'an Gelin fails to obtain a license for the
Tianan pain relief capsule by December 2011 the $1,000,000 will be returned to
us.
17
The following is a summary of the status of our products:
Approved or
Estimated Cost Projected Date
Needed to Obtain of Governmental Marketing
Product Class Government Approval Approval Date
- ---------------------------------------------------------------------------------------------
Compound Ginseng capsule Pharmaceutical N/A Approved January 2003
Nizhuanle Yin granule Pharmaceutical $43,000 November 2006 November 2006
Tianan soft capsule Nutraceutical N/A Approved January 2006
Tianan pain relief capsule Pharmaceutical (1) 2011 2011
(1) Development costs are being paid by Xi'an Gelin Healthy Production Research
Institution.
Our estimates of the costs associated with future research and obtaining
necessary government approvals for our products may be substantially lower than
the actual costs of these activities. If our cost estimates are incorrect, we
will need additional funding for our research efforts. There can be no assurance
that our products will prove to have any therapeutic or other value.
Raw Materials and Manufacturing
None of the ingredients used in any of our products is proprietary and
most of the herbs and other raw ingredients used in the manufacture of our
products are available from a number of suppliers.
Our GMP-certified manufacturing facility, located in Xi'an, China is 1,683
square meters in size and is capable of producing 70 million capsules per year.
We lease this plant until 2009 at a rate of $8,058 per month.
Sales and Distribution
We sell our products only to independent distributors who act as
resellers. We maintain regional sales offices in Xi'an, Beijing, Shanghai and
Guangzhou which are primarily responsible for servicing our distributors and
monitoring sales activity. Although during the six months ended June 30, 2006
sales to six distributors represented approximately 99% of our Operating
Revenues, we do not think that the loss of any single distributor would result
in a material decline in our revenue.
Our distributors sell our products primarily to:
o Pharmacies and drugstores
o Hospitals
Five distributors exclusively sell our compound ginseng capsule and one
distributor exclusively sells our Tianan soft capsule. The distribution
agreements:
o were all signed between January and March 2006 and have a one
year term;
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o provide the distributor with exclusive marketing rights in
specified territories in China so long as required sales goals
are met. If the sales goals are not met, we have the right to
appoint other distributors to sell the product in the territory;
o allow the distributor to purchase our product at a fixed price
during the term of the agreement. In the case of our compound
ginseng capsule, the price is RMB 63.8 for a 60-granule bottle
and RMB 98 for a 72-granule box. In the case of our Tianan soft
capsule the price is RMB 27.6 for a 120 granule bottle.
In December 2005, we and Xi Peng, one of our officers, formed Xian Tianan
Pharmacy Marketing Co., Ltd. We contributed cash of approximately $2,600,000 for
a 96.3% interest in Tianan Pharmacy. When we receive the necessary approval from
the Chinese government, expected by November 2006, we will use Tianan Pharmacy
to sell our products directly to retail stores, pharmacies and hospitals in
areas not covered by our distributors.
As of the date of this prospectus our products were only sold in China.
Research and Development
In order to be competitive we will need to commit to continuous product
innovation and improvement through research. Through the improvement of existing
TCM herbal formulas and by creating new formulas, we plan to develop new natural
remedies for the treatment and prevention of diseases.
Our research efforts will combine in-house research, published research,
and clinical studies and will involve the following:
o Investigation of the in vitro activity of new natural herbal extracts,
o Identification and research of combinations of herbal extracts that
may be suitable for new products,
o Analysis of the benefits of existing and newly identified herbal
extracts, and
o Improvement of existing products following new discoveries in TCM.
Other than the $1,000,000 we paid Xi'an Gelin Healthy Production Research
Institution in 2005 to develop our Tianan pain relief capsule, we did not spend
any material amounts on research and development during the three years ended
December 31, 2005.
Competition
The alternative medicine industry is highly competitive. Many
pharmaceutical companies, chemical companies, health product companies, herb
extraction companies, biological engineering companies and research and
development institutions, are involved in the sale of natural herb-based
products. We believe that competition is based primarily on brand awareness,
price, availability and product efficacy.
19
Many of our competitors are large, well-established companies in the
pharmaceutical, chemical, and health care fields and have greater resources than
we do to devote to manufacturing, marketing, sales, research and development.
We believe that our ability to effectively compete will be due to the
following:
1. Our Compound Ginseng capsule is the only TCM product known to us which
both treats and cures prostate gland proliferation.
2. In clinical trials involving 300 patients in China the Nizhuanle Yin
Granule was effective with 90% of the patients using the product.
3. In toxicity studies performed for us our Tianan soft capsule acted
rapidly without harmful side effects.
Intellectual Property
Pursuant to the State Protection law of China, certain herbal medicine
products which have received China State Food and Drug Administration approval
have automatic protected intellectual property rights for an eight-year period
from the date approval. An application can subsequently be made to extend such
protection for up to two consecutive seven-year periods.
Under the State Protection law our Compound Ginseng capsule is protected
until April 2010 and our Nizhuanle Yin granule is protected until November 2010.
Our Tianan soft capsule, which is a nutraceutical and is not required to be
approved by the China State Food and Drug Administration, is not covered by the
State Protection law.
Certain trade secrets, primarily those pertaining to the formulas for our
products, are considered trade secrets. However, it is possible that the
formulas for our products may become known to or independently developed by
competitors.
Our trademark, Tianrunxing is registered with the PRC. We plan to use this
trademark to identify our products when we begin marketing them through our
subsidiary, Xian Tianan Pharmacy Marketing Co., Ltd.
PRC Laws and Regulations Affecting Our Business
Before a health product can be sold in China, a product sample must be
sent to a clinical testing agent designated by the Ministry of Health, which
conducts extensive clinical testing and examinations to verify that the product
has the specified functions as stated by the company producing the product. A
report is issued by the clinical testing agent confirming or negating such
functions. It generally takes approximately six months to one year for the
report to be issued. This report is then submitted to a provincial Health
Management Commission for approval. A letter of approval issued by the
commission is then submitted to the Ministry of Health for the issuance of a
certificate that authorizes the sales and marketing of the product in China. In
general, the approval process in China takes one and a half to two years.
20
The Pharmaceutical Administrative Law of China governs the licensing,
manufacturing, marketing and distribution of pharmaceutical products in China
and sets penalties for violations of the law. The Chinese Food Sanitation Law
provides for food sanitation standards. In China only products manufactured
within Government Good Manufacturing Practice certified facilities are available
for sale in China. The Good Manufacturing Practice inspections are conducted by
the China Food and Drug Administration.
We are required to use Good Manufacturing Practice approved methods to
process and manufacture our products. Under GMP requirements, the manufacturing
process must be capable of consistently producing quality batches of the product
and the manufacturer must develop methods for testing the quality, purity, and
potency of the final product. Additionally, appropriate packaging must be
selected and tested and chemistry stability studies must be conducted to
demonstrate that the product does not undergo unacceptable deterioration over
its shelf-life.
The cost of compliance with environmental laws in China has been, and is
not expected to be, material.
The PRC Legal System
The PRC legal system is a civil law system. Unlike the common law system,
the civil law system is based on written statutes in which decided legal cases
have little value as precedents. In 1979, the PRC began to promulgate a
comprehensive system of laws and has since introduced many laws and regulations
to provide general guidance on economic and business practices in the PRC and to
regulate foreign investment. Progress has been made in the promulgation of laws
and regulations dealing with economic matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade. The promulgation
of new laws, changes of existing laws and the abrogation of local regulations by
national laws could have a negative impact on our business and business
prospects. In addition, as these laws, regulations and legal requirements are
relatively recent, their interpretation and enforcement involve significant
uncertainty.
However, and subject to limitations on converting currency and statutory
reserve requirements, we do not believe there are any limitations concerning our
ability to access the assets held by Tian Pharma, a PRC corporation which is our
wholly owned subsidiary.
Taxes
All of our income is generated in the PRC and is subject to a corporate
income tax rate of 15%.
Based on our current and expected income, assets and operations, we
believe that we will not be subject to U.S. federal income tax under the
controlled foreign corporation rules.
21
Required Statutory Reserve Funds
In accordance with current Chinese laws, regulations and accounting
standards, we are required to set aside as a general reserve at least 10% of our
respective after-tax profits. Appropriations to the reserve account are not
required after these reserves have reached 50% of our registered capital. These
reserves are created to fund potential operating losses and are not
distributable as cash dividends. We are also required to set aside between 5% to
10% of our after-tax profits to the statutory public welfare reserve. In
addition and at the discretion of our directors, we may set aside a portion of
our after-tax profits for enterprise expansion funds, staff welfare and bonus
funds and a surplus reserve. These statutory reserves and funds can only be used
for specific purposes and may not be used for dividends.
Political and Trade Relations with the United States
Political and trade relations between the U.S. and the PRC
government during the past five years have been volatile and may continue to be
in the future. There can be no assurance that the political and trade
ramifications of these causes of volatility or the emergence of new causes of
volatility will not cause difficulties in our operations in the PRC marketplace.
Economic Reform Issues
The PRC is transitioning from a planned economy to a market economy. While
the PRC government has pursued economic reforms since its adoption of the
open-door policy in 1978, a large portion of the PRC economy is still operating
under five-year plans and annual state plans. Through these plans and other
economic measures, such as control on foreign exchange, taxation and
restrictions on foreign participation in the domestic market of various
industries, the PRC government exerts considerable direct and indirect influence
on the economy. Many of the economic reforms carried out by the PRC government
are unprecedented or experimental, and are expected to be refined and improved.
Other political, economic and social factors can also lead to further
readjustment of such reforms. This refining and readjustment process may not
have a positive effect on our operations or future business development. Our
operating results may be adversely affected by changes in the PRC's economic and
social conditions as well as by changes in the policies of the PRC government,
such as changes in laws and regulations (or the interpretation of laws or
regulations), measures which may be introduced to control inflation, changes in
the interest rate or method of taxation, and the imposition of additional
restrictions on currency conversion.
There can be no assurance that the reforms to the PRC's economic system
will continue or that we will not be adversely affected by changes in the PRC's
political, economic, and social conditions and by changes in policies of the
government, such as changes in laws and regulations, measures which may be
introduced to control inflation, changes in the rate or method of taxation,
imposition of additional restrictions on currency conversion and remittance
abroad, and reduction in tariff protection and other import restrictions.
22
Currency Conversion and Exchange
The currency in the PRC is designated as the Renminbi ("RMB"). Although the
RMB/U.S. dollar exchange rate has been relatively stable in the past five years
there can be no assurance that the exchange rate will not become volatile or
that the RMB will not be officially devalued against the U.S. dollar by
direction of the PRC government.
Exchange rate fluctuations may adversely affect our financial performance
because of our foreign currency denominated assets and liabilities, and may
reduce the value, translated or converted, as applicable into U.S. dollars, of
our net fixed assets, our earnings and our declared dividends. We do not engage
in any hedging activities in order to minimize the effect of exchange rate
risks. As of September 30, 2006 the currency exchange rate was approximately 7.9
RMB for each U.S. dollar.
The PRC government imposes control over the conversion of Renminbi into
foreign currencies. Under the current unified floating exchange rate system, the
People's Bank of China publishes an exchange rate, which we refer to as the PBOC
exchange rate, based on the previous day's dealings in the inter-bank foreign
exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC exchange rate according to market
conditions.
Although we do not intend to pay dividends, any inability to convert RMB
into U.S. $ will limit our ability to pay dividends in the future.
Employees
As of October 31, 2006 we had 126 full time employees. Our employees were
engaged in administration (22), sales and marketing (36), and manufacturing
(49). None of our employees are represented by a labor union or similar
collective bargaining organization. We believe that our relations with our
employees are good.
Facilities
Our executive offices are located at Level 11, International Trade Centre
No. 196 Xiaozhai East Road, Xi'an, China and consist of approximately 1,260
square feet of office space which is leased until October 2006 at a rate of
$3,913 per month.
We lease our manufacturing plant in Xi'an until 2009 at a rate of $8,058
per month.
We also have sales offices in Xi'an, Beijing, Shanghai and Guangzhou.
These sales offices range in size from 60 to 108 square feet. We pay
approximately $1,248 in monthly rent for the three sales offices in Beijing,
Shanghai and Guanzhou. The sales office in Xi'an is part of our executive
offices.
23
We own Level 10, International Trade Centre No. 196 Xiaozhai East Road,
Xi'an, China, which we lease to a third party. Rental income from this property
is not material to our operations.
We believe our properties are adequately insured.
MANAGEMENT
Directors and Executive Officers
The names, ages and positions held by our executive officers and directors
are listed below.
Name Age Position
---- --- --------
Weng Jianjun 48 Chief Executive Officer and a Director
Tang Huachu 42 Chief Investment Officer
Xue Hailiang 39 Chief Production Officer
Shi Yongzhi 58 Chief Quality Officer
Xi Peng 42 Chief Marketing Officer
Jia Andong 45 Chief Administration Officer
Zhu Jie 45 Chief Financial and Accounting Officer
Wang Renhua 36 Secretary
Li Deshun 55 Director
Jia Ning 48 Director
Wang Hongwei 44 Director
He Yanming 52 Director
Ma Zhiguo 46 Director
Liang Dingbang 63 Director
Ren Ping 49 Director
Wang Yanqing 36 Director
Weng Jianjun has been one of our officers and directors since January
2003. Since 1995 Mr. Weng has also been the Chief Executive Officer of Xi'an
Gelin Science and Technology Limited Company, a research and development firm.
Between 1999 and 2002 Mr. Weng was the Chief Executive Officer of Xi'an Tian'an
Pharmaceutical Limited Company.
