UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________.
Commission File Number - None
TIAN'AN PHARMACEUTICAL CO., LTD.
Nevada None
- --------------------------- ------------------------------------
State or other jurisdiction (I.R.S.) Employer Identification No.
of incorporation
Level 11, International Trade Centre,
No. 196 Xiaozhai East Road
Xi'an, China
---------------------------------
Address of principal executive offices
0086-29-85381586
-----------------------------
Registrant's telephone number, including area code
N/A
-------------------------------------
Former address of principal executive offices
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) had been subject to such filing
requirements for the past 90 days.
Yes X No __
------------ ------------
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act):
Yes No X
------------------ -------
As of July 31, 2007 the Company had 13,994,850 outstanding shares of common
stock.
TIAN'AN PHARMACEUTICAL CO., LTD.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2007 AND 2006
INDEX TO FINANCIAL STATEMENTS
Page(s)
Condensed Consolidated Balance Sheet as of June 30, 2007 (Unaudited) 1
Condensed Consolidated Statements of Income and Accumulated Other
Comprehensive Income for the Six and Three Months Ended
June 30, 2007 and 2006 (Unaudited) 2
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 2006 and 2005 and
Six Months Ended June 30, 2007 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2007 and 2006 (Unaudited) 4
Notes to Condensed Consolidated Financial Statements 5-23
TIAN' AN PHARMACEUTICAL CO., LTD.
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2007 (UNAUDITED)
(IN US$)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 6,616,242
Accounts receivable, net 2,337,552
Inventories 628,000
Other receivables 1,049,872
Prepaid expenses and other current assets 57,941
-------------
Total Current Assets 10,689,607
-------------
Fixed assets, net of depreciation 1,215,717
-------------
Other Assets:
Intangible assets, net 1,300,037
-------------
Total Other Assets 1,300,037
-------------
TOTAL ASSETS $ 13,205,361
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Current Liabilities:
Accounts payable and accrued expenses $ 450,649
Accrued taxes 156,361
-------------
Total Current Liabilities 607,010
-------------
Total Liabilities 607,010
-------------
Minority interest 98,918
-------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 Par Value; 20,000,000
shares authorized and 0 shares issued and
outstanding -
Common stock, $.001 Par Value; 50,000,000 shares
authorized and 13,994,850 shares issued and
outstanding, respectively 13,995
Additional paid-in capital 7,287,451
Statutory reserves 380,632
Retained earnings 4,105,078
Accumulated other comprehensive income 712,277
-------------
Total Stockholders' Equity 12,499,433
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,205,361
=============
The accompanying notes are an integral part of the consolidated financial
statements.
1
TIAN' AN PHARMACEUTICAL CO., LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
ACCUMULATED OTHER COMPREHENSIVE INCOME
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2007 AND 2006 (UNAUDITED)
(IN US $)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
2007 2006 2007 2006
--------- --------- ---------- ---------
OPERATING REVENUES $ 5,134,958 $ 3,461,039 $ 2,737,270 $ 1,778,759
------------ ------------ ------------ ------------
COST OF SALES
Inventory, beginning of period 608,490 473,294 639,289 355,733
Depreciation and amortization expense 230,264 179,823 115,935 90,147
Purchases 1,471,362 1,057,602 763,118 663,081
Inventory, end of period (628,000) (480,472) (628,000) (480,472)
------------ ------------ ------------ ------------
Total Cost of Sales
1,682,116 1,230,247 890,342 628,489
------------ ------------ ------------ ------------
GROSS PROFIT 3,452,842 2,230,792 1,846,928 1,150,270
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling and promotion 1,233,181 1,158,705 685,511 594,213
General and administrative fees 201,829 269,906 100,181 190,183
Loss on disposal of fixed assets - 1,671 - 1,671
Depreciation, amortization and
impairment 14,473 6,047 7,284 3,277
------------ ------------ ------------ ------------
Total Operating Expenses 1,449,483 1,436,329 792,976 789,344
------------ ------------ ------------ ------------
INCOME BEFORE OTHER INCOME 2,003,359 794,463 1,053,952 360,926
OTHER INCOME
Rental income 31,451 19,237 20,818 10,458
Interest income 20,195 13,794 10,780 7,436
------------ ------------ ------------ ------------
Total Other Income 51,646 33,031 31,598 17,894
------------ ------------ ------------ ------------
NET INCOME BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST 2,055,005 827,494 1,085,550 378,820
