PINX:JZHG JinZangHuang Tibet Pharmaceuticals, Inc. Annual Report 10-K Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K

(Mark One)

( X )
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

FOR THE FISCAL YEAR ENDED JUNE 30, 2012

(   )
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: 0-53254

JINZANGHUANG TIBET PHARMACEUTICALS, INC.
 (Exact Name of Registrant as Specified in Its Charter)

DELAWARE
26-2443288
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
Leling Economic Development Zone, Kaiyuan East Blvd., Dezhou, Shandong, P.R.China 253600
(Address of principal executive offices)

86-534-2111-962
(Issuer's telephone number)

Securities Registered Pursuant to Section 12(b) of the Exchange Act: NONE

Securities Registered Pursuant to Section 12(g) of the Exchange Act:

COMMON STOCK, $0.001 PAR VALUE
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 406 of the Securities Act.    Yes __ No √ 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes __ No √ 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  √     No __

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

 
 

 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained,  to the best of registrant's  knowledge, in definitive proxy or information  statements incorporated  by reference  in Part III of this Form 10-K or any  amendment to this Form 10-K. [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
 
Large accelerated filer     Accelerated filer     Non-accelerated filer     Smaller reporting company  X  

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

As of December 31, 2011, the last day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates was $335,868, based upon the closing price on December 31, 2011 of $0.01 per share.

As of September 28, 2012, there were 50,665,063 shares of common stock outstanding.

Documents incorporated by reference: NONE

 
 

 

PART I

FORWARD-LOOKING STATEMENTS: NO ASSURANCES INTENDED

In addition to historical information, this Annual Report contains forward-looking statements, which are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans to,” “estimates,” “projects,” or similar expressions. These forward-looking statements represent Management’s belief as to the future of Jinzanghuang Tibet Pharmaceuticals, Inc.  Whether those beliefs become reality will depend on many factors that are not under Management’s control.  Many risks and uncertainties exist that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section 1A of this Report, entitled “Risk Factors.” Readers are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.
 
ITEM 1.                BUSINESS

Jinzanghuang Tibet Pharmaceuticals, Inc. is a Delaware corporation with no business operations and only one asset:  a wholly-owned subsidiary named Tibet Medicine, Inc.  Tibet Medicine, Inc., likewise, is a Delaware corporation with no business operations and only one asset: 100% of the registered capital of Beijing Taibodekang Consulting Co., Ltd., a Wholly Foreign Owned Entity organized under the laws of the People’s Republic of China (“Beijing Taibodekang”).  Beijing Taibodekang has no assets other than cash, but it does have a business operation, namely the management of Leling Jinzanghuang Biotech Co., Ltd. (“Leling Jinzanghuang”), which is also organized under the laws of the People’s Republic.  Beijing Taibodekang carries out that management pursuant to the terms of four agreements that it made on January 4, 2009 with Leling Jinzanghuang and with the equity owners in Leling Jinzanghuang.  Collectively, the agreements provide Beijing Taibodekang exclusive control over the business of Leling Jinzanghuang.  The relationship is one that is generally identified as “entrusted management.” As a result of that relationship, the financial statements of Leling Jinzanghuang are consolidated with the Company’s financial statements in this Report.

At times throughout this Report we will use the term “Company” to refer to the four entities mentioned above as a single entity, which is a consolidated entity for financial reporting purposes.  References to the “business of the Company” and the like, however, all refer to the business carried out by Leling Jinzanghuang, which is the only one of the four consolidated entities that carries on business operations.
 
Leling Jinzanghuang was founded in November 2008 under the laws of the People’s Republic of China with registered capital of 3.5 million RMB ($549,105). Registered capital increased to 8.5 million RMB (approximately $1,333,542) as of June 30, 2010.  Leling Jinzanghuang’s executive offices and operations are located in Leling City, Shandong Province, in eastern China.

Leling Jinzanghuang was organized to facilitate the distribution of pharmaceutical and nutraceutical products manufactured by Shandong Jinzanghuang (Tibet) Pharmaceutical Co., Ltd. (“Shandong Jinzanghuang”), a company primarily owned and managed by the Company’s CEO, which utilizes the principles of Tibetan medicine in developing its products.  Until October 2010 Leling Jinzanghuang served as a distributor of the Shandong Jinzanghuang products.  Since October 2010 Leling Jinzanghuang has devoted its attention to a program of marketing the Shandong Jinzanghuang products for use by sauna stores in China.  The program currently includes 158 sauna stores as customers.