Tang Huachu has been one of our officers since September 2004. Since 2001
Mr. Tang has also been the Chairman of the Board of Directors of Shaanxi Haishi
Investment Limited Company, a private investment firm.
Xue Hailiang has been one of our officers since December 2003. Between
1999 and 2002 Mr. Xue was the Chief Production Officer of Shaanxi Hualong
Pharmaceutical Limited Company, a firm engaged in the production and sale of TCM
products.
24
Shi Yongzhi has been one of our officers since January 2003. Between 1993
and 2002 Mr. Shi was the Manager of the Quality Control Department for Xi'an
Zhengda Pharmaceutical Limited Company, a firm engaged in the production and
sale of TCM products.
Xi Peng has been one of our officers since May 2004. Between 2001 and 2004
Mr. Xi was the Chief Marketing Officer of Delibang Pharmaceutical Group, a
company involved in the production and sale of prescription medicine.
Jia Andong has been one of our officers since November 2004. Between 1992
and 2004 Mr. Jia was the Manager of Administration for the Gaoxin Branch of the
China Construction Bank.
Zhu Jie has been one of our officers since April 2005. Between 1998 and
2005 Mr. Zhu was the manager of the financial department of Shaanxi Xirui Group,
a company involved in the production and sale of flour.
Wang Renhua has been one of our officers since March 2003. Between 2000
and 2003 Mr. Wang was Secretary of the Board of Directors for Xi'an Shengwei
Science and Technology Limited Company, a firm involved in the production and
sale of pesticide.
Li Deshun has been a director since 2004. Since 1992 Mr. Li has also been
the Chief Executive Officer of Beijing Jiali Taxi Company.
Jia Ning has been a director since 2003. Since 1994 Mr. Jia has also been
a partner with Xi'an Gelin Healthcare Research Institute, a research and
development firm.
Wang Hongwei has been a director since 2003. Since 1999 Mr. Wang has been
the Chief Executive Officer of Xi'an Huaming Jingmao Limited Company, a firm
involved in technology development and business consulting. Since 2001 Mr. Wang
has been the Chief Executive Officer of Shaaxi Economy, Technology and
Information Industry Center. Mr. Wang has also been the Chief Executive Officer
of Shaanxi Bafang Science and Technology Investment Limited Company, a
management and financial consulting firm, since 2002.
He Yanming has been a director since May 2005. Since April 2000 Mr. He has
also been a professor at Xi'an Jiaotong University.
Ma Zhiguo has been a director since May 2005. Since June 2001 Mr. Ma has
been a professor at Xi'an Jiaotong University. Since January 2005 Mr. Ma has
also been a vice dean of the Humanities Institute at Xi'an Jiaotong University.
Liang Dingbang has been a director since March 2006. Since June 2002 Mr.
Liang has also been a director of Shaanxi Baoguang Vacuum Electronic Equipment
Co., Ltd., a firm engaged in the production and sale of electronic transformers
and transmission equipment. Between 1998 and 2003 Mr. Liang was Chief Financial
Officer for the Chinese Airspace Science and Industry Group No. 210 Institute.
25
Ren Ping has been a director since March 2006. Between 1997 and 2004 Mr.
Ren was a counselor for the Asia market for Sanlan Technological Development
Company, a firm involved in the design and manufacture of electronic devices.
Since 2004 Mr. Ren has been the marketing advisor for Xi'an Haida Pharmaceutical
Co., Ltd., a firm involved in the manufacture and sale of prescription medicine.
Wang Yanqing has been a director since March 2006. Since 2001 Mr. Wang has
also been the Chief Financial Officer of Yajian International Golf Club. Between
1997 and 1999 Mr. Wang was the assistant financial manager for Century Golden
Flower Co., Ltd, a company involved in the retail sale of general merchandise.
Directors serve in such capacity until the next annual meeting of our
stockholders and until their successors have been elected and qualified. Our
officers serve at the discretion of our Board of Directors, until their death,
or until they resign or have been removed from office.
He Yanming, Ma Zhiguo, Liang Dingband, Ren Ping and Wang Yanqing are
independent directors as that term is defined by Rule 4200 of the NASDAQ
Marketplace Rules.
Summary Compensation Table
The following table shows the compensation paid or accrued during the
three years ended December 31, 2005 to Weng Jianjun, our Chief Executive
Officer. None of our executive officers or directors received compensation in
excess of $100,000 during our past three fiscal years.
Other All
Name and Annual Restricted Other
Principal Fiscal Compen- Stock Options Compen-
Position Year Salary Bonus sation Awards Granted sation
- ----------- ---- ------ ----- ------ ---------- ------- -------
Weng Jianjun, 2005 $5,095 -- -- -- -- --
Chief Executive 2004 $4,516 -- -- -- -- --
Officer 2003 $4,626 -- -- -- -- --
We have employment agreements with all of our officers. Each employment
agreement expires in January 2008. The salaries to be paid to our officers in
accordance with the terms of the employment agreements are shown below:
Name Monthly Salary
---- --------------
Weng Jianjun $ 520
Tang Huachu $ 372
Xue Hailiang $ 372
Shi Yongzhi $ 372
Xi Peng $ 372
Jia Andong $ 372
26
Zhu Jie $ 372
Wang Renhua $ 248
Transactions with related parties and recent sales of unregistered securities.
In August 2005 we sold 100 shares of our common stock to Weng Jianjun for
$1.00.
In September, 2005 we acquired all of the outstanding shares of Tian
Pharma, a PRC corporation, by means of a merger. In connection with this merger
we issued 13,994,750 shares of our common stock to the shareholders of Tian
Pharma. The purpose of the merger was to redomicile us as a Nevada corporation.
In connection with the merger, the following members of affiliates received
shares of our common stock:
Xi'an Gelin Science and Technology Limited Company is controlled by Weng
Jianjun, one of our officers and directors, and received 63,613 shares.
Shaanxi Haishi Investment Limited Company is controlled by Tang Huachu,
one of our officers, and received 508,906 shares.
Xi'an Gelin Healthy Production Research Institution is controlled by Jia
Ning, one of our directors, and received 2,862,560 shares.
Shaanxi Bafang Science and Technology Limited Company is controlled by
Wang Hongwei, one of our directors, and received 636,132 shares.
In August 2005 we paid Xi'an Gelin Healthy Production Research Institution
approximately $1,000,000 for their services in bringing our Tian pain relief
capsule to market by December 2011 and have it licensed. If Xi'an Gelin fails to
obtain a license for the Tian pain relief capsule by August 2011 the $1,000,000
will be returned to us. Xi'an Gelin contributed its rights to the Compound
Ginseng capsule in consideration for shares of Tian Pharma, our Chinese
subsidiary, which we acquired by merger in September 2005. Xi'an Gelin is
controlled by Jia Ning, one of our directors.
In December 2005, we and Xi Peng formed Xian Tianan Pharmacy Marketing
Co., Ltd. We contributed cash of approximately $2,600,000 for a 96.3% interest
in Tianan Pharmacy. When we receive the necessary approval from the Chinese
government, expected by November 2006, we will use Tianan Pharmacy to sell our
products directly to retail stores, pharmacies and hospitals in areas not
covered by our distributors. Xi Peng is our Chief Marketing Officer and paid
$100,000 for his 3.7% interest in Tian Pharmacy. As a shareholder, Xi Peng will
be entitled to 3.7% of any profits derived from the operations of Tian Pharmacy.
PRINCIPAL SHAREHOLDERS
The following table shows, as of the date of this prospectus, the
common stock ownership of (i) each person known by us to be the beneficial owner
of five percent or more of our common stock, (ii) each officer and director and
(iii) all officers and directors as a group. Except as otherwise indicated, each
27
person has sole voting and investment power with respect to the shares of common
stock shown, and all ownership is of record and beneficial.
Number Percent
Name and Address of Shares of Class
---------------- --------- --------
Xi'an Gelin Science and Technology 63,613 0.5%
Limited Company
#91 Youyi West Road , Xi'an, China
Shaanxi Haishi Investment 508,906 3.6%
Limited Company
# 4Gaoxin 2nd Road, Xi'an, Shaanxi, China
Xi'an Gelin Healthy Production 2,862,595 20.4%
Research Institution
#125Youyi West Road, Xi'an, China
Shaanxi Bafang Science and 636,132 4.5%
Technology Limited Company
Building of International Trade Center,
10th Floor, Apartment 108, Xi'an China
All officers and directors 4,071,246 29%
as a group (16 persons)
Xi'an Gelin Science and Technology Limited Company is controlled by Weng
Jianjun, one of our officers and directors.
Shaanxi Haishi Investment Limited Company is controlled by Tang Huachu,
one of our officers.
Xi'an Gelin Healthy Production Research Institution is controlled by Jia
Ning, one of our directors.
Shaanxi Bafang Science and Technology Limited Company is controlled by
Wang Hongwei, one of our directors.
As indicated in the "Selling Shareholder" section of this prospectus,
three of the shareholders shown in the table above are selling some of their
shares by means of this prospectus.
SELLING SHAREHOLDERS AND PLAN OF DISTRIBUTION
The persons listed in the following table plan to offer the shares shown
opposite their respective names by means of this prospectus. The owners of the
common stock to be sold by means of this prospectus are referred to as the
28
"selling shareholders". The selling shareholders acquired their shares in
exchange for their shares of Tian Pharma, a PRC corporation which was merged
into us in September, 2005.
We will not receive any proceeds from the sale of the shares by the
selling shareholders. Although we will pay all costs of registering the shares
offered by the selling shareholders the selling shareholders will pay all sales
commissions and other costs of the sale of the shares offered by them.
Shares to
be sold Shares ownership
Shares in this after this Offering
Name Owned Offering Number %
- ---- ----- -------- ------ --------
Xi'an Gelin Science and Technology
Limited Company 63,613 10,000 53,613 0.4%
Shaanxi Haishi Investment
Limited Company 508,906 45,000 463,906 3.3%
Shaanxi Bafang Science and
Technology Limited Company 636,132 200,000 436,132 3.1%
Shaanxi Economy Cooperation
Industry Company 286,260 145,000 141,260 1%
Xi'an Gelin Science and Technology Limited Company is controlled by Weng
Jianjun, one of our officers and directors.
Shaanxi Haishi Investment Limited Company is controlled by Tang Huachu,
one of our officers.
Shaanxi Bafang Science and Technology Limited Company is controlled by
Wang Hongwei, one of our directors.
Shaanxi Economy Cooperation Industry Company is controlled by Xiao Wei.
Plan of Distribution
The shares of our common stock which the selling stockholders or
their pledgees, donees, transferees or other successors in interest may offer
for resale will be sold initially at a price of $1.00 per share and thereafter
if the shares are listed for trading on the OTC Bulletin Board or any other
stock exchange at then prevailing market prices or privately negotiated prices
in one or more of the following transactions:
o Block transactions;
29
o Transactions on the OTC Bulletin Board or on such other market on
which our common stock may from time to time be trading;
o Privately negotiated transactions;
o Through the writing of options on the shares;
o Short sales; or
o Any combination of these transactions.
The sale price to the public in these transactions may be:
o The market price prevailing at the time of sale;
o A price related to the prevailing market price;
o Negotiated prices; or
o Such other price as the selling stockholders determine from time to
time.
The initial offering price is based upon our earnings per share for the
six months ended June 30, 2006 and a price/earnings ratio of ten.
In the event that we permit or cause this prospectus to lapse, the selling
stockholders may only sell shares of our common stock pursuant to Rule 144 under
the Securities Act of 1933. The selling stockholders will have the sole and
absolute discretion not to accept any purchase offer or make any sale of these
shares of our common stock if they deem the purchase price to be unsatisfactory
at any particular time.
The selling stockholders or their pledges, donees, transferees or other
successors in interest, may also sell these shares of our common stock directly
to market makers and/or broker-dealers acting as agents for their customers.
These broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders and/or the purchasers
of these shares of our common stock for whom such broker-dealers may act as
agents. As to a particular broker-dealer, this compensation might be in excess
of customary commissions. Market makers and block purchasers purchasing these
shares of our common stock may do so for their own account and at their own
risk. It is possible that a selling stockholder will attempt to sell shares of
our common stock in block transactions to market makers or other purchasers at a
price per share which may be below the prevailing market price of our common
stock. There can be no assurance that all or any of these shares of our common
stock offered hereby will be issued to, or sold by, the selling stockholders.
Upon effecting the sale of any of these shares of our common stock offered under
this prospectus, the selling stockholders and any brokers, dealers or agents,
hereby, may be deemed "underwriters" as that term is defined under the
Securities Act of 1933 or the Securities Exchange Act of 1934, or the rules and
regulations thereunder.
Alternatively, the selling stockholders may sell all or any part of the
shares of our common stock offered hereby through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into. If a selling
stockholder enters into an agreement or agreements with an underwriter, then the
relevant details will be set forth in a post-effective amendment to the
registration statement of which this prospectus is a part.
30
The selling shareholders may also sell their shares pursuant to Rule 144
of the Securities and Exchange Commission.
The selling stockholders and any other persons participating in the sale or
distribution of these shares of our common stock will be subject to applicable
provisions of the Securities Exchange Act of 1934 and the rules and regulations
thereunder including, without limitation, Regulation M. These provisions may
restrict activities of, and limit the timing of purchases and sales of any of
these shares of our common stock by, the selling stockholders. Furthermore,
pursuant to Regulation M, a person engaged in a distribution of securities is
prohibited from bidding for, purchasing or attempting to induce any person to
bid for or purchase our securities for a period beginning five business days
prior to the date of this prospectus until such person is no longer a selling
stockholder. These regulations may affect the marketability of these shares of
our common stock.