Minority interest (164) 268 4,194 57
------------ ------------ ------------ ------------
NET INCOME BEFORE PROVISION FOR
INCOME TAXES 2,054,841 827,762 1,089,744 378,877
Provision for Income Taxes (241,806) (141,753) (97,396) (69,310)
------------ ------------ ------------ ------------
NET INCOME APPLICABLE TO COMMON
SHARES $ 1,813,035 $ 686,009 $ 992,348 $ 309,567
============ ============ ============ ============
NET INCOME PER BASIC AND DILUTED
SHARES $ 0.13 $ 0.05 $ 0.07 $ 0.02
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 13,994,850 13,994,850 13,994,851 3,994,850
============ ============ ============ ============
COMPREHENSIVE INCOME
Net income $ 1,813,035 $ 686,009 $ 992,348 $ 309,567
Other comprehensive income
Currency translation adjustments 285,738 89,989 173,805 27,605
------------ ------------ ------------ ------------
Comprehensive income $ 2,098,773 $ 775,998 $ 1,166,153 337,172
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
2
TIAN' AN PHARMACEUTICAL CO., LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2007 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(IN US $)
Accumulated
Additional Other
Common Stock Paid-in Statutory Retained Comprehenisve Treasury
Shares Amount Capital Reserves Earnings Income (Loss) Stock Total
--------------------------------------------------------------------------------------------
Balance January 1, 2005 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 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) - - -
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
Transfer of statutory reserves - - - 227,582 (227,582) - - -
Net income for the year ended
December 31, 2006 - - - - 1,520,220 296,986 - 1,817,206
------------ ------------ ---------- ----------- ---------- ----------- ----------- -----------
Balance December 31, 2006 13,994,850 13,995 7,287,451 380,632 2,291,879 426,539 - 10,400,496
Net income for the period
ended June 30, 2007 - - - - 1,813,199 285,738 - 2,098,937
------------ ------------ ---------- ----------- ---------- ----------- ----------- -----------
Balance June 30, 2007 $13,994,850 $ 13,995 $7,287,451 $ 380,632 $4,105,078 $ 712,277 $ - $2,499,433
============= ============ ========== =========== ========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
3
TIAN' AN PHARMACEUTICAL CO., LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (UNAUDITED)
(IN US $)
2007 2006
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,813,035 $ 686,009
------------ ------------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation, amortization and impairment 244,737 187,977
Loss on disposal of fixed assets - 1,671
Minority interest 164 (268)
Changes in assets and liabilities
(Increase) in accounts receivable (786,154) (294,996)
(Increase) decrease in inventory (3,404) (7,178)
(Increase) in other receivables - (10,747)
Decrease in prepaid expenses and other current assets - (29,665)
Decrease in other assets - 60,327
(Decrease) in accounts payable and
and accrued expenses (28,740) 26,439
Increase in accrued taxes 27,215 -
------------ ------------
Total adjustments (546,182) (66,440)
------------ ------------
Net cash provided by operating activities 1,266,853 619,569
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Acquisitions) of fixed assets (477) (29,165)
Disposals of fixed assets - 28,118
------------ ------------
Net cash (used in) investing activities (477) (1,047)
------------ ------------
Effect of foreign currency translation 159,263 89,989
------------ ------------
NET INCREASE IN
CASH AND CASH EQUIVALENTS 1,425,639 708,511
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 5,190,603 3,561,148
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 6,616,242 $ 4,269,659
============ ============
CASH PAID DURING THE PERIOD FOR:
Income taxes $ - $ -
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
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"). The condensed financial
statements and notes are presented as permitted on Form 10-QSB and do
not contain information included in the Company's annual statements
and notes. 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 consolidated financial statements be
read in conjunction with the December 31, 2006 audited financial
statements and the accompanying notes thereto. While management
believes the procedures followed in preparing these condensed
consolidated 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 condensed consolidated financial statements
reflect all adjustments, including normal recurring adjustments which,
in the opinion of management, are necessary to present fairly the
consolidated 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.
