The accompanying notes are an integral part of the consolidated financial
statements.
The accompanying notes are an integral part of the consolidated financial
statements.
The accompanying notes are an integral part of the consolidated financial
statements.
The accompanying notes are an integral part of the consolidated financial
statements.
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.
6
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION (Continued)
n 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.
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.
7
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION (Continued)
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.
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
8
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 $730 as of
September 30, 2007 in cash on hand. The remainder of the cash was in
financial institutions.
9
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006
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 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 September 30, 2007 was 7.5061 and the average
period RMB to the US dollar for the nine months ended September 30,
2007 and 2006 were 7.673 and 7.938, 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).
10
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2007 and 2006, the Company recorded
approximately $472,268 and $226,204 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.
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 $7,914 as of September 30, 2007.
11
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2007 and 2006 of $1,475,574 and $1,274,236, 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.
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.
12
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
13
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2007
Gross
Carrying Accumulated
Amount Amortization Net
--------------------------------------
Amortized Intangible Assets:
Pharmaceutical licenses $2,521,272 $1,297,684 $1,223,588
======================================
Amortization Expense:
For the nine months ended September 30, 2007 $ 282,294
For the nine months ended September 30, 2006 247,920
Estimated Amortization Expense:
For the three months ended December 31, 2007 $ 129,421
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 $1,223,588
===========
|
14
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 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:
September September
30, 30,
2007 2006
--------- ---------
Net income $ 2,645,641 $ 1,229,718
------------- -------------
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 nine months ended September 30, 2007 and 2006, the Company
had five major customers that represented approximately 91% and 92%
of the Company's sales, respectively.
15
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 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.
16
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 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.
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.
17
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. SFAS 153 has not had a material impact on the
Company's 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.
18
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Cont'd)
SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The
adoption of SFAS 154 has not had 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 adoption of SFAS 155 has not
had a material impact on the Company's 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 has not had 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.
19
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Cont'd)
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.
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.
20
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006
NOTE 3- FIXED ASSETS
Fixed assets as of September 30, 2007 were as follows:
Estimated Useful
Lives (Years)
----------------
Land use right 50 $0
Building 35 639,630
Equipment 5 46,529
Machinery 10 666,658
Vehicles 8 26,628
Leasehold improvements 5 126,484
------------
1,505,929
Less: accumulated depreciation 301,538
------------
Property and equipment, net $1,204,391
============
|
There was $87,106 and $82,750 charged to operations for depreciation
expense for the nine months ended September 30, 2007 and 2006,
respectively, of which approximately $65,216 and $57,000 is included
in cost of goods sold. There was no impairment for these assets
during the nine months ended September 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.
21
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006
NOTE 4- INVENTORIES
Inventories consisted of the following as of September 30, 2007:
Raw materials $ 20,105
Work in process 196,124
Finished goods 494,978
---------
711,207
Less: provision for write-down of inventory --
---------
Inventory, net $ 711,207
=========
|
There was no obsolescence of inventory or write-downs of inventory
for the nine months ended September 30, 2007 and 2006.
NOTE 5- STOCKHOLDERS' EQUITY
Common Stock
As of September 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.
Preferred Stock
As of September 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.
22
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006
NOTE 5- STOCKHOLDERS' EQUITY (Continued)
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 September 30, 2007 and 2006, corporate income tax consists of the
following:
2007 2006
---- ----
Tax expense - current $ 373,294 $ 246,477
|
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.
23
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 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 15.00% 15.0%
Surcharge on taxes not deductible for
PRC purposes (2.63)% 1.7%
--------- -------
12.37% 16.7%
|
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
September 30, 2007 is $99,023 and is included in accounts payable
and accrued expenses.
24
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006
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 condensed
consolidated balance sheet as of September 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.
25
TIAN' AN PHARMACEUTICAL CO., LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006
NOTE 9- COMMITMENTS (Continued)
Rental (Cont'd)
Minimum lease payments under operating leases at September 30, 2007
are as follows:
Period ending September 30, 2008 $103,900
2009 86,500
26