None of the selling shareholders are broker/dealers or are affiliated with
broker/dealers.
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 50,000,000 shares of our common stock, $.001 par
value per share, and 20,000,000 shares of preferred stock, $.001 par value per
share. See "Business-PRC Laws and Regulations Affecting our Business" for
information concerning PRC laws and regulations which could impact the rights of
our shareholders or limit our ability to pay dividends.
Common Stock
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders, including the election of
directors. There is no right to cumulate votes in the election of directors. The
holders of common stock are entitled to any dividends that may be declared by
the Board of Directors out of funds legally available therefor subject to the
prior rights of holders of preferred stock and any contractual restrictions we
have against the payment of dividends on common stock. In the event of our
liquidation or dissolution, holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preferences of any outstanding shares of preferred stock.
The currency in the PRC is designated as the Renminbi ("RMB"). The PRC
government imposes control over the conversion of Renminbi into foreign
currencies. Although we do not intend to pay dividends, any inability to convert
RMB into U.S. $ will limit our ability to pay dividends in the future.
Holders of common stock have do not have preemptive rights and do not have
the right to convert their common stock into any other securities.
31
Preferred Stock
We are authorized to issue 20,000,000 shares of $.001 par value preferred
stock in one or more series with such designations, voting powers, if any,
preferences and relative, participating, optional or other special rights, and
such qualifications, limitations and restrictions, as are determined by
resolution of our Board of Directors. The issuance of preferred stock may have
the effect of delaying, deferring or preventing a change in control of our
company without further action by stockholders and could adversely affect the
rights and powers, including voting rights, of the holders of common stock. In
certain circumstances, the issuance of preferred stock could depress the market
price of the common stock. There are no shares of preferred stock outstanding.
Transfer Agent
Corporate Stock Transfer
3200 Cherry Creek Drive South
Suite 430
Denver, CO 80209
(303) 282-4800
(303)-282-5800 - Fax
EXPERTS
Our financial statements included in this prospectus as of and for the
years ended December 31, 2005 and 2004 have been included in reliance on the
report of Michael Pollack C.P.A., a independent registered certified public
accountant, given on the authority of Mr. Pollack as a expert in accounting and
auditing.
INDEMNIFICATION
The Nevada Revised Statutes authorize indemnification of any of our
directors, officers, employees or agents against expenses incurred in connection
with any action, suit, or proceeding to which he or she is named a party by
reason of having acted or served in such capacity, except for liabilities
arising from his or her own misconduct or negligence in the performance of his
or her duties. In addition, even a director, officer, employee, or agent who was
found liable for misconduct or negligence in the performance of his or her
duties may obtain such indemnification if, in view of all the circumstances in
the case, a court of competent jurisdiction determines such person is fairly and
reasonably entitled to indemnification. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers, or persons controlling us pursuant to the foregoing
provisions, we have been informed that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is therefore unenforceable.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form SB-2 under the Securities Act of 1933
with respect to the common stock offered by this prospectus. This prospectus
32
does not contain all of the information set forth in the registration statement
and the exhibits to the registration statement. For further information with
respect to Tian'an Pharmaceutical Co., Ltd. and our common stock offered hereby,
reference is made to the registration statement and the exhibits filed as part
of the registration statement. Following the effective date of the prospectus,
we will be required to file periodic reports with the Securities and Exchange
Commission, including quarterly reports, annual reports which include our
audited financial statements and proxy statements. The registration statement,
including exhibits thereto, and all of our periodic reports may be inspected
without charge at the Securities and Exchange Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained from the
Public Reference Section of the Securities and Exchange Commission, 100 F Street
N.E., Washington, D.C. 20549. You may obtain additional information regarding
the operation of the Public Reference Section by calling the Securities and
Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission
also maintains a web site which provides online access to reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission at the address:
http://www.sec.gov.
33
TIAN'AN PHARMACEUTICAL CO., LTD.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
INDEX TO FINANCIAL STATEMENTS
Page(s)
-------
Report of Independent Registered Public Accounting Firm 1
Consolidated Balance Sheets as of December 31, 2005 and 2004 (Restated) 2
Consolidated Statements of Income and Accumulated Other
Comprehensive Income for the Years Ended December 31, 2005
and 2004 (Restated) 3
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 2005 and 2004 (Restated) 4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005 and 2004 (Restated) 5
Notes to Consolidated Financial Statements 6-22
MICHAEL POLLACK CPA
46 EQUESTRIAN LANE
CHERRY HILL, NJ 08003
TEL (215) 588-5299
FAX (609) 482-8018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Tian'An Pharmaceutical Co., Ltd.
I have audited the accompanying consolidated balance sheets of Tian' An
Pharmaceutical Co., Ltd. (the "Company") as of December 31, 2005 and 2004 and
the related consolidated statements of income and accumulated other
comprehensive income, changes in stockholders' equity, and cash flows for the
years ended December 31, 2005 and 2004. These consolidated financial statements
are the responsibility of the Company's management. My responsibility is to
express an opinion on these consolidated financial statements based on my
audits.
I conducted my audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that I plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. I was not
engaged to perform an audit of the Company's internal control over financial
reporting. My 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, I express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. I believe that my audits provide a reasonable
basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Tian'
An Pharmaceutical Co., Ltd. as of December 31, 2005 and 2004, and the results of
its consolidated statements of income and accumulated other comprehensive
income, changes in stockholders' equity, and cash flows for the years ended
December 31, 2005 and 2004 in conformity with U.S. generally accepted accounting
principles.
/s/ Michael Pollack CPA
Cherry Hill, NJ
June 13, 2006, except for Note 10, which is dated August 15, 2006
TIAN' AN PHARMACEUTICAL CO., LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
(IN US$)
ASSETS
2005 2004
---- ----
(Restated) (Restated)
Current Assets:
Cash and cash equivalents $ 3,561,148 $ 1,652,695
Accounts receivable, net 755,434 451,026
Inventories 473,294 164,606
Other receivables 994,745 1,939,751
Prepaid expenses and other current assets 55,571 95,009
------------ ------------
Total Current Assets 5,840,192 4,303,087
------------ ------------
Fixed assets, net of depreciation 1,275,509 310,628
------------ ------------
Other Assets:
Other assets 314,929 -
Intangible assets, net 1,762,076 1,225,125
------------ ------------
Total Other Assets 2,077,005 1,225,125
------------ ------------
TOTAL ASSETS $ 9,192,706 $ 5,838,840
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities:
Accounts payable and accrued expenses $ 292,097 $ 291,897
Accrued taxes 218,297 10,702
------------ ------------
Total Current Liabilities 510,394 302,599
------------ ------------
Total Liabilities 510,394 302,599
------------ ------------
Minority interest 99,022 -
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 Par Value; 20,000,000
shares authorized and 0 shares issued and
outstanding - -
Common stock, $0.001 Par Value; 50,000,000
shares authorized and 13,994,850 and 5,445,000
shares issued and outstanding, respectively 13,995 5,445,000
Additional paid-in capital 7,287,451 -
Statutiry reserves 153,050 13,686
Retained earnings 999,241 77,555
Accumulated other comprehensive income 129,553 -
------------ ------------
Total Stockholders' Equity 8,583,290 5,536,241
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,192,706 $ 5,838,840
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
2
TIAN' AN PHARMACEUTICAL CO., LTD.
CONSOLIDATED STATEMENTS OF INCOME AND
ACCUMULATED OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(IN US $)
2005 2004
---- ----
(Restated) (Restated)
OPERATING REVENUES $ 3,516,888 $ 612,288
------------ ------------
COST OF SALES
Inventory, beginning of period 164,606 63,390
Depreciation and amortization expense 301,767 206,028
Purchases 1,277,268 290,084
Inventory, end of period (473,294) (164,606)
------------ ------------
Total Cost of Sales 1,270,347 394,896
------------ ------------
GROSS PROFIT 2,246,541 217,392
------------ ------------
OPERATING EXPENSES
Selling and promotion 688,705 63,305
General and administrative fees 285,470 64,228
Consulting fees for stock 1 -
Bad debt expense 1,461 1,525
Depreciation, amortization and impairment 16,499 2,409
------------ ------------
Total Operating Expenses 992,136 131,467
------------ ------------
INCOME BEFORE OTHER INCOME (EXPENSE) 1,254,406 85,925
OTHER INCOME (EXPENSE)
Rental income 3,372 -
Interest income, net of expense 23,357 26,462
------------ ------------
Total Other Income (Expense) 26,729 26,462
------------ ------------
NET INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST 1,281,134 112,387
Minority interest (12) -
------------ ------------
NET INCOME BEFORE PROVISION FOR INCOME TAXES 1,281,122 112,387
Provision for Income Taxes (220,072) --
------------ ------------
NET INCOME APPLICABLE TO COMMON SHARES $ 1,061,050 $ 112,387
============ ============
NET INCOME PER BASIC AND DILUTED SHARES $ 0.08 $ 0.01
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 13,994,851 3,994,850
============ ============
COMPREHENSIVE INCOME
Net income $ 1,061,050 $ 112,387
Other comprehensive income
Currency translation adjustments 129,553 -
------------ ------------
Comprehensive income $ 1,190,603 $ 112,387
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
TIAN' AN PHARMACEUTICAL CO., LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(IN US $)
Accumulated
Additional Other
Common Stock Paid-in Statutory Retained Comprehenisve
Shares Amount Capital Reserves Earninings Income Total
--------------------------------------------------------------------------------------------------
Balance January 1, 2004 5,445,000 $ 5,445,000 $ - $ - $ (21,146) $ - $ 5,423,854
Transfer of statutory reserves - - - 13,686 (13,686) - -
Net income for the year ended
December 31, 2004, as
previously reported - - - - 98,701 - 98,701
Prior period adjustment,
see Note 10 - - - - 13,686 - 13,686
----------- ------------ --------- ---------- ------------ ------------- --------------
Net income for the year
ended December 31, 2004,
as restated - - - - 112,387 - 112,387
----------- ------------ --------- ---------- ------------ ------------- --------------
Balance December 31, 2004 5,445,000 5,445,000 - 13,686 77,555 - 5,536,241
Capital contributions 1,856,445 1,856,445 - - - - 1,856,445
Shares cancelled upon
merger with
Tian An (Nevada) (7,301,445) (7,301,445) - - - - (7,301,445)
Shares issued for services 100 - 1 - - - 1
Shares issued in reverse
merger with Xi' An Tian' An 13,994,750 13,995 7,287,450 - - - 7,301,445
Transfer of statutory reserves - - - 139,364 (139,364) - -
Allocation of noncontrolling
interest - - - - - - -
Net income for the year
ended December 31, 2005,
as previously reported - - - - 921,686 - 921,686
Prior period adjustment,
see Note 10 - - - - 139,364 - 139,364
Net income for the year
ended December 31, 2005 - - - - 1,061,050 129,553 1,190,603
Balance December 31, 2005 13,994,850 $ 13,995 $7,287,451 $ 153,050 $ 999,241 $ 129,553 $ 8,583,290
The accompanying notes are an integral part of the consolidated financial
statements.
4
TIAN' AN PHARMACEUTICAL CO., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(IN US $)
2005 2004
---- ----
(Restated) (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,061,050 $ 112,387
------------- -------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation, amortization and impairment 316,905 208,896
Shares issued for services rendered 1 -
Minority interest 99,022 -
Allowance for doubtful accounts 1,530 2,266
Changes in assets and liabilities
(Increase) in accounts receivable (305,938) (305,760)
(Increase) in inventory (308,688) (101,216)
(Increase) decrease in other receivables 945,006 (1,935,153)
(Increase) decrease in prepaid expenses
and other current assets 39,438 (95,009)
(Increase) in other assets (314,929) -
Increase in accounts payable and
and accrued expenses 207,795 195,479
------------- -------------
Total adjustments 680,142 (2,030,497)
------------- -------------
Net cash provided by (used in) operating
activities 1,741,192 (1,918,110)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Acquisitions) of fixed assets (1,050,898) (299,746)
Disposals of fixed assets - 805
(Acquisitions) of intangible assets (767,839) -
------------- -------------
Net cash (used in) investing activities (1,818,737) (298,941)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITES
Proceeds from issuance of common stock 1,856,445 -
------------- -------------
Net cash provided by financing activities 1,856,445 -
------------- -------------
Effect of foreign currency translation 129,553 -
------------- -------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 1,908,453 (2,217,051)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 1,652,695 3,869,746
------------- -------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 3,561,148 $ 1,652,695
============= =============
CASH PAID DURING THE YEAR FOR:
Income taxes $ - $ -
============= =============
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
5
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Tian' An Pharmaceutical Co. Ltd. ("Tian' An") was established in Xi'An
of the Peoples Republic of China ("PRC") by Shaanxi Bafang Science and
Technology Investment Co., Ltd, Shaanxi Economic Cooperation Property
Company, Shaanxi Ruike Investment Co., Ltd., Xi'An Green Health
Products Research Center, Xi' An Green Science and Technology and
nineteen individuals on January 17, 2003. In 2005, Shaanxi Bafang
Science and Technology Investment Co., Ltd. and Shaanxi Ruike
Investment Co., Ltd. transferred a portion of their ownership interest
to two individuals, and an additional 1,856,445 shares were purchased
by two individuals and one company.
Tian' An was first organized for the purpose of the development,
manufacturing and commercialization of traditional Chinese herbal
medicines and biological pharmaceuticals. The main business line of
Tian' An is production and sales of hard capsule, soft ointment, as
well as research and development of biology goods and health care
products. The Company conducts its business exclusively in the PRC.
In December 2005, Tian' An and another individual set up a subsidiary
company, Xi' An Tianan Pharmacy Marketing Co., Ltd (the "Subsidiary").