5
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2007 AND 2006
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 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.
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.
6
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2007 AND 2006
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.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed 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 Tian'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.
7
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2007 AND 2006
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 $906 as of June
30, 2007 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.
8
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2007 AND 2006
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ----------------------------------------------------------------
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts reported in the condensed 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 condensed 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 June 30, 2007 was 7.62 and the average period RMB to the US dollar
for the six months ended June 30, 2007 and 2006 were 7.653 and 8.007,
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 six months
ended June 30, 2007 and 2006, the Company recorded approximately
$285,738 and $89,989 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.
9
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2007 AND 2006
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 $7,796 as
of June 30, 2007.
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 six months ended June 30, 2007
and 2006 of $1,016,595 and $986,983, respectively are included in
selling and promotional expenses in the condensed 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.
10
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2007 AND 2006
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.
11
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2007 AND 2006
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 June 30, 2007
-------------------------------
Gross
Carrying Accumulated
Amount Amortization Net
-------- ------------ -------
Amortized Intangible Assets:
Pharmaceutical licenses $ 2,521,272 $ 1,221,235 $1,300,037
=========== =========== ==========
Amortization Expense:
For the six months ended June 30, 2007 $ 186,845
For the six months ended June 30, 2006 179,823
Estimated Amortization Expense:
For the six months ended December 31, 2007 $ 205,870
For the year ended December 31, 2008 373,342
For the year ended December 31, 2009 373,342
For the year ended December 31, 2010 347,483
-----------
Total $ 1,300,037
============
12
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2007 AND 2006
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:
June 30, June 30,
2007 2006
------------- -------------
Net income $ 1,813,035 $ 686,009
------------- -------------
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
============= =============
Major Customers
---------------
A major customer is a customer that represents 10% of the Company's
sales.
For the six months ended June 30, 2007 and 2006, the Company had five
major customers that represented approximately 96% and 92% of the
Company's sales, respectively.
13
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2007 AND 2006
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 2007 and
2006 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.
On January 1, 2006, the Company adopted the provisions of FAS No. 123R
"Share-Based Payment" ("FAS 123R") which requires recognition of
stock-based compensation expense for all share-based payments based on
fair value. Prior to January 1, 2006, the Company measured
compensation expense for all of its share-based compensation using the
intrinsic value method prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations. The Company has provided pro
forma disclosure amounts in accordance with FAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123" ("FAS 148"), as if the fair value
method defined by FAS No. 123, "Accounting for Stock Based
Compensation" ("FAS 123") had been applied to its stock-based
compensation.
14
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2007 AND 2006
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ----------------------------------------------------------------
Stock-Based Compensation (Continued)
------------------------------------
The Company has elected to use the modified-prospective approach
method. Under that transition method, the calculated expense in 2006
is equivalent to compensation expense for all awards granted prior to,
but not yet vested as of January 1, 2006, based on the grant-date fair
values estimated in accordance with the original provisions of FAS
123. Stock-based compensation expense for all awards granted after
January 1, 2006 is based on the grant-date fair values estimated in
accordance with the provisions of FAS 123R. The Company recognizes
these compensation costs, net of an estimated forfeiture rate, on a
pro rata basis over the requisite service period of each vesting
tranche of each award. The Company considers voluntary termination
behavior as well as trends of actual option forfeitures when
estimating the forfeiture rate.