Tibetan medicine is a centuries-old medical system that employs a complex approach to diagnosis, incorporating techniques such as pulse analysis and urinalysis, and utilizes behavior and dietary modification. By synthesizing knowledge from various medical systems, Tibetans created an approach to medicine drawn from thousands of years of empirical knowledge and intuition about the nature of health and illness. Since practitioners of Tibetan medicine seek to treat diseases in a natural way, Tibetan pharmaceuticals are usually composed of natural materials, particularly the herbs and minerals found in the high-latitude, low-temperature, and pollution-free environment of Tibet.  Practitioners have demonstrated the benefits of Tibetan medicine in treating diseases of the human respiratory system, digestive system, cardiovascular system, kinematic system, and skin. Until recently, however, the primitive manufacturing techniques used in traditional Tibetan medicine prevented its integration into modern medical practice.  With the incorporation of modern techniques into the production process, however, Tibetan medicine is being gradually recognized along with Chinese traditional medicine as a medical system parallel to western medicine.
 
 
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Within China, Tibetan medicine is classified as one type of Chinese traditional medicine, a pharmaceutical industry that exists parallel to western medicine in China.  The Chinese have long perceived and accepted traditional Chinese medicine as a safe and effective solution to diseases, having the advantage of causing fewer side effects than western medicine, due to the natural ingredients used.  With the improvement of living standards in China, the revenues of the health care industry have been substantially increased in recent decades, which has also stimulated the domestic demands for Tibetan medicine.
 
The market for Tibetan pharmaceuticals in China is only a very small portion of the overall medical market in China.  The annual production of Tibetan medicine amounts to approximately 1500 tons with more than 293 items marketed.  The growth rate of the market for Tibetan pharmaceuticals is substantial, however.  One factor spurring growth has been the willingness of Chinese regulators to accredit products based on Tibetan medicine.  At the present time, this accreditation includes:
 
 
·
14 products that have been listed on the Protected Chinese Traditional Medicine List;
 
·
24 products that have been included in the National Medicine Index;

 
·
218 products that have been certified by the SFDA; and
 
·
20+ products that have registered trademarks in China.

In 2006, the overall revenues of the 19 major Tibetan pharmaceutical companies in the Tibet Autonomous Region were 623 million RMB ($98,888,888).  We believe, moreover, that the supply of Tibetan medicine in China’s domestic market falls short of demand, which presents a considerable market potential. Furthermore, as Chinese traditional medicine is gradually recognized in the international medical community as an alternative way to treat diseases, there is a potential international market for Tibetan medicine and nutritious products as well.
 
Sauna Stores
 
From November 2008, when it was first organized, until October 2010 Leling Jinzanghuang served as a distributor for 13 Tibetan health products manufactured by Shandong Jinzanghuang.  In October 2010, however, Leling Jinzanghuang took a new direction.  In that month Leling Jinzanghuang entered into a Cooperative Trial Operation Agreement with Shenyang Jintao Technology Co. (“Jintao”).  The agreement provided that Jintao would initially introduce 50 sauna stores to Leling Jinzanghuang, and Leling Jinzanghuang would pay Jintao a fee of 8,000 Renminbi ($1,269) for each store with which it contracted.  Since that time, Jintao has introduced an additional 108 sauna stores to Leling Jinzanghuang, and been paid fees in that approximate amount for each of the 158 stores that are now participating in the program.

Leling Jinzanghuang and Shandong Jinzanghuang have entered into a one-year Tripartite Cooperation Agreement with each of the sauna stores.  The Tripartite Cooperation Agreement provides that each month the store will purchase directly from Shandong Jinzanghuang a supply of Tibetan medicine-based pharmaceuticals specially developed to be integrated with the health and beauty programs offered by the sauna store.  After training and advice by Leling Jinzanghuang, the sauna store resells the products to their customers.  At the end of each month, Leling Jinzanghuang takes an inventory of the sales by each store, and charges the store a fee based on its monthly sales.  The fee paid by a sauna store to Leling Jinzanghuang equals 35% or 40% of the store’s revenue from sale of the Shandong Jinzanghuang products.