Tian' An injected cash amounting to approximately $2,600,000 as its
capital contribution, accounting for 96.3% of the total registered
capital of the Subsidiary (See Note 7).
On August 15, 2005, the officers of Tian' An filed Articles of
Incorporation in the State of Nevada which was approved August 23,
2005 to create Tian' An Pharmaceutical Co., Ltd, a Nevada corporation
(the "Company") and also established T2 Pharmaceutical Inc., a
Colorado corporation ("T2") and wholly owned subsidiary of the
Company.
On August 25, 2005, Tian' An merged into and with T2 and became the
surviving entity and wholly owned subsidiary of the Company. The
Company incorporated with 50,000,000 shares of common stock and
20,000,000 shares of preferred stock both with a par value of $0.001.
The Company issued 100 shares of common stock to its founder for
$1.00, then issued 13,994,750 shares of common stock in exchange for
100% of the issued and outstanding shares of Tian' An. Thereafter and
for purposes of these consolidated financial statements the "Company"
and "Tian' An" are used to refer to the operations of Tian' An
Pharmaceutical Co. Ltd. For accounting purposes, the Company accounted
for the acquisition of Tian' An as a recapitalization. The transaction
involved entities under common control as defined in Statement of
Financial Standard 141, "Business Combinations". As such, the net
assets of Tian' An were acquired at their carrying values at the time
of the acquisition. The comparative figures for 2004 are those of
Tian' An.
As modern medical science is experiencing a change from biological
research to biological-psychological-social research with traditional
medical science playing a more important role than ever, the Company
has positioned itself with the products they currently manufacture as
well as the products under development to be successful. Many modern
chemical medicines contain high toxicities and present numerous side
effects. Purely chemical medicines are difficult, time consuming and
expensive to develop.
6
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005 AND 2004
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION CONTINUED)
--------------------------------------
The Company's Traditional Chinese Medicines represent advantages over
chemical medicines and the process of combining herbal extraction and
chemical medicines is becoming a popular alternative, following the
current trends of "natural" and "green" products in a variety of
industries.
The Company sells its products on a wholesale basis to distributors
who resell the product to customers located in China. The Company has
five major sales agents, Huayuan Life Pharmacy, Shaanxi Guangda
Pharmacy, Hubiaohang Nanyang Tonic, Gansu Fuhe and Guangzhou Jidong
Pharmacy, which distribute approximately 91% of the products. In
general, sales are made under a purchase order arrangement with
payment in full on the order due prior to shipment. The Company does
not sell its products directly to end-users.
The Company employs Good Manufacturing Practice "GMP" approved methods
in processing and manufacturing its products. The Company obtains its
raw materials from company-approved vendors and then process the
materials into Traditional Chinese Medicine formulas in its facility.
In the case of batch manufacturing, the Company employs a fully
automated production line to produce the bio-engineered
neutraceuticals. Post Production, the product is shipped to vendors.
The raw materials are subjected to a combined process involving a
solid/liquid extraction step, followed by a liquid/liquid-purifying
step to obtain the purified extract.
Once the purification process has been completed, the extract is
concentrated and re-filtering at which time it is packaged and shipped
to its customers. The Company maintains approximately one month of
finished product on hand, and approximately two months of raw
materials for production.
The GMP inspection was performed by State Food and Drug
Administration. The Chinese central government mandates manufacturers
of Chinese herbs to comply with GMP standards by December 31, 2005.
Starting on January 1, 2006, only products manufactured within GMP
certified facilities are available for sale in China. Currently,
approximately one third of Chinese manufacturers in this industry are
in compliance with the new mandate. The Company has invested
substantial capital in its manufacturing facility in order to comply
with the more stringent standards mandated by the central government
in order to pass the GMP inspection.
As noted in Note 10, the Company has restated its consolidated
financial statements to properly account for the statutory reserves.
The net effect of this change resulted in an increase to the net
income of the Company of $139,364 and $13,686 for the years ended
December 31, 2005 and 2004, respectively.
7
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. The 3.7%
interest not owned by the Company in its joint venture with Xi' An
Tina'An Pharmacy Marketing Co., Ltd. is reflected as a minority
interest in the consolidated financial statements.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
On an on-going basis, the Company evaluates its estimates, including,
but not limited to, those related to bad debts, income taxes and
contingencies. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual
results could differ from those estimates.
Economic and Political Risks
----------------------------
The Company's operations are conducted in the PRC. Accordingly, the
Company's business, financial condition and results of operations may
be influenced by the political, economic and legal environment in the
PRC, and by the general state of the PRC economy.
The Company's operations in the PRC are subject to special
considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks
associated with, among others, the political, economic and legal
environment and foreign currency exchange. The Company's results may
be adversely affected by changes in governmental policies with respect
to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation,
among other things.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments and other
short-term investments with an initial maturity of three months or
less to be cash equivalents. The Company maintained $250 and $658 as
of December 31, 2005 and 2004, respectively in cash on hand. The
remainder of the cash was in financial institutions.
8
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income
--------------------
The Company adopted Statement of Financial Accounting Standards No,
130, "Reporting Comprehensive Income," (SFAS No. 130). SFAS No. 130
requires the reporting of comprehensive income in addition to net
income from operations.
Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of information that historically
has not been recognized in the calculation of net income.
Inventory
---------
Inventory is valued at the lower of cost or market (using the weighted
average method) and net realizable value. Inventory includes raw
material, work in process and finished goods.
The net realizable value is the estimated selling price in the
ordinary course of business less the estimated costs of completion,
selling expenses and related taxes.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts reported in the consolidated balance sheet for
cash and cash equivalents, and accounts payable approximate fair value
because of the immediate or short-term maturity of these financial
instruments.
Currency Translation
--------------------
The Company's functional currency is that of the PRC which is the
Chinese Renminbi (RMB). The reporting currency is that of the US
Dollar. Capital accounts of the consolidated financial statements are
translated into United States dollars from RMB at their historical
exchange rates when the capital transactions occurred. Assets and
liabilities are translated at the exchange rates as of the balance
sheet date. Income and expenditures are translated at the average
exchange rate of the year. The year end RMB to US dollar as of
December 31, 2005 and 2004 were 8.0702 and 8.3, respectively, and the
average yearly RMB to the US dollar for 2005 and 2004 were 8.1734 and
8.3, respectively. The RMB is not freely convertible into foreign
currency and all foreign currency exchange transactions must take
place through authorized institutions. No representation is made that
the RMB amounts could have been, or could be, converted into US dollar
at the rates used in translation. The Company records these
translation adjustments as accumulated other comprehensive income
(loss). Gains and losses from foreign currency transactions are
included in other income (expense) in the results of operations. For
the years ended December 31, 2005 and 2004, the Company recorded
approximately $129,553 and $0 in transaction gains (losses) as a
result of currency translation.
9
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and Development
------------------------
The Company annually incurs costs on activities that relate to
research and development of new products. Research and development
costs are expensed as incurred.
Retirement Benefits
-------------------
Retirement benefits in the form of contributions under defined
contribution retirement plans to the relevant authorities are charged
to the consolidated statements of income as incurred.
Revenue Recognition
-------------------
The Company generates revenue from the sale of its nutritional herbal
products.
Revenue for the sale of its goods are recognized in accordance with
Staff Accounting Bulletin 101. Revenue is recognized when:
1) Persuasive evidence of an arrangement exists;
2) Delivery has occurred or services have been rendered;
3) The seller's price to the buyer is fixed or determinable,
and
4) Collectibility is reasonably assured.
The Company's customers consist primarily of large pharmaceutical
wholesalers who sell directly into the retail channel.
Accounts Receivable
-------------------
The Company conducts business and extends credit based on an
evaluation of the customers' financial condition, generally without
requiring collateral. Exposure to losses on receivables is expected to
vary by customer due to the financial condition of each customer. The
Company monitors exposure to credit losses and maintains allowances
for anticipated losses considered necessary under the circumstances.
The Company has established a reserve for uncollectibles of $3,796 and
$2,266 as of December 31, 2005 and 2004, respectively.
Accounts receivable are generally due within 30 days and collateral is
not required.
10
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
-----------------
The Company expenses the costs associated with advertising as
incurred. Advertising expenses for the years ended December 31, 2005
and 2004 of $554,554 and $8,216, respectively are included in selling
and promotional expenses in the consolidated statements of income.
Advertising costs include marketing brochures and displays for retail
outlets.
Advance to Suppliers
--------------------
Advances to suppliers represent the cash paid in advance for
purchasing raw materials.
Fixed Assets
------------
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets,
net of the estimated residual values; building - 35 years (5%
estimated residual value), equipment - 5 years (5% residual value),
machinery- 10 years (5% residual value), leasehold improvements - 5
years (no residual value) and vehicles - 8 years (5% residual value).
When assets are retired or otherwise disposed of, the costs and
related accumulated depreciation are removed from the accounts, and
any resulting gain or loss is recognized in income for the period. The
cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized. Deduction is
made for retirements resulting from renewals or betterments.
Land Use Rights
---------------
According to the laws of China, the government owns all the land in
China. Companies or individuals are authorized to possess and use the
land only through land use rights granted by the Chinese government.
Land use rights would be amortized using the straight-line method over
the respective lease term. The Company does not have nay land use
rights.
Construction in Progress
------------------------
Construction in progress represents direct costs of construction or
acquisition and design fees incurred, as well as interest charges
directly related to debt incurred on behalf of particular construction
projects. Capitalization of these costs ceases and the construction in
progress is transferred to fixed assets (building or equipment) when
substantially all the activities necessary to prepare the assets for
their intended use are completed. No depreciation is provided until it
is completed and ready for intended use.
11
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-Lived Assets
-------------------------------
Long-lived assets, primarily fixed assets and intangible assets, are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets might not be
recoverable. The Company does perform a periodic assessment of assets
for impairment in the absence of such information or indicators.
Conditions that would necessitate an impairment assessment include a
significant decline in the observable market value of an asset, a
significant change in the extent or manner in which an asset is used,
or a significant adverse change that would indicate that the carrying
amount of an asset or group of assets is not recoverable. For
long-lived assets to be held and used, the Company recognizes an
impairment loss only if its carrying amount is not recoverable through
its undiscounted cash flows and measures the impairment loss based on
the difference between the carrying amount and estimated fair value.
Intangible Assets
-----------------
Intangible assets consist of pharmaceutical licenses and are initially
recorded at acquisition cost and amortized on a straight-line basis
over their estimated useful lives of between five and eight years.
Amortization expense is included in cost of sales in the consolidated
statements of operations.
Costs incurred in creating products are charged to expense when
incurred as research and development until technological feasibility
is established upon completion of a working model. Thereafter, all
production costs are capitalized and carried at cost. Capitalized
costs are amortized based on straight-line amortization over the
remaining estimated economic life of the product.
Identified intangible assets are regularly reviewed to determine
whether facts and circumstances exist which indicate that the useful
life is shorter than originally estimated or the carrying amount of
assets may not be recoverable. The Company assesses the recoverability
of its identifiable intangible assets by comparing the fair value of
the intangible assets against the respective carrying amounts of these
intangible assets. Impairment, if any, is based on the excess of the
carrying amount over the fair value of those assets.
12
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible Assets (Continued)
-----------------
As of December 31, 2005
Gross
Carrying Accumulated
Amount Amortization Net
Amortized Intangible Assets:
Pharmaceutical licenses $ 2,401,340 $ 639,264 $ 1,762,076
============ ============= ============
Amortization Expense:
For the year ended December 31, 2005 $ 230,888
For the year ended December 31, 2004 204,188
Estimated Amortization Expense:
For the year ended December 31, 2006 $ 357,366
For the year ended December 31, 2007 357,366
For the year ended December 31, 2008 357,366
For the year ended December 31, 2009 357,366
For the year ended December 31, 2010 332,612
--------------
Total $ 1,762,076
=============
13
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings Per Share of Common Stock
----------------------------------
Basic net earnings per common share is computed using the weighted
average number of common shares outstanding. Diluted earnings per
share (EPS) includes additional dilution from common stock
equivalents, such as stock issuable pursuant to the exercise of stock
options and warrants. Common stock equivalents are not included in the
computation of diluted earnings per share when the Company reports a
loss because to do so would be antidilutive for periods presented. The
Company did not have a loss for either period.
The following is a reconciliation of the computation for basic and
diluted EPS:
December 31, December 31,
2005 2004
------------ -----------
(Restated) (Restated)
Net income $ 1,061,050 $ 112,387
Weighted-average common shares
Outstanding (Basic) 13,994,850 13,994,850
Weighted-average common stock
Equivalents
Stock options -- --
Warrants -- --
-------------- --------------
Weighted-average common shares
Outstanding (Diluted) 13,994,850 13,994,850
============== ==============
14
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Income Taxes
------------
The Company accounts for income tax using an asset and liability
approach and allows for recognition of deferred tax benefits in future
years. Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation
allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to
realize their benefits, or that future realization is uncertain.
In accordance with the relevant tax laws and regulations of PRC and
US, the corporation income tax rate applicable ranges from 15% to 34%.
Stock-Based Compensation
------------------------
The Company follows FASB 123R in accounting for its stock based
compensation (see Recent Accounting Pronouncements). This measures
compensation expense for its employee stock-based compensation using
the intrinsic-value method. Under the intrinsic-value method of
accounting for stock-based compensation, when the exercise price of
options granted to employees and common stock issuances are less than
the estimated fair value of the underlying stock on the date of grant,
deferred compensation is recognized and is amortized to compensation
expense over the applicable vesting period. The Company for 2005 and
2004 did not grant any options or warrants that would need to be
valued under such method. The following represents the effect on net
income attributable to common shareholders per share if the fair value
method had been applied to all awards.