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)
JUNE 30, 2007 AND 2006
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 2007 and 2006, the Company operated
in one segment and one geographical location.
Recent Accounting Pronouncements
--------------------------------
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," an interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial
Statements." FIN 46 establishes accounting guidance for consolidation
of variable interest entities that function to support the activities
of the primary beneficiary. In December 2003, the FASB revised FIN 46
and issued FIN 46 (revised December 2003) ("FIN 46R"). In addition to
conforming to previously issued FASB Staff Positions, FIN No. 46R
deferred the implementation date for certain variable interest
entities. This revised interpretation is effective for all entities no
later than the end of the first reporting period that ends after March
15, 2004. The Company does not have any investments in or contractual
relationship or other business relationship with a variable interest
entity and therefore the adoption of this interpretation will not have
any impact on the Company's results of operations, financial position
or cash flows.
On December 16, 2004, FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets, an amendment of APB Opinion 29, Accounting for
Non-monetary Transaction" ("SFAS 153"). This statement amends APB
Opinion 29 to eliminate the exception for non-monetary exchanges of
similar productive assets and replaces it with a general exception for
exchanges of non-monetary assets that do not have commercial
substance. Under SFAS 153, if a non-monetary exchange of similar
productive assets meets a commercial-substance criterion and fair
value is determinable, the transaction must be accounted for at fair
value resulting in recognition of any gain or loss. SFAS 153 is
effective for non-monetary transactions in fiscal periods that begin
after June 15, 2005. The Company does not anticipate that the
implementation of this standard will have a material impact on its
financial position, results of operations or cash flows.
In May 2005, the FASB issued Statement of Financial Accounting
Standard No. 154, "Accounting Changes and Error Corrections" ("SFAS
154"). SFAS 154 is a replacement of APB No. 20, "Accounting Changes",
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements". SFAS 154 applies to all voluntary changes in accounting
principle and changes the requirements for accounting and reporting of
a change in accounting principle. This statement establishes that,
unless impracticable, retrospective application is the required method
for reporting of a change in accounting principle in the absence of
explicit transition requirements specific to the newly adopted
accounting principle. It also requires the reporting of an error
correction which involves adjustments to previously issued financial
statements similar to those generally applicable to reporting an
accounting change retrospectively.
16
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2007 AND 2006
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ----------------------------------------------------------------
Recent Accounting Pronouncements (Continued)
--------------------------------------------
SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. The Company
believes the adoption of SFAS 154 will not have a material impact on
its consolidated financial statements.
In February 2006, the FASB issued Statement of Financial Accounting
Standard No. 155, "Accounting for Certain Hybrid Instruments" ("SFAS
155"). FASB 155 allows financial instruments that have embedded
derivatives to be accounted for as a whole (eliminating the need to
bifurcate the derivative from its host) if the holder elects to
account for the whole instrument on a fair value basis. This statement
is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after
September 15, 2006. The Company will evaluate the impact of SFAS 155
on its consolidated financial statements.
In September 2006, the FASB issued SFAS 157, "Fair Value
Measurements." This standard defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles, and expands disclosure about fair value measurements. This
statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007. Early adoption is encouraged.
The adoption of SFAS 157 is not expected to have a material impact on
the consolidated financial statements.
In September 2006, the FASB issued SFAS 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements 87, 88, 106 and 132(R)" ("SFAS 158").
SFAS 158 requires an employer to recognize the over-funded or
under-funded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement
of financial position and to recognize changes in that funded status
in the year in which the changes occur through comprehensive income.
SFAS 158 also requires the measurement of defined benefit plan assets
and obligations as of the date of the employer's fiscal year-end
statement of financial position (with limited exceptions). Management
does not expect adoption of SFAS 158 to have a material impact on the
Company's consolidated financial statements.