The primary function of Leling Jinzanghuang in this program is to provide information flow between the sauna stores and Shandong Jinzanghuang. Among the services provided by Leling Jinzanghuang are the following:
 
 
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·
Leling Jinzanghuang provides the staff of each sauna store training and direction regarding the use of the Shandong Jinzanghuang products.
·
Leling Jinzanghuang discusses with each sauna store the effect of weather and physical location on the efficacy of the products, and consults with Shandong Jinzanghuang regarding adjustments to the products’ ingredients to suit local and seasonal requirements.
·
Leling Jinzanghuang discusses with each sauna store the product requests made by the store and/or its customers, and provides this information to Shandong Jinzanghuang to enable it to develop new products to meet the demand.
 
The products involved in the program are among those Tibetan medicines made with modern drug manufacturing techniques. The manufacturing equipment and techniques used by Shandong Jinzanghuang are certified under China’s national standards of Good Manufacturing Practice (GMP), and are in compliance with applicable regulations of the Chinese Food and Drug Administration (“SFDA”), which regulates both the pharmaceutical and the nutraceutical industries in China. The automatic production and testing processes used by Shandong Jinzanghuang assure the accurate execution of the formula and the quality and quantity of the products. Moreover, the strict quality control and inspection procedures performed in Shandong Jinzanghuang’s state-of-the-art laboratories assure the quality of the products used by the sauna stores.
  
In the past year we have added seven products to our offerings, so that currently fifteen products designed for use in a sauna bath are included in the program:
 
Zhu Yan Qing Shen San, which is used to offset the effects of eating fatty foods by lowering blood lipid and cholesterol levels.  Zhu Yan Qing Shen San is also believed to delay the effects of senility.
 
Mi Zong Xiao Ban San, which increases dermal blood circulation, thereby facilitating the absorption of nutrition by the skin, reducing the effects of wrinkling and acne.
 
Liang Yan Yang Sheng San is a nutritional supplement for women in the menstrual period or the gestation period, or who are otherwise subject to periods of weakness.  Liang Yan Yang Sheng San also aids in reducing wrinkling and skin discoloration.
 
Wu He Yang Sheng Powder boosts women’s immune systems and aids in the absorption of nutrients.  The Powder is beneficial in offsetting fatigue and providing improved overall physical function.

Run Fu Zhu Yan San is a multi-faceted treatment for skin, providing moisture, resisting wrinkles, reducing hypersensitivity, and whitening the skin.  Run Fu Zhu Yan San also serves as a tooth whitener.

Zi Yin Yang Xue Bao is a nutrient supplement that is beneficial for kidney function.  It is also believed to delay senility and whiten skin.

Yang Yan Hu Xin Bao improves heart function and increases circulation in the limbs.  Yang Yan Hu Xin Bao is believed to help prevent sudden heart failure.

Huo Xue Qin Xin Bao is a combination of herbal compounds that provides an overall tonic for the body.  Huo Xue Qin Xin Bao invigorates blood circulation, aids in pulmonary function, helps to regulate menstruation, and aids in treatment of arthralgia and pheumatalgia.  It also whitens skin and improves skin texture.

Qu Ban Li Yan San is a combination of herbal compounds, which increases dermal blood circulation and whitens skin.

Wu Long Bu Xue Yang Sheng Fen is a nutritional supplement, which provides a tonic for the body and relieves fatigue and drowsiness due to a lack of nutrients.

 
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Jin Zang Liu Wei Yang Sheng Fen is a combination of nutritional herbal compounds that relieves depression and other symptoms of excessive internal heat.

Yin Xing Yang Sheng San facilitates the digestion of fats, thereby reducing blood lipids and generally offsetting the effects of eating fatty foods.

Mei Rong Yang Yan Run Fu San is used to increase dermal blood circulation. Mei Rong Yang Yan Run Fu San is also believed to reduce hypersensitivity by moistening the skin and increasing bodily fluids.

Bu Xue Yang Sheng Bao is a nutritional supplement that improves heart function, increases circulation, and relieves symptoms of anemia.

Long Zang Yang Sheng San facilitates the body’s absorption of nutrition, thus improving physical function. Long Zang Yang Sheng San is also believed to delay the effects of senility.

Manufacturing

All of the products used in the sauna store program are manufactured by Shandong Jinzanghuang , whose manufacturing facility is located approximately five kilometers from our offices. Xue Bangyi, our Chief Executive Officer, is also the Chief Executive Officer of Shandong Jinzanghuang.
 