Years Ended December 31,
------------------------
2005 2004
---- ----
Net income: (Restated) (Restated)
As reported
$1,061,050 $112,387
Add: Stock-based employee
compensation expense included in
reported net loss, net of related - -
tax effects
Less: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (-) (-)
----------- ----------
Pro forma $1,061,050 $112,387
Net earnings per share:
As reported:
Basic $0.08 $0.01
Diluted $0.08 $0.01
Pro forma:
Basic $0.08 $0.01
Diluted $0.08 $0.01
15
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Stock-Based Compensation (Continued)
------------------------------------
The Company measures compensation expense for its non-employee
stock-based compensation under the Financial Accounting Standards
Board (FASB) Emerging Issues Task Force (EITF) Issue No. 96-18,
"Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services". The fair value of the option issued is used to measure the
transaction, as this is more reliable than the fair value of the
services received. The fair value is measured at the value of the
Company's common stock on the date that the commitment for performance
by the counterparty has been reached or the counterparty's performance
is complete. The fair value of the equity instrument is charged
directly to compensation expense and additional paid-in capital.
Segment Information
-------------------
The Company follows the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This standard
requires that companies disclose operating segments based on the
manner in which management disaggregates the Company in making
internal operating decisions. For 2005 and 2004, the Company operated
in one segment and one geographical location.
Recent Accounting Pronouncements
--------------------------------
On December 16, 2004, the Financial Accounting Standards Board
("FASB") published Statement of Financial Accounting Standards No. 123
(Revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R
requires that compensation cost related to share-based payment
transactions be recognized in the financial statements. Share-based
payment transactions within the scope of SFAS 123R include stock
options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions
of SFAS 123R, as amended, are effective for small business issuers
beginning as of the next fiscal year after December 15, 2005.
16
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005 AND 2004
NOTE 3- FIXED ASSETS
------------
Fixed assets as of December 31, 2005 and 2004 were as follows:
Estimated
Useful
Lives (Years) 2005 2004
Land use right 50 $0 $0
Buildings 35 594,574 0
Equipment 5 41,370 9,327
Machinery 10 601,196 297,246
Vehicles 8 23,477 19,360
Leasehold improvements 5 117,575 0
----------- --------
1,378,192 325,933
Less: accumulated depreciation 15,305 102,683
----------- --------
Property and equipment, net $1,275,509 $310,628
=========== =========
There was $87,378 and $4,249 charged to operations for depreciation
expense for the years ended December 31, 2005 and 2004, respectively,
of which $70,879 and $1,840 is included in cost of goods sold. There
was no impairment for these assets during the years ended December 31,
2005 and 2004.
The Company leased a factory in the Xi' An High-and new tech
Industrial Development Zone in November 2004 to engage in pharmacy
production. In May 2005, the Company passed its Good Manufacturing
Practice, which as of June 1, 2005, was mandatory for all
pharmaceutical companies in PRC. The Company employs Good
Manufacturing Practice "GMP" approved methods in processing and
manufacturing its products. The Company obtains its raw materials from
company-approved vendors and then process the materials into
Traditional Chinese Medicine formulas in its facility. In the case of
batch manufacturing, the Company employs a fully automated production
line to produce the bio-engineered neutraceuticals. Post Production,
the product is shipped to vendors. The raw materials are subjected to
a combined process involving a solid/liquid extraction step, followed
by a liquid/liquid-purifying step to obtain the purified extract.
The Company has leased a portion of its buildings to two non-related
parties. The lease term runs from November 2005 to November 2006.
Rental income earned by the Company approximates $27,568 RMB per month
($3,370 US$). These amounts are included in other income in the
consolidated financial statements.
17
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005 AND 2004
NOTE 4- INVENTORIES
-----------
Inventories consisted of the following as of December 31, 2005 and
2004:
2005 2004
Raw materials $6,989 $5,277
Work in process 118,590 -
Finished goods 347,715 159,329
------- -------
473,294 164,606
Less: provision for
write-down of inventory - -
- -
Inventory, net $473,294 $164,606
======== ========
There was no obsolescence of inventory or write-downs of inventory for
the years ended December 31, 2005 and 2004.
NOTE 5- STOCKHOLDERS' EQUITY
--------------------
Common Stock
------------
As of December 31, 2005, the Company has 50,000,000 shares of common
stock authorized with a par value of $0.001.
The Company issued 100 shares of common stock to its founder for
$1.00, then exchanged 13,994,750 shares of common stock in exchange of
100% of the authorized capital of Tian' An Pharmaceutical Co., Ltd
(CHINA).
Tian' An Pharmaceutical Co., Ltd (CHINA) in 2003 issued 5,445,000
shares.
During 2005, Tian' An issued an additional 1,856,445 shares pre-merger
with the Nevada corporation to have 7,301,445 shares issued. These
shares were exchanged for 13,994,750 shares of the Nevada corporation.
The Company has not granted any options or warrants during 2005 or
2004.
18
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005 AND 2004
NOTE 5- STOCKHOLDERS' EQUITY (CONTINUED)
-------------------------------
Preferred Stock
---------------
As of December 31, 2005, the Company has 20,000,000 shares of
preferred stock authorized with a par value of $0.001. There are no
shares issued and outstanding.
Statutory Reserves
------------------
Statutory reserves include a statutory surplus reserve and a statutory
public welfare fund, which are maintained in accordance with the legal
requirements of the PRC. Pursuant to the Articles of Association, the
Company has to appropriate 15% of the net income, based on the
accounts prepared in accordance with accounting principles generally
accepted in the PRC, to the statutory surplus reserve and statutory
public welfare fund. The statutory surplus reserve can be utilized to
offset prior years' losses or for capitalization as additional paid-in
capital, whereas the statutory public welfare fund shall be utilized
for collective staff welfare benefits such as building of staff
quarters or housing. No distribution of the statutory reserves shall
be made other than on a liquidation of the Company.
NOTE 6- PROVISION FOR INCOME TAXES
--------------------------
Corporate Income Taxes
----------------------
In accordance with the relevant tax laws and regulations of PRC, the
corporate income tax rate is 15% and 33%. The corporate income tax for
2005 was 15% because Tian' An is considered a high technology company
by the Chinese government. For 2004, the Company was provided tax
relief by the government and their tax was at 0%. For 2005 through
2007, the Company will be taxed at the 15% rate, and then commencing
in 2008, the Company will apply for approval to be taxed as a high
technology company again for another three years at a rate of 15%.
Should they not be considered a high technology company they will be
taxed at the 33% tax rate.
At December 31, 2005 and 2004, corporate income tax consists of the
following:
2005 2004
---- ----
Tax expense - current $ 220,072 $ --
19
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005 AND 2004
NOTE 6- PROVISION FOR INCOME TAXES (CONTINUED)
--------------------------------------
Corporate Income Taxes (Continued)
----------------------------------
A reconciliation of the PRC enterprise income tax rate to the
effective income tax rate is as follows:
---------------------------
2005 2004
----------- ------------
Statutory rate - corporate income tax 15% 0%
Surcharge on taxes not deductible for 2.2 0
PRC purposes ----------- ------------
17.2% 0%
=========== ============
The surcharge on taxes not deductible for PRC purposes represents
permanent differences due to salary and welfare items exceeding the
ceiling based on PRC regulations regarding headcount. In addition,
there are some very small tax surcharges included such as a business
tax on the rental income, water conservancy funds and educational
assessments.
Deferred income taxes are determined using the liability method for
the temporary differences between the financial reporting basis and
income tax basis of the Company's assets and liabilities. Deferred
income taxes are measured based on the tax rates expected to be in
effect when the temporary differences are included in the Company's
tax return. Deferred tax assets and liabilities are recognized based
on anticipated future tax consequences attributable to differences
between financial statement carrying amounts of assets and liabilities
and their respective tax bases. The Company has no temporary or
permanent differences. Therefore, no deferred tax assets and
liabilities have been recognized and no valuation allowance has been
established.
The depreciation and amortization methods and lives the Company
utilizes are identical for book and tax purposes. Additionally, there
is no income or expense included in books not included in tax.
Value Added Tax
---------------
In accordance with the relevant taxation laws in the PRC, the Value
Added tax ("VAT") rate for export sales is 0% and domestic sales is
17%. VAT is levied at 17% on the invoiced value of sales and is
payable by the purchaser. The Company is required to remit the VAT it
collects to the tax authority, but may deduct therefrom the VAT it has
paid on eligible purchases. The VAT that the Company collects on sales
is not included in sales. The amount of VAT payable as of December 31,
2005 and 2004 is $76,154 and $9,510, respectively and is included in
accounts payable and accrued expenses.
NOTE 7- SUBSIDIARY
----------
As noted in Note 1, the Company and an individual in December 2005
established a subsidiary company through a joint venture, Xi' An
Tian'an Pharmacy Marketing Co., Ltd (the "Subsidiary"). Tian' An
injected cash amounting to approximately $2,600,000 as its capital
contribution, accounting for 96.3% of the total registered capital of
the Subsidiary. The capital infusion will be utilized for start-up
costs of the Subsidiary as well as the hiring of staff and an
extensive marketing campaign for the Company. The remaining 3.7%
ownership is reflected as minority interest in the consolidated
financial statements.
20
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005 AND 2004
NOTE 8- RELATED PARTY TRANSACTIONS
--------------------------
In July 2005, the Tian'an entered into a Pharmaceutical License
Purchase Contract with Xi' An Gelin Healthy Production Research
Institute for the development of Tian' An Pain Relief capsule. Xi' An
Gelin Healthy Production Research Institute is a shareholder of the
Company and contributed their license for Compound Ginseng Capsule for
their shares in Tian' An (see Note 2 - Intangible Assets). The Company
has valued the intangibles at historical cost.
Tian' An paid Xi' An Gelin Healthy Production Research Institute
approximately $1,000,000 (US$) (8,000,000 RMB). Xi' An Gelin Healthy
Production Research Institute in accordance with the agreement must
offer the result of their research and development of the new medicine
by August 2011, and have it licensed by December 2011. Should Xi' An
Gelin Healthy Production Research Institute fail to obtain a license
for the product, they must return the fee. The Company has recorded
this fee in other receivables on its consolidated balance sheets as of
December 31, 2005.
Should Tian' An receive the license, the payment will be reclassified
to Intangible Assets and amortized over the term of the license and
tested for impairment quarterly by Management.
NOTE 9- COMMITMENTS
-----------
Rental
------
Tian' An has entered into lease agreements for their manufacturing
plant and office space that expire through October 2009. Rentals vary
in amounts ranging up to $8,000 (US) per month.
Minimum lease payments under operating leases at December 31, 2005 are
as follows:
Year ending December 31, 2006 $143,800
2007 96,700
2008 96,700
2009 80,500
Failed Business Combination
---------------------------
In 2004, Tian' An intended to acquire a local pharmacy called Tongyi
Chain Drugstore . Tian' An paid a deposit in the amount of
approximately $1,936,000 (16,000,000 RMB) for this acquisition. Upon
further due diligence, Tian' An decided to terminate the purchase
agreement and was returned their deposit. Tian' An has included the
deposit in other receivables on the consolidated balance sheets at
December 31, 2004.
21
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005 AND 2004
NOTE 10- RESTATEMENTS OF PRIOR FINANCIAL STATEMENTS
------------------------------------------
The Company has restated its prior consolidated financial statements
to properly account for the statutory reserves. The net effect of this
change resulted in an increase to the net income of the Company of
$139,364 and $13,686 for the years ended December 31, 2005 and 2004,
respectively. The change increased the net income from $921,686 to
$1,061,050 in 2005 and from $98,701 to $112,387 in 2004. The following
represents the line items effected in the restatements:
2005
Selling and promotion $80,000
General and administrative fee 59,364
------
$139,364
========
2004
Selling and promotion $ 0
General and administrative fee 13,686
------
$ 13,686
========
The adjustment is necessary due to the increase in statutory reserves
being reflected previously as increases in the expense accounts and
posted as a liability. Upon further analysis, the Company determined
that the statutory reserves did not meet the definition of a liability
under CON 6, and these items will be reflected as increases to equity.
22
TIAN'AN PHARMACEUTICAL CO., LTD.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
INDEX TO FINANCIAL STATEMENTS
Page(s)
-------
Report of Independent Registered Public Accounting Firm 1
Condensed Consolidated Balance Sheet as of September 30, 2006
(Unaudited) 2
Condensed Consolidated Statements of Operations and Accumulated Other
Comprehensive Income (Loss) for the Nine and Three Months Ended
September 30, 2006 and 2005 (Unaudited) 3
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 2005 and 2004 and Nine Months Ended
September 30, 2006 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2006 and 2005 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6-23
MICHAEL POLLACK CPA
46 EQUESTRIAN LANE
CHERRY HILL, NJ 08003
TEL (215) 588-5299
FAX (609) 482-8018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Tian'An Pharmaceutical Co., Ltd.
I have reviewed the accompanying condensed consolidated balance sheet of Tian'
An Pharmaceutical Co., Ltd. (the "Company") as of September 30, 2006 and the
related condensed consolidated statements of operations and accumulated other
comprehensive income (loss), changes in stockholders' equity, and cash flows for
the nine months ended September 30, 2006 and 2005. These interim condensed
consolidated financial statements are the responsibility of the Company's
management.
I conducted the reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the condensed consolidated
financial statements taken as a whole. Accordingly, I do not express such an
opinion.
Based on my reviews, I am not aware of any material modifications that should be
made to the accompanying interim condensed consolidated financial statements for
them to be in conformity with U.S. generally accepted accounting principles.