In February 2007, the FASB issued FAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities - Including an
amendment of FASB Statement No. 115", ("FAS 159") which permits
entities to choose to measure many financial instruments and certain
other items at fair value at specified election dates. A business
entity is required to report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each
subsequent reporting date. This statement is expected to expand the
use of fair value measurement. FAS 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years.
17
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2007 AND 2006
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (Continued)
In July 2006, the FASB issued Interpretation No. 48 (FIN No. 48),
"Accounting for Uncertainty in Income Taxes." This interpretation
requires recognition and measurement of uncertain income tax positions
using a "more-likely-than-not" approach. FIN No. 48 is effective for
fiscal years beginning after December 15, 2006. Management is still
evaluating what effect this will have on the Company's consolidated
financial statements.
In September 2006, the United States Securities and Exchange
Commission ("SEC") issued SAB 108, "Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements."
This SAB provides guidance on the consideration of the effects of
prior year misstatements in quantifying current year misstatements for
the purpose of a materiality assessment. SAB 108 establishes an
approach that requires quantification of financial statement errors
based on the effects of each of the company's financial statements and
the related financial statement disclosures. SAB 108 permits existing
public companies to record the cumulative effect of initially applying
this approach in the first year ending after November 15, 2006 by
recording the necessary correcting adjustments to the carrying values
of assets and liabilities as of the beginning of that year with the
offsetting adjustment recorded to the opening balance of retained
earnings. Additionally, the use of the cumulative effect transition
method requires detailed disclosure of the nature and amount of each
individual error being corrected through the cumulative adjustment and
how and when it arose. The Company does not anticipate that SAB 108
will have a material impact on its consolidated financial statements.
18
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2007 AND 2006
NOTE 3- FIXED ASSETS
- ----------------------
Fixed assets as of June 30, 2007 were as follows:
Estimated
Useful
Lives (Years)
Land use right 50 $0
Building 35 621,155
Equipment 5 45,192
Machinery 10 647,402
Vehicles 8 25,859
Leasehold improvements 5 122,831
----------
1,462,439
Less: accumulated depreciation 246,722
----------
Property and equipment, net $1,215,717
==========
There was $57,892 and $26,003 charged to operations for depreciation
expense for the six months ended June 30, 2007 and 2006, respectively,
of which $43,419 and $19,956 is included in cost of goods sold. There
was no impairment for these assets during the six months ended June
30, 2007 and 2006.
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 to November 2006 and
has been extended for another year. Rental income earned by the
Company approximates $40,420 RMB per month ($3,370 US$). These amounts
are included in other income in the condensed consolidated financial
statements.
19
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2007 AND 2006
NOTE 4- INVENTORIES
- ---------------------
Inventories consisted of the following as of June 30, 2007:
Raw materials $195,850
Work in process 25,715
Finished goods 406,435
---------
628,000
Less: provision for write-down
of inventory -
---------
Inventory, net $ 628,000
=========
There was no obsolescence of inventory or write-downs of inventory for
the six months ended June 30, 2007 and 2006.
NOTE 5- STOCKHOLDERS' EQUITY
- ------------------------------
Common Stock
------------
As of June 30, 2007, 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.
No shares were issued in 2006 or 2007, however, two shareholders of
the Company privately sold 666,950 shares to another entity. The
transaction had no impact on new issued shares, and no value added to
treasury stock.
The Company has not granted any options or warrants during 2007 or
2006.
20
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2007 AND 2006
NOTE 5- STOCKHOLDERS' EQUITY (CONTINUED)
- ------------------------------------------
Preferred Stock
---------------
As of June 30 2007, 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
2007 and 2006 was 15%, respectively, 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 2007, it is anticipated that 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 to be taxed at 15%. Should they not be considered a high
technology company they will be taxed at the 33% tax rate.