The principal raw materials used for the production of the products are natural plants and minerals located in the Qing Tibetan Plateau, which extends across Tibet and Yunnan Province. To ensure a sufficient supply of raw materials, Shandong Jinzanghuang has developed multiple raw material purchase spots in Changdu and Lizhi City in the Tibetan Autonomous Region and in Di Qin City in Yunnan Province. All the raw materials used by Shandong Jinzanghuang are tested by experts to ensure their quality.

Government Regulation
 
Unlike its U.S. counterpart, the Chinese Food and Drug Administration (“SFDA”) regulates the manufacture and distribution of both pharmaceuticals and nutraceuticals in China.  Each Chinese province also has an agency with responsibility for the pharmaceuticals and nutraceuticals distributed in the Province.  Pharmaceutical products can be distributed only after clinical trials and approval of the SFDA.  In order to achieve widespread market acceptance, a nutraceutical product must obtain certification from either SFDA or the provincial agency, and preferably from both.  Certain tests need to be conducted to get the approval depending on the alleged medical effects.

The products used in our sauna store program are exempt from regulation by the SFDA because they are applied to the skin and are not ingested.  Nevertheless, because Shandong Jinzanghuang also manufactures many nutraceutical products that are regulated by the SFDA, Shandong Jinzanghuang applies the best practices used in manufacturing its regulated products to the manufacture of its unregulated products, such as the sauna solutions used in our sauna store program.
 
Competition
 
The Tibetan medicine industry is now in a transition stage from small, backyard enterprises into large-scale, industrialized operations. Our competitors can be divided into two categories in terms of scale and competitiveness:
 
 
·
State-run pharmaceutical companies, such as Jingqiu Tibetan Medicine, Jinhe Tibetan Medicine and Tibetan Pharmaceutical Factory; and
 
 
·
Private or joint-venture enterprises, such as Tibet Cheezheng Tibetan Medicine and Niemula Tibet Medicine.
 
The state-owned enterprises have access to state financial and political support. They also entered into the market earlier than we did, and thus have accumulated management experiences and personnel in the Tibetan medicine business. Meanwhile, the private pharmaceutical companies, like us, entered into market later, but grow very fast due to the efficient management skills.

 
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Our competitive advantages include our unique business model of marketing to sauna stores, as well as the proprietary product portfolio owned by Shandong Jinzanghuang.  Nevertheless, we can expect to face substantial competition from our competitors in theTibetan pharmaceutical industry as news of the success of our sauna store marketing program inspires new entrants into the market.

Employees
 
Leling Jinzanghuang currently has 80 full-time employees.  59 employees are involved in providing services to our sauna clients.  5 employees are dedicated to sales functions.  The remaining 16 employees are involved in administration and financial management.     
 
ITEM 1A .            RISK FACTORS

Investing in our common stock involves risk. You should carefully consider the risks described below together with all of the other information contained in this Report, including the financial statements and the related notes, before deciding whether to purchase any shares of our common stock. If any of the following risks occurs, our business, financial condition or operating results could materially suffer. In that event, the trading price of our common stock could decline and you may lose all or part of your investment.

Our business and operations are newly established. Unless we manage our growth effectively, our business will fail.
 
Leling Jinzanghuang was organized in November 2008.  Some members of our management had prior experience marketing the products of Shandong Jinzanghuang when they were employed by that company.  The extrapolation of that experience into a marketing business on the magnitude contemplated by Leling Jinzanghuang will place significant demands on our management, and on our operational and financial infrastructure. The problems of growth have been compounded by our recent revision to the business plan, which now focuses solely on sauna stores, a market with which we had no experience prior to 2010.  If we do not effectively manage our operations, the quality of our marketing program will suffer, which would negatively affect our operating results. Moreover, if the necessary funding cannot be obtained, we will be unable to improve our operational, financial and management controls and our reporting systems and procedures. The complexity of this undertaking means that we are likely to face many challenges, some of which are not yet foreseeable. Problems may occur with our product acquisition, and with our ability to sell our products to our customers. If we are not able to obtain the necessary funding and operate efficiently, our business plan may fall short of its goals, and our ability to manage our growth could be hurt.