/s/ Michael Pollack CPA
Cherry Hill, NJ
November 9, 2006
TIAN' AN PHARMACEUTICAL CO., LTD.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2006 (UNAUDITED)
(IN US$)
ASSETS
Current Assets:
Cash and cash equivalents $ 4,837,747
Accounts receivable, net 1,337,523
Inventories 462,893
Other receivables 1,097,872
Prepaid expenses and other current assets 18,168
---------------
Total Current Assets 7,754,203
-------------
Fixed assets, net of depreciation 1,242,531
-------------
Other Assets:
Other assets 226,051
Intangible assets, net 1,532,005
-------------
Total Other Assets 1,758,056
--------------
TOTAL ASSETS $10,754,790
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities:
Accounts payable and accrued expenses $ 412,450
Accrued taxes 204,374
--------------
Total Current Liabilities 616,824
---------------
Total Liabilities 616,824
---------------
Minority interest 98,754
----------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 Par Value; 20,000,000 shares
authorized and 0 shares issued and outstanding -
Common stock, $0.001 Par Value; 50,000,000 shares
authorized and 13,994,850 and 5,445,000 shares issued
and outstanding, respectively 13,995
Additional paid-in capital 7,287,451
Statutory reserves 153,050
Retained earnings 2,228,959
Accumulated other comprehensive income 355,757
---------------
Total Stockholders' Equity 10,039,212
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,754,790
=============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
TIAN' AN PHARMACEUTICAL CO., LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)
(IN US $)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2006 2005
---- ---- ---- ----
OPERATING REVENUES $ 5,265,833 $1,956,472 $1,804,794 $ 1,284,296
------------ ----------- ----------- -------------
COST OF SALES
Inventory, beginning of period 473,294 63,390 480,472 376,756
Depreciation and amortization expense 270,770 153,141 90,948 51,047
Purchases 1,576,517 970,219 518,915 445,846
Inventory, end of period (462,893) (448,396) (462,873) (448,396)
------------ ----------- ----------- -------------
Total Cost of Sales 1,857,688 738,354 627,462 425,253
------------ ----------- ----------- -------------
GROSS PROFIT 3,408,145 1,218,118 1,177,332 859,043
------------ ----------- ----------- -------------
OPERATING EXPENSES
Selling and promotion 1,534,033 471,365 375,328 296,674
General and administrative fees 438,774 230,952 168,868 90,290
Loss on disposal of fixed assets 1,671 - - -
Depreciation, amortization and impairment 8,743 12,970 2,696 2,377
------------ ----------- ----------- -------------
Total Operating Expenses 1,983,221 715,287 546,892 389,341
INCOME BEFORE OTHER INCOME (EXPENSE) 1,424,924 502,831 630,440 469,702
OTHER INCOME (EXPENSE)
Rental income 29,201 - 9,964 -
Interest income, net of expense 21,802 16,671 8,008 7,345
Total Other Income (Expense) 51,003 16,671 17,972 7,345
------------ ----------- ----------- -------------
NET INCOME BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST 1,475,927 519,502 648,412 477,047
Minority interest 268 - - -
------------ ----------- ----------- -------------
NET INCOME BEFORE PROVISION FOR
INCOME TAXES 1,476,195 519,502 648,412 477,047
Provision for Income Taxes (246,477) (87,162) (104,724) (76,176)
------------ ----------- ----------- -------------
NET INCOME APPLICABLE TO COMMON SHARES $ 1,229,718 $ 432,340 $ 543,688 $ 400,871
============ =========== =========== =============
NET INCOME PER BASIC AND DILUTED SHARES $ 0.09 $ 0.03 $ 0.04 $ 0.03
============ =========== =========== =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 13,994,850 13,994,850 13,994,850 13,994,850
============ =========== =========== =============
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ 1,229,718 $ 432,340 $ 543,688 $ 400,871
Other comprehensive income (loss)
Currency translation adjustments 226,204 - 136,215 -
------------ ----------- ----------- -------------
Comprehensive income (loss) $ 1,455,922 $ 432,340 $ 679,903 $ 400,871
============ =========== =========== =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
TIAN' AN PHARMACEUTICAL CO., LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(IN US $)
Accumulated
Additional Other
Common Stock Paid-in Statutory Retained Comprehenisve
Shares Amount Capital Reserves Earnings Income Total
---------------------------------------------------------------------------------------------
Balance January 1, 2004 5,445,000 $ 5,445,000 $ - $ - $ (21,146) $ - $ 5,423,854
Transfer of statutory reserves - - - 13,686 (13,686) - -
Net income for the year ended
December 31, 2004, as
previously reported - - - - 98,701 - 98,701
Prior period adjustment,
see Note 10 - - - - 13,686 - 13,686
------------ ------------ ------------ ------------ ----------- ----------- ------------
Net income for the year ended
December 31, 2004,
as restated - - - - 112,387 - 112,387
------------ ------------ ------------ ------------ ----------- ----------- ------------
Balance December 31, 2004 5,445,000 5,445,000 - 13,686 77,555 - 5,536,241
Capital contributions 1,856,445 1,856,445 - - - - 1,856,445
Shares cancelled upon merger
with Tian An (Nevada) (7,301,445) (7,301,445) - - - - (7,301,445)
Shares issued for services 100 - 1 - - - 1
Shares issued in reverse merger
with Xi' An Tian' An 13,994,750 13,995 7,287,450 - - - 7,301,445
Transfer of statutory reserves - - - 139,364 (139,364) - -
Allocation of noncontrolling
interest - - - - - - -
Net income for the year ended
December 31, 2005, as
previously reported - - - - 921,686 - 921,686
Prior period adjustment,
see Note 10 - - - - 139,364 - 139,364
------------ ------------ ------------ ------------ ----------- ----------- ------------
Net income for the year
ended December 31, 2005 - - - - 1,061,050 129,553 1,190,603
------------ ------------ ------------ ------------ ----------- ----------- ------------
Balance December 31, 2005 13,994,850 $ 13,995 $ 7,287,451 $ 153,050 $ 999,241 $ 129,553 $ 8,583,290
============ ============ ============ ============ =========== =========== ============
Net income for nine months
ended September 30, 2006 - - - - 1,229,718 226,204 1,455,922
------------ ------------ ------------ ------------ ----------- ----------- ------------
Balance September 30, 2006 13,994,850 $ 13,995 $ 7,287,451 $ 153,050 $ 2,228,959 $ 355,757 $10,039,212
============ ============ ============ ============ =========== ========== ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
TIAN' AN PHARMACEUTICAL CO., LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)
(IN US $)
2006 2005
---- -----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,229,718 $ 432,340
------------ -------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and impairment 265,573 196,310
Loss on disposal of fixed assets 1,671 -
Minority interest (268) -
Changes in assets and liabilities
(Increase) in accounts receivable (582,089) (274,106)
(Increase) decrease in inventory 10,401 (283,790)
(Increase) decrease in other receivables (103,127) 967,213
(Increase) decrease in prepaid expenses and
other current assets 37,403 (188,579)
(Increase) decrease in other assets 88,878 (338,688)
Increase in accounts payable and
and accrued expenses 106,430 116,414
------------- ------------
Total adjustments (175,128) 194,774
------------- ------------
Net cash provided by operating activities 1,054,590 627,114
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Acquisitions) of fixed assets (32,313) (320,956)
Disposals of fixed assets 28,118 -
------------- ------------
Net cash (used in) investing activities (4,195) (320,956)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITES
Proceeds from issuance of common stock - 1,815,000
------------- ------------
Net cash provided by financing activities - 1,815,000
------------- ------------
Effect of foreign currency translation 226,204 -
NET INCREASE IN
CASH AND CASH EQUIVALENTS 1,276,599 2,121,158
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 3,561,148 1,652,695
------------- ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 4,837,747 $ 3,773,853
============= ============
CASH PAID DURING THE PERIOD FOR:
Income taxes $ - $ -
============= ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006 AND 2005
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been
prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested
that these condensed financial statements be read in conjunction with the
December 31, 2005 audited financial statements and the accompanying notes
thereto. While management believes the procedures followed in preparing
these condensed financial statements are reasonable, the accuracy of the
amounts are in some respects dependent upon the facts that will exist, and
procedures that will be accomplished by the Company later in the year.
These condensed unaudited financial statements reflect all adjustments,
including normal recurring adjustments which, in the opinion of
management, are necessary to present fairly the operations and cash flows
for the periods presented.
Tian' An Pharmaceutical Co. Ltd. ("Tian' An") was established in Xi'An of
the Peoples Republic of China ("PRC") by Shaanxi Bafang Science and
Technology Investment Co., Ltd, Shaanxi Economic Cooperation Property
Company, Shaanxi Ruike Investment Co., Ltd., Xi'An Green Health Products
Research Center, Xi' An Green Science and Technology and nineteen
individuals on January 17, 2003. In 2005, Shaanxi Bafang Science and
Technology Investment Co., Ltd. and Shaanxi Ruike Investment Co., Ltd.
transferred a portion of their ownership interest to two individuals, and
an additional 1,856,445 shares were purchased by two individuals and one
company.
Tian' An was first organized for the purpose of the development,
manufacturing and commercialization of traditional Chinese herbal
medicines and biological pharmaceuticals. The main business line of Tian'
An is production and sales of hard capsule, soft ointment, as well as
research and development of biology goods and health care products. The
Company conducts its business exclusively in the PRC.
In December 2005, Tian' An and another individual set up a subsidiary
company, Xi' An Tianan Pharmacy Marketing Co., Ltd (the "Subsidiary").
Tian' An injected cash amounting to approximately $2,600,000 as its
capital contribution, accounting for 96.3% of the total registered capital
of the Subsidiary (See Note 7).
On August 15, 2005, the officers of Tian' An filed Articles of
Incorporation in the State of Nevada which was approved August 23, 2005 to
create Tian' An Pharmaceutical Co., Ltd, a Nevada corporation (the
"Company") and also established T2 Pharmaceutical Inc., a Colorado
corporation ("T2") and wholly owned subsidiary of the Company.
6
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2006 AND 2005
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION CONTINUED)
--------------------------------------
On August 25, 2005, Tian' An merged into and with T2 and became the
surviving entity and wholly owned subsidiary of the Company. The Company
incorporated with 50,000,000 shares of common stock and 20,000,000 shares
of preferred stock both with a par value of $0.001. The Company issued 100
shares of common stock to its founder for $1.00, then issued 13,994,750
shares of common stock in exchange for 100% of the issued and outstanding
shares of Tian' An. Thereafter and for purposes of these consolidated
financial statements the "Company" and "Tian' An" are used to refer to the
operations of Tian' An Pharmaceutical Co. Ltd. For accounting purposes,
the Company accounted for the acquisition of Tian' An as a
recapitalization. The transaction involved entities under common control
as defined in Statement of Financial Standard 141, "Business
Combinations". As such, the net assets of Tian' An were acquired at their
carrying values at the time of the acquisition. The comparative figures
for 2005 are those of Tian' An.
As modern medical science is experiencing a change from biological
research to biological-psychological-social research with traditional
medical science playing a more important role than ever, the Company has
positioned itself with the products they currently manufacture as well as
the products under development to be successful. Many modern chemical
medicines contain high toxicities and present numerous side effects.
Purely chemical medicines are difficult, time consuming and expensive to
develop. The Company's Traditional Chinese Medicines represent advantages
over chemical medicines and the process of combining herbal extraction and
chemical medicines is becoming a popular alternative, following the
current trends of "natural" and "green" products in a variety of
industries.
The Company sells its products on a wholesale basis to distributors who
resell the product to customers located in China. The Company has five
major sales agents, Huayuan Life Pharmacy, Shaanxi Guangda Pharmacy,
Hubiaohang Nanyang Tonic, Gansu Fuhe and Guangzhou Jidong Pharmacy, which
distribute approximately 91% of the products. In general, sales are made
under a purchase order arrangement with payment in full on the order due
prior to shipment. The Company does not sell its products directly to
end-users.
The Company employs Good Manufacturing Practice "GMP" approved methods in
processing and manufacturing its products. The Company obtains its raw
materials from company-approved vendors and then process the materials
into Traditional Chinese Medicine formulas in its facility. In the case of
batch manufacturing, the Company employs a fully automated production line
to produce the bio-engineered neutraceuticals. Post Production, the
product is shipped to vendors. The raw materials are subjected to a
combined process involving a solid/liquid extraction step, followed by a
liquid/liquid-purifying step to obtain the purified extract.
7
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2006 AND 2005
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION CONTINUED)
--------------------------------------
Once the purification process has been completed, the extract is
concentrated and re-filtering at which time it is packaged and shipped to
its customers. The Company maintains approximately one month of finished
product on hand, and approximately two months of raw materials for
production.
The GMP inspection was performed by State Food and Drug Administration.
The Chinese central government mandates manufacturers of Chinese herbs to
comply with GMP standards by December 31, 2005. Starting on January 1,
2006, only products manufactured within GMP certified facilities are
available for sale in China. Currently, approximately one third of Chinese
manufacturers in this industry are in compliance with the new mandate. The
Company has invested substantial capital in its manufacturing facility in
order to comply with the more stringent standards mandated by the central
government in order to pass the GMP inspection.
As noted in Note 10, the Company restated its consolidated financial
statements for the years ended December 31, 2005 and 2004 to properly
account for the statutory reserves. The net effect of this change resulted
in an increase to the net income of the Company of $139,364 and $13,686
for the years ended December 31, 2005 and 2004, respectively. These
changes had no impact on the Company's operations for the nine months
ended September 30, 2005.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The 3.7% interest not
owned by the Company in its joint venture with Xi' An Tina'An Pharmacy
Marketing Co., Ltd. is reflected as a minority interest in the
consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an
on-going basis, the Company evaluates its estimates, including, but not
limited to, those related to bad debts, income taxes and contingencies.