At June 30, 2007 and 2006, corporate income tax consists of the
following:
2007 2006
---- ----
Tax expense - current $ 241,806 $ 141,753
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.
21
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2007 AND 2006
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:
-------------------------
2007 2006
----------- ------------
Statutory rate - corporate income tax 15% 15%
Surcharge on taxes not deductible for (3.25) 3
PRC purposes ----------- ------------
11.75% 18%
=========== ============
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 June 30,
2007 is $110,688 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.
22
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2007 AND 2006
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 condensed consolidated balance
sheet as of June 30, 2007.
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 June 30, 2007 are as
follows:
Period ending June 30, 2008 $164,432
2009 110,992
2010 32,250
23
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION
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 report. Our financial
statements have been prepared in accordance with U.S. GAAP. In addition, our
financial statements and the financial data included in this report 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 report 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.
Six Months Ended June 30, 2007
- ------------------------------
Material changes of items in our Statement of Operations for the six
months ended June 30, 2007, as compared to the six months ended June 30, 2006,
are discussed below:
Operating Revenue: Our third product, the Nizhuanie soft capsule, came to
market in January 2007. As a result, revenues increased significantly during the
current six month period.
Gross Profit: Our gross profit percentage was 67% during June 30, 2007,
which was comparable to our gross profit percentage of 64% during June 30, 2006.
Net Income: Net income during the six months ended June 30, 2007 was 35%
of our Operating Revenues. In comparison, our net income was 19% of our
Operating Revenues during the six months ended June 30, 2006. The increase, from
a percentage standpoint, was due to a higher gross profit percentage during the
period and the fact that Operating Expenses were relatively the same amount as
during the six months ended June 30, 2006 despite a significant increase in
sales during the current period.
Trends, Events and Uncertainties
- --------------------------------
We anticipate that revenues will continue to increase since we received
government approval to sell our Nizhuanle soft capsule in December 2006.
Revenues are also expected to increase once we receive government approval to
market all of our products through our subsidiary, Xian Tianan Pharmacy
Marketing Co., Ltd.
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.
Liquidity and Capital Resources
- -------------------------------
Future payments due on our contractual obligations as of June 30, 2007 are
as follows:
Twelve Months Ended June 30,
Item Total 2008 2009 2010
- ---- ----- -------- -------- --------
Lease Payments $307,674 $164,432 $110,992 $32,250
Except as shown in the foregoing table, as of June 30, 2007 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.
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.
2
Our material sources and (uses) of cash during the six months ended June 30,
2007 were:
2007
----
Cash provided by operations $1,266,853
Changes in foreign exchange rate $ 159,263
Our material sources and (uses) of cash during the six months ended
June 30, 2006 were:
2006
----
Cash provided by operations $619,569
Changes in foreign exchange rate $ 89,989
Income from our operations has been, and is expected to be in the future,
our primary source of cash.
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 report.
ITEM 3. CONTROLS AND PROCEDURES
- -------------------------------
Weng Jianjun, the Company's Chief Executive Officer and Zhu Jie, the
Company's Principal Financial Officer, have evaluated the effectiveness of the
Company's disclosure controls and procedures as of a date prior to the filing
date of this report, and in their opinion the Company's disclosure controls and
procedures are effective to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known to them by
others within those entities, particularly during the period in which this
report is being prepared, so as to allow timely decisions regarding required
disclosure. There have been no changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls.
As a result, no corrective actions with regard to significant deficiencies or
material weakness in the Company's internal controls were required.
3
PART II
OTHER INFORMATION
Item 6. Exhibits
Number Exhibit
------ -------
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
4
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on August 9, 2007.
TIAN'AN PHARMACEUTICAL CO., LTD.
By: /s/ Weng Jianjun
---------------------------------------
Weng Jianjun, Principal Executive Officer
By: /s/ Zhu Jie
---------------------------------------
Zhu Jie, Principal Financial and Accounting
Officer