If we were unable to enforce the terms of the entrusted management agreements between Beijing Taibodekang and Leling Jinzanghuang, we would have no business operations.

All of our business activities are carried out by Leling Jinzanghuang.  Substantially all of the assets shown on our balance sheet are owned by Leling Jinzanghuang.  However, Jinzanghuang Tibet Pharmaceuticals, Inc., the U.S. public company owned by our shareholders, does not own any equity in Leling Jinzanghuang.  Instead, we consolidate the assets and results of operations of Leling Jinzanghuang with the financial statements of Jinzanghuang Tibet Pharmaceuticals by reason of a set of four contracts.  Those contracts transfer 95% of the benefits of and responsibilities for the operations of Leling Jinzanghuang to a wholly-owned subsidiary of Jinzanghuang Tibet Pharmaceuticals.  As a result, under U.S. accounting principles, Leling Jinzanghuang is deemed to be a variable interest entity with respect to that subsidiary, and so is a consolidated entity within the Company.  Our entitlement to those benefits, however, depends on our ability to enforce the agreements between our subsidiary, Beijing Taibodekang, and Leling Jinzanghuang.  If a dispute arose between those entities that could not be resolved amicably, we would have to resort to a court or arbitration tribunal in the People’s Republic of China to secure our rights with respect to Leling Jinzanghuang.  We are not aware, however, of a body of reported decisions regarding the enforceability of agreements of this sort under the laws of the PRC.  It is possible, therefore, that the Chinese tribunal would decide that the agreements were not enforceable, either as a matter of national policy or for some other reason.  If that were to occur, Jinzanghuang Tibet Pharmaceuticals, Inc. would have no business operations or assets, and its outstanding common stock would be essentially worthless.

 
5

 
           
A recession in China could significantly hinder our growth.
 
The success of our efforts to introduce Tibetan pharmaceuticals and nutraceuticals in China will depend on continuation of recent improvements in the Chinese economy and the amount of disposable income available to the Chinese population.  If money becomes tight, individuals will be less willing to pay extra for the benefits offered by our products.  In recent years, China’s economy has suffered the effects of the worldwide liquidity crisis, and many financial commentators expect a recession to occur in China in the near future.  The occurrence of a serious recession could significantly hinder our efforts to implement our business plan.

We operate in a highly competitive marketplace, which could adversely affect our sales and financial condition.
 
The appeal of our products to the sauna store industry depends on quality, price, product availability and security of supply, product development and customer service. Although we are developing an essentially new market, there is virtually no barrier to entry by competition.  A number of Chinese nutraceutical companies are substantially larger than us and have greater financial resources.  If one or more of them were to copy our business model and enter into competition in the sauna store industry, the competition could limit our growth.  Our competitors may introduce new products based on more competitive alternative technologies that may cause us to lose customers which would result in a decline in our sales volume and earnings. Our customers demand high quality and low cost products and services. The cost in the research and development and marketing expansion may continue to increase and thus adversely affect the competitiveness of our products. Competition could cause us to lose market share, increase expenditures or reduce pricing, each of which would have an adverse effect on our results of operations, cash flows and financial condition.

Increased government regulation of our marketing operations could diminish our profits.
 
At present, there is no significant government regulation of the health claims that participants in the nutraceutical industry make regarding their products.  Other developed countries, in particular members of the European Community, have far more extensive regulation of the marketing of nutraceuticals, including strict limitations on the health-related claims that can be made without scientifically-tested evidence.  It is not unlikely, therefore, that China will increase its regulation of our activities in the future.  To the extent that new regulations required us to conduct a regimen of scientific tests of the efficacy of our nutraceutical products, the expense of such testing would reduce our profitability.  In addition, to the extent that the health benefits of some of our products could not be fully supported by scientific evidence, our sales might be reduced.
 
                 We may have difficulty defending our intellectual property rights from infringement, which may undermine our competitive position.
 
Our ability to compete effectively depends on our ability to distinguish our products from those of our competitors.  A primary distinction on which we intend to rely is the availability to Shandong Jinzanghuang of the Tibetan formulae known only to its chief pharmacist.  We will rely on trade secret laws and restrictions on disclosure to protect our intellectual property rights. Unauthorized use of our formulae could damage our ability to compete effectively.  At the same time, the appearance of counterfeit products on the market could also damage our marketing program.  Policing the unauthorized use of proprietary technology and the appearance of counterfeit products can be difficult and expensive.
 