The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from those
estimates.
8
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Economic and Political Risks
The Company's operations are conducted in the PRC. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environment in the PRC,
and by the general state of the PRC economy.
The Company's operations in the PRC are subject to special considerations
and significant risks not typically associated with companies in North
America and Western Europe. These include risks associated with, among
others, the political, economic and legal environment and foreign currency
exchange. The Company's results may be adversely affected by changes in
governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion, remittances abroad, and
rates and methods of taxation, among other things.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments and other
short-term investments with an initial maturity of three months or less to
be cash equivalents. The Company maintained $282 as of September 30, 2006
in cash on hand. The remainder of the cash was in financial institutions.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No, 130,
"Reporting Comprehensive Income," (SFAS No. 130). SFAS No. 130 requires the
reporting of comprehensive income in addition to net income from
operations.
Comprehensive income is a more inclusive financial reporting methodology
that includes disclosure of information that historically has not been
recognized in the calculation of net income.
Inventory
Inventory is valued at the lower of cost or market (using the weighted
average method) and net realizable value. Inventory includes raw material,
work in process and finished goods.
The net realizable value is the estimated selling price in the ordinary
course of business less the estimated costs of completion, selling
expenses and related taxes.
9
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheet for cash
and cash equivalents, and accounts payable approximate fair value because
of the immediate or short-term maturity of these financial instruments.
Currency Translation
The Company's functional currency is that of the PRC which is the Chinese
Renminbi (RMB). The reporting currency is that of the US Dollar. Capital
accounts of the consolidated financial statements are translated into
United States dollars from RMB at their historical exchange rates when the
capital transactions occurred. Assets and liabilities are translated at
the exchange rates as of the balance sheet date. Income and expenditures
are translated at the average exchange rate of the year. The period end
RMB to US dollar as of September 30, 2006 and 2005 were 7.88 and 8.3,
respectively, and the average period RMB to the US dollar for 2006 and
2005 were 7.938 and 8.3, respectively. The RMB is not freely convertible
into foreign currency and all foreign currency exchange transactions must
take place through authorized institutions. No representation is made that
the RMB amounts could have been, or could be, converted into US dollar at
the rates used in translation. The Company records these translation
adjustments as accumulated other comprehensive income (loss). Gains and
losses from foreign currency transactions are included in other income
(expense) in the results of operations. For the nine months ended
September 30, 2006 and 2005, the Company recorded approximately $226,204
and $0 in transaction gains (losses) as a result of currency translation.
Research and Development
The Company annually incurs costs on activities that relate to research
and development of new products. Research and development costs are
expensed as incurred.
Retirement Benefits
Retirement benefits in the form of contributions under defined
contribution retirement plans to the relevant authorities are charged to
the consolidated statements of income as incurred.
10
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company generates revenue from the sale of its nutritional herbal
products.
Revenue for the sale of its goods are recognized in accordance with Staff
Accounting Bulletin 101. Revenue is recognized when:
1) Persuasive evidence of an arrangement exists;
2) Delivery has occurred or services have been rendered;
3) The seller's price to the buyer is fixed or determinable, and
4) Collectibility is reasonably assured.
The Company's customers consist primarily of large pharmaceutical
wholesalers who sell directly into the retail channel.
Accounts Receivable
The Company conducts business and extends credit based on an evaluation of
the customers' financial condition, generally without requiring
collateral. Exposure to losses on receivables is expected to vary by
customer due to the financial condition of each customer. The Company
monitors exposure to credit losses and maintains allowances for
anticipated losses considered necessary under the circumstances. The
Company has established a reserve for uncollectibles of $3,893 as of
September 30, 2006.
Accounts receivable are generally due within 30 days and collateral is not
required.
Advertising Costs
The Company expenses the costs associated with advertising as incurred.
Advertising expenses for the nine months ended September 30, 2006 and 2005
of $1,274,236 and $330,875, respectively are included in selling and
promotional expenses in the consolidated statements of income. Advertising
costs include marketing brochures and displays for retail outlets.
Advance to Suppliers
Advances to suppliers represent the cash paid in advance for purchasing
raw materials.
11
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, net of
the estimated residual values; building - 35 years (5% estimated residual
value), equipment - 5 years (5% residual value), machinery- 10 years (5%
residual value), leasehold improvements - 5 years (no residual value) and
vehicles - 8 years (5% residual value).
When assets are retired or otherwise disposed of, the costs and related
accumulated depreciation are removed from the accounts, and any resulting
gain or loss is recognized in income for the period. The cost of
maintenance and repairs is charged to income as incurred; significant
renewals and betterments are capitalized. Deduction is made for
retirements resulting from renewals or betterments.
Land Use Rights
According to the laws of China, the government owns all the land in China.
Companies or individuals are authorized to possess and use the land only
through land use rights granted by the Chinese government. Land use rights
would be amortized using the straight-line method over the respective
lease term. The Company does not have nay land use rights.
Construction in Progress
Construction in progress represents direct costs of construction or
acquisition and design fees incurred, as well as interest charges directly
related to debt incurred on behalf of particular construction projects.
Capitalization of these costs ceases and the construction in progress is
transferred to fixed assets (building or equipment) when substantially all
the activities necessary to prepare the assets for their intended use are
completed. No depreciation is provided until it is completed and ready for
intended use.
Impairment of Long-Lived Assets
Long-lived assets, primarily fixed assets and intangible assets, are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets might not be recoverable.
The Company does perform a periodic assessment of assets for impairment in
the absence of such information or indicators. Conditions that would
necessitate an impairment assessment include a significant decline in the
observable market value of an asset, a significant change in the extent or
manner in which an asset is used, or a significant adverse change that
would indicate that the carrying amount of an asset or group of assets is
not recoverable. For long-lived assets to be held and used, the Company
recognizes an impairment loss only if its carrying amount is not
recoverable through its undiscounted cash flows and measures the
impairment loss based on the difference between the carrying amount and
estimated fair value.
12
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible Assets
Intangible assets consist of pharmaceutical licenses and are initially
recorded at acquisition cost and amortized on a straight-line basis over
their estimated useful lives of between five and eight years. Amortization
expense is included in cost of sales in the consolidated statements of
operations.
Costs incurred in creating products are charged to expense when incurred
as research and development until technological feasibility is established
upon completion of a working model. Thereafter, all production costs are
capitalized and carried at cost. Capitalized costs are amortized based on
straight-line amortization over the remaining estimated economic life of
the product.
Identified intangible assets are regularly reviewed to determine whether
facts and circumstances exist which indicate that the useful life is
shorter than originally estimated or the carrying amount of assets may not
be recoverable. The Company assesses the recoverability of its
identifiable intangible assets by comparing the fair value of the
intangible assets against the respective carrying amounts of these
intangible assets. Impairment, if any, is based on the excess of the
carrying amount over the fair value of those assets.
As of September 30, 2006
Gross
Carrying Accumulated
Amount Amortization Net
-------------------------------------
Amortized Intangible Assets:
Pharmaceutical licenses $ 2,401,340 $ 869,335 $ 1,532,005
Amortization Expense:
For the nine months ended September 30, 2006 $ 247,920
For the nine months ended September 30, 2005 153,141
Estimated Amortization Expense:
For the year ended September 30, 2007 $ 357,366
For the year ended September 30, 2008 357,366
For the year ended September 30, 2009 357,366
For the year ended September 30, 2010 357,366
For the year ended September 30, 2011 102,541
------------
Total $ 1,532,005
============
13
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings Per Share of Common Stock
Basic net earnings per common share is computed using the weighted average
number of common shares outstanding. Diluted earnings per share (EPS)
includes additional dilution from common stock equivalents, such as stock
issuable pursuant to the exercise of stock options and warrants. Common
stock equivalents are not included in the computation of diluted earnings
per share when the Company reports a loss because to do so would be
antidilutive for periods presented. The Company did not have a loss for
either period.
The following is a reconciliation of the computation for basic and diluted
EPS:
September 30, September 30,
2006 2005
--------------- ---------------
Net income $ 1,229,718 $ 432,340
-----------
Weighted-average common shares
Outstanding (Basic) 13,994,850 13,994,850
Weighted-average common stock
Equivalents
Stock options - -
Warrants - -
----------- -----------
Weighted-average common shares
Outstanding (Diluted) 13,994,850 13,994,850
=========== ===========
Income Taxes
The Company accounts for income tax using an asset and liability approach
and allows for recognition of deferred tax benefits in future years. Under
the asset and liability approach, deferred taxes are provided for the net
tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes. A valuation allowance is provided for deferred tax
assets if it is more likely than not these items will either expire before
the Company is able to realize their benefits, or that future realization
is uncertain.
In accordance with the relevant tax laws and regulations of PRC and US, the
corporation income tax rate applicable ranges from 15% to 34%.
14
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
The Company follows FASB 123R in accounting for its stock based
compensation (see Recent Accounting Pronouncements). This measures
compensation expense for its employee stock-based compensation using the
intrinsic-value method. Under the intrinsic-value method of accounting for
stock-based compensation, when the exercise price of options granted to
employees and common stock issuances are less than the estimated fair
value of the underlying stock on the date of grant, deferred compensation
is recognized and is amortized to compensation expense over the applicable
vesting period. The Company for 2005 and 2004 did not grant any options or
warrants that would need to be valued under such method. The following
represents the effect on net income attributable to common shareholders
per share if the fair value method had been applied to all awards.
Nine Months
Ended June 30,
2006 2005
Net income
As reported $1,229,718 $432,340
Add: Stock-based employee compensation
expense included in reported net loss, net of
related tax effects -- --
Less: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (-) (-)
----------- ---------
Pro forma $1,229,718 $432,340
Net earnings per share:
As reported:
Basic $ 0.09 $ 0.03
Diluted $ 0.09 $ 0.03
Pro forma:
Basic $ 0.09 $ 0.03
Diluted $ 0.09 $ 0.03
The Company measures compensation expense for its non-employee stock-based
compensation under the Financial Accounting Standards Board (FASB)
Emerging Issues Task Force (EITF) Issue No. 96-18, "Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services". The fair value of the option
issued is used to measure the transaction, as this is more reliable than
the fair value of the services received. The fair value is measured at the
value of the Company's common stock on the date that the commitment for
performance by the counterparty has been reached or the counterparty's
performance is complete. The fair value of the equity instrument is
charged directly to compensation expense and additional paid-in capital.
15
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Segment Information
The Company follows the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This standard requires
that companies disclose operating segments based on the manner in which
management disaggregates the Company in making internal operating
decisions. For 2006 and 2005, the Company operated in one segment and one
geographical location.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised
2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R requires that
compensation cost related to share-based payment transactions be
recognized in the financial statements. Share-based payment transactions
within the scope of SFAS 123R include stock options, restricted stock
plans, performance-based awards, stock appreciation rights, and employee
share purchase plans. The provisions of SFAS 123R, as amended, are
effective for small business issuers beginning as of the next fiscal year
after December 15, 2005.
NOTE 3- FIXED ASSETS
Fixed assets as of September 30, 2006 was as follows:
Estimated Useful
Lives (Years)
Land use right 50$ 0
Building 35 609,723
Equipment 5 43,892
Machinery 10 617,973
Vehicles 8 25,383
Leasehold improvements 5 120,478
----------
1,417,449
Less: accumulated depreciation 174,918
-----------
Property and equipment, net $1,242,531
==========
There was approximately $82,750 and $59,000 charged to operations for
depreciation expense for the nine months ended September 30, 2006 and
2005, respectively, of which approximately $57,000 and $46,000 is included
in cost of sales for the nine months ended September 30, 2006 and 2005,
respectively.
16
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2006 AND 2005
NOTE 3- FIXED ASSETS (CONTINUED)
The Company leased a factory in the Xi' An High-and new tech Industrial
Development Zone in November 2004 to engage in pharmacy production. In May
2005, the Company passed its Good Manufacturing Practice, which as of June
1, 2005, was mandatory for all pharmaceutical companies in PRC. The
Company employs Good Manufacturing Practice "GMP" approved methods in
processing and manufacturing its products. The Company obtains its raw
materials from company-approved vendors and then process the materials
into Traditional Chinese Medicine formulas in its facility. In the case of
batch manufacturing, the Company employs a fully automated production line
to produce the bio-engineered neutraceuticals. Post Production, the
product is shipped to vendors. The raw materials are subjected to a
combined process involving a solid/liquid extraction step, followed by a
liquid/liquid-purifying step to obtain the purified extract.
The Company has leased a portion of their buildings to two non-related
parties. The lease term runs from November 2005 through November 2006.
Rental income earned by the Company approximates $27,568 RMB per month
($3,370 US$). These amounts are included in other income in the
consolidated financial statements.
NOTE 4- INVENTORIES
Inventories consisted of the following as of September 30, 2006:
Raw materials $ 12,191
Work in process 127,162
Finished goods 323,540
---------
462,893
Less: provision for write-down
of inventory --
---------
Inventory, net $462,893
=========
There was no obsolescence of inventory or write-downs of inventory for the
nine months ended September 30, 2006 and 2005.
17
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2006 AND 2005
NOTE 5- STOCKHOLDERS' EQUITY
Common Stock
As of September 30, 2006, the Company has 50,000,000 shares of common
stock authorized with a par value of $0.001.
The Company issued 100 shares of common stock to its founder for $1.00,
then exchanged 13,994,750 shares of common stock in exchange of 100% of
the authorized capital of Tian' An Pharmaceutical Co., Ltd (CHINA).
Tian' An Pharmaceutical Co., Ltd (CHINA) in 2003 issued 5,445,000 shares.
During 2005, Tian' An issued an additional 1,856,445 shares pre-merger
with the Nevada corporation to have 7,301,445 shares issued. These shares
were exchanged for 13,994,750 shares of the Nevada corporation.
The Company has not granted any options or warrants during 2006 or 2005.
Preferred Stock
As of September 30, 2006, the Company has 20,000,000 shares of preferred
stock authorized with a par value of $0.001. There are no shares issued
and outstanding.
Statutory Reserves
Statutory reserves include a statutory surplus reserve and a statutory
public welfare fund, which are maintained in accordance with the legal
requirements of the PRC. Pursuant to the Articles of Association, the
Company has to appropriate 15% of the net income, based on the accounts
prepared in accordance with accounting principles generally accepted in
the PRC, to the statutory surplus reserve and statutory public welfare
fund. The statutory surplus reserve can be utilized to offset prior years'
losses or for capitalization as additional paid-in capital, whereas the
statutory public welfare fund shall be utilized for collective staff
welfare benefits such as building of staff quarters or housing. No
distribution of the statutory reserves shall be made other than on a
liquidation of the Company.
18
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2006 AND 2005
NOTE 6- PROVISION FOR INCOME TAXES
Corporate Income Taxes
In accordance with the relevant tax laws and regulations of PRC, the
corporate income tax rate is 15% and 33%. The corporate income tax for
2005 was 15% because Tian' An is considered a high technology company by
the Chinese government. For 2004, the Company was provided tax relief by
the government and their tax was at 0%. For 2005 through 2007, the
Company will be taxed at the 15% rate, and then commencing 2008, the
Company will apply for approval to be taxed as a high technology company
again for another three years at a rate of 15%. Should they not be
considered a high technology company they will be taxed at the 33% tax
rate.
At September 30, 2006 and 2005, corporate income tax consists of the
following:
2006 2005
---- -----
Tax expense - current $246,477 $ 87,162
A reconciliation of the PRC enterprise income tax rate to the effective
income tax rate is as follows:
-------------------------------
2006 2005
------------- -------------
Statutory rate - corporate income tax 15% 15%
Surcharge on taxes not deductible for
PRC purposes 1.7 1.8
------------- -------------
16.7% 16.8%
============= =============
The surcharge on taxes not deductible for PRC purposes represents
permanent differences due to salary and welfare items exceeding the
ceiling based on PRC regulations regarding headcount. In addition, there
are some very small tax surcharges included here such as a business tax
on the rental income, water conservancy funds and educational
assessments.
Deferred income taxes are determined using the liability method for the
temporary differences between the financial reporting basis and income
tax basis of the Company's assets and liabilities. Deferred income taxes
are measured based on the tax rates expected to be in effect when the
temporary differences are included in the Company's tax return. Deferred
tax assets and liabilities are recognized based on anticipated future tax
consequences attributable to differences between financial statement
carrying amounts of assets and liabilities and their respective tax
bases. The Company has no temporary or permanent differences. Therefore,
no deferred tax assets and liabilities have been recognized and no
valuation allowance has been established.
19
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2006 AND 2005
NOTE 6- PROVISION FOR INCOME TAXES (CONTINUED)
Corporate Income Taxes (Continued)
The depreciation and amortization methods and lives the Company utilizes
are identical for book and tax purposes. Additionally, there is no income
or expense included in books not included in tax.
Value Added Tax
In accordance with the relevant taxation laws in the PRC, the Value Added
tax ("VAT") rate for export sales is 0% and domestic sales is 17%. VAT is
levied at 17% on the invoiced value of sales and is payable by the
purchaser. The Company is required to remit the VAT it collects to the
tax authority, but may deduct therefrom the VAT it has paid on eligible
purchases. The VAT that the Company collects on sales is not included in
sales. The amount of VAT payable as of September 30, 2006 is $88,911 and
included in accounts payable and accrued expenses.
NOTE 7- SUBSIDIARY
As noted in Note 1, the Company and an individual in December 2005
established a subsidiary company through a joint venture, Xi' An Tian'an
Pharmacy Marketing Co., Ltd (the "Subsidiary"). Tian' An injected cash
amounting to approximately $2,600,000 as its capital contribution,
accounting for 96.3% of the total registered capital of the Subsidiary.
The capital infusion will be utilized for start-up costs of the
Subsidiary as well as the hiring of staff and an extensive marketing
campaign for the Company. The remaining 3.7% ownership is reflected as
minority interest in the consolidated financial statements.
NOTE 8- RELATED PARTY TRANSACTIONS
In July 2005, the Tian'an entered into a Pharmaceutical License Purchase
Contract with Xi' An Gelin Healthy Production Research Institute for the
development of Tian' An Pain Relief capsule. Xi' An Gelin Healthy
Production Research Institute is a shareholder of the Company and
contributed their license for Compound Ginseng Capsule for their shares in
Tian' An (see Note 2 - Intangible Assets). The Company has valued the
intangibles at historical cost.
Tian' An paid Xi' An Gelin Healthy Production Research Institute
approximately $1,000,000 (US$) (8,000,000 RMB). Xi' An Gelin Healthy
Production Research Institute in accordance with the agreement must offer
the result of their research and development of the new medicine by August
2011, and have it licensed by December 2011. Should Xi' An Gelin Healthy
Production Research Institute fail to obtain a license for the product,
they must return the fee. The Company has recorded this fee in other
receivables on its consolidated balance sheets as of September 30, 2006.
Should Tian' An receive the license, the payment will be reclassified to
Intangible Assets and amortized over the term of the license and tested
for impairment quarterly by Management.
20
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2006 AND 2005
NOTE 9- COMMITMENTS
Rental
Tian' An has entered into lease agreements for their manufacturing plant
and office space that expire through October 2009. Rentals vary in amounts
ranging up to $8,000 (US) per month.
Minimum lease payments under operating leases at September 30, 2006 are as
follows:
Period ending September 30, 2007 $143,800
2008 96,700
2009 96,700
2010 56,350
NOTE 10- RESTATEMENTS OF PRIOR FINANCIAL STATEMENTS
The Company has restated its prior consolidated financial statements to
properly account for the statutory reserves. The net effect of this change
resulted in an increase to the net income of the Company of $139,364 and
$13,686 for the years ended December 31, 2005 and 2004, respectively. The
change increased the net income from $921,686 to $1,061,050 in 2005 and
from $98,701 to $112,387 in 2004. The following represents the line items
effected in the restatements:
2005
Selling and promotion $ 80,000
General and administrative fee 59,364
----------
$139,364
==========
2004
Selling and promotion $ 0
General and administrative fee 13,686
----------
$ 13,686
==========
The adjustment is necessary due to the increase in statutory reserves
being reflected previously as increases in the expense accounts and posted
as a liability. Upon further analysis, the Company determined that the
statutory reserves did not meet the definition of a liability under CON 6,
and these items will be reflected as increases to equity.
These changes had no effect on the results of operations for the Company
for the nine months ended September 30, 2006 and 2005.
21
TIAN'AN PHARMACEUTICAL CO., LTD.
No dealer salesman or other person has been authorized to give any information
or to make any representations, other than those contained in this prospectus.
Any information or representation not contained in this prospectus must not be
relied upon as having been authorized by us. This prospectus does not constitute
an offer to sell, or a solicitation of an offer to buy, the securities offered
hereby in any state or other jurisdiction to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this prospectus nor
any sale made hereunder shall, under any circumstances, create an implication
that there has been no change in our affairs since the date of this prospectus.
TABLE OF CONTENTS
Page
Prospectus Summary ............................................
Risk Factors ...................................................
Market for Common Stock ........................................
Management's Discussion and Analysis and Plan of Operation .....
Business .......................................................
Management .....................................................
Principal Shareholders .........................................
Selling Shareholders ...........................................
Description of Capital Stock....................................
Experts ........................................................
Indemnification ................................................
Additional Information .........................................
Financial Statements ...........................................
Until ________________, ____ (90 days from the date of this prospectus), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation provide for indemnification of our officers,
directors and controlling persons to the full extent provided by Nevada law. Our
Articles of Incorporation also provide that no director is personally liable to
us or our stockholders for monetary damages for any breach of fiduciary duty by
such person as a director or officer except for (i) a breach of the director's
duty of loyalty to us or our stockholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct, fraud or a knowing violation of
law, (iii) a transaction from which the director received an improper benefit or
(iv) an act or omission for which the liability of a director is expressly
provided under Nevada law.
Under the Nevada corporate statutes, Nevada corporations are permitted to
indemnify their officers and directors for liability to stockholders, so long as
such indemnification does not include the items set forth in the previous
paragraph under (i) through (iv).
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC Registration Fees $ 43
Legal Fees $ 50,000
Accounting Fees $ 50,000
Miscellaneous Expenses $ 4,957
---------
Total $105,000
=========
(1) All expenses, except the SEC registration fee, are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the last three years, we have not issued any shares of our
unregistered securities, except for the sale of 100 shares (for $1.00) to Weng
Jianjun in August 2005 and the issuance of 13,994,750 shares in September, 2005
to 2,810 persons which we issued in connection with our merger with Tian'an
Pharmaceutical Co., Ltd., a Chinese corporation. These shares were all issued to
non-U.S. persons who reside outside of the United States. The negotiations and
agreements relating to the issuance of these shares were made by the Company's
officers (who were all Chinese citizens) from China. The shares are restricted
from resale in the public markets for a period of one year from the date of
their issuance. There is no market for the Company's securities in the United
States and none of the securities have been transferred since their issuance.
The issuance of these shares was exempt from the registration requirements of
the Securities Act of 1933 pursuant to Rule 901 of the Securities and Exchange
Commission.
1
ITEM 27. EXHIBIT INDEX.
Number Exhibit
- ------ -------
2 Plan of Merger *
3.1 Articles of Incorporation *
3.2 Bylaws *
5 Opinion of Counsel *
10.1 Employment Contracts, together with schedule required
by Instruction 2 to Item 601 of Regulation S-B. *
10.2 Distribution Agreements *
10.3 Agreement with Xi'an Gelin Healthy Production
Research Institution *
10.4 Agreement with Xi Peng relating to the formation of Xian Tianan
Pharmacy Marketing Co., Ltd.
21. Subsidiaries *
23.1 Consent of Attorneys *
23.2 Consent of Accountants
* Filed with initial registration statement.
ITEM 28. UNDERTAKINGS.
(a) The small business issuer will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to.
(i) Include any Prospectus required by Section l0 (a)(3) of the
Securities Act:
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
2
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer
under the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned small business issuer undertakes that in a primary
offering of securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned
small business issuer relating to the offering required to be filed pursuant to
Rule 424;
(ii) Any free writing prospectus relating to the offering prepared
by or on behalf of the undersigned small business issuer or used or referred to
by the undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to
the offering containing material information about the undersigned small
business issuer or its securities provided by or on behalf of the undersigned
small business issuer; and
(iv) Any other communication that is an offer in the offering made
by the undersigned small business issuer to the purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of l933 (the "Act") may be permitted to directors, officers and controlling
persons of the Small Business Issuer pursuant to the foregoing provisions or
otherwise, the Small Business Issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Small Business Issuer of expenses incurred or paid by a director, officer or
controlling person of the Small Business Issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Small Business
Issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(c) That, for the purpose of determining liability under the Securities Act
to any purchaser:
(1) If the small business issuer is relying on Rule 430B:
(i) Each prospectus filed by the undersigned small business issuer
pursuant to Rule 424(b)(3) shall be deemed to be part of the registration
statement as of the date the filed prospectus was deemed part of and included in
the registration statement; and
3
(ii) Each prospectus required to be filed pursuant to Rule
424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on
Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or
(x) for the purpose of providing the information required by section 10(a) of
the Securities Act shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form of prospectus is
first used after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided in Rule
430B, for liability purposes of the issuer and any person that is at that date
an underwriter, such date shall be deemed to be a new effective date of the
registration statement relating to the securities in the registration statement
to which that prospectus relates, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such effective date, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such effective date; or
(2) If the small business issuer is subject to Rule 430C, include the
following:
Each prospectus filed pursuant to Rue 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
4
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing Form SB-2 and has caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the city of Xi'an, China on November 16, 2006.
TIAN'AN PHARMACEUTICAL CO., LTD.
By: /s/ Weng Jianjun
----------------------------------
Weng Jianjun, Principal Executive Officer
Pursuant to the requirements of the Securities Act, as amended, this
Registration Statement has been signed below by the following persons.
Name Position Date
- ---- -------- ----
/s/ Weng Jianjun Principal Executive
- -------------------------- Officer and a Director November 16, 2006
Weng Jianjun
/s/ Li Deshun Director November 16, 2006
- --------------------------
Li Deshun
/s/ Jia Ning Director November 16, 2006
- ---------------------------
Jia Ning
/s/ Wang Hongwei Director November 16, 2006
- ---------------------------
Wang Hongwei
Director
- ---------------------------
He Yanming
/s/ Ma Zhiguo Director November 16, 2006
- ---------------------------
Ma Zhiguo
/s/ Liang Dingbang Director November 16, 2006
- ---------------------------
Liang Dingbang
Director
- ---------------------------
Ren Ping
/s/ Wang Yanqing Director November 16, 2006
- ---------------------------
Wang Yanqing
/s/ Zhu Jie Principal Financial
- -------------------------- and Accounting Officer November 16, 2006
Zhu Jie
EXHIBITS
TIAN'AN PHARMACEUTICAL CO., LTD.
REGISTRATION STATEMENT ON
FORM SB-2
AMENDMENT NO. 3