If litigation becomes necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others, such litigation may be costly and may divert management attention away from our business. An adverse determination in any such litigation would impair our intellectual property rights and could harm our business, prospects and reputation. Enforcement of judgments in China is uncertain and even if we are successful in litigation it may not provide us with an effective remedy. In addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
 
 
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In addition, third parties may file infringement claims against us asserting that we are infringing on their patents or trademarks. In the event that such claims are filed, regardless of the merit of such a claim, we may incur substantial costs and diversion of management as a result of our involvement in such proceedings.

Product liability claims could materially impact operating results and profitability.
 
We may produce products which inadvertently have an adverse pharmaceutical effect on the health of individuals.  Existing laws and regulations in China do not require us to maintain third party liability insurance to cover product liability claims.  However, if a product liability claim is brought against us, it may, regardless of merit or eventual outcome, result in damage to our reputation, breach of contract with our customers, decreased demand for our products, costly litigation, product recalls, loss of revenue, and our inability to commercialize some products.

We are subject to the risk of natural disasters.
 
Many of the raw materials that are used to manufacture our products are very sensitive crops, which can be readily damaged by harsh weather, by disease, and by pests.  If our suppliers find their raw materials scarce due to drought, flood, storm, blight, or the other woes of farming, they will increase their prices and may be unable to satisfy our orders.  If, as a result, we are unable to produce sufficient products at reasonable prices to meet demand, our distribution network is likely to atrophy.  This could have a long-term negative effect on our ability to grow our business, in addition to the near-term loss of income.

We may have difficulty establishing adequate management and financial controls in China.
 
The People’s Republic of China has only recently begun to adopt the management and financial reporting concepts and practices that investors in the United States are familiar with.  We may have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls that are expected of a United States public company.  If we cannot establish such controls, we may experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. standards.
 
The staff of our accounting department lack training and experience in U.S. accounting principles, which may result in accounting errors in the financial statements that we file with the Securities and Exchange Commission.

Our executive offices are located in Leling in the PRC. Our entire bookkeeping and accounting staff is located there.  Our books and records are maintained in Chinese, using Chinese accounting principles. Chinese accounting principles vary in many important respects from U.S. accounting principles. To file our Company’s financial statements with the Securities and Exchange Commission, our accounting staff must convert the financial statements from Chinese accounting principles to U.S. accounting principles.  However, none of the members of our accounting staff has extensive experience or training in the preparation of financial statements under U.S. accounting principles.  Neither do we have any employee who has previous experience in accounting for a U.S. public company.  This situation creates a risk that the financial statements we file with the SEC will fail to present our financial condition and/or results of operations as required by SEC rules and the principles of accounting generally applied in the United States.

We may incur significant costs to ensure compliance with U.S. corporate governance and accounting requirements.
 
We may incur significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, and other rules implemented by the Securities and Exchange Commission. We expect all of these applicable rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors, on committees of our board of directors or as executive officers.
 
 
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As a public company, we are required to comply with rules and regulations of the SEC, including expanded disclosure, accelerated reporting requirements and more complex accounting rules.  This will continue to require additional cost management resources. We will need to continue to implement additional finance and accounting systems, procedures and controls as we grow to satisfy these reporting requirements. In addition, we may need to hire additional legal and accounting staff with appropriate experience and technical knowledge, and we cannot assure you that if additional staffing is necessary that we will be able to do so in a timely fashion. If we are unable to complete the required annual assessment as to the adequacy of our internal reporting or if our independent registered public accounting firm is unable to provide us with an unqualified report as to the effectiveness of our internal controls over financial reporting in the future, we could incur significant costs to become compliant.

Capital outflow policies in China may hamper our ability to pay dividends to shareholders in the United States.
 
The People’s Republic of China has adopted currency and capital transfer regulations. These regulations require that we comply with complex regulations for the movement of capital. Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange. We may be unable to obtain all of the required conversion approvals necessary for our operations, and Chinese regulatory authorities may impose greater restrictions on the convertibility of the RMB in the future. Because most of our future revenues will be in RMB, any inability to obtain the requisite approvals or any future restrictions on currency exchanges will limit our ability to pay dividends to our shareholders.
 
Currency fluctuations may adversely affect our operating results.
 
Leling Jinzanghuang generates revenues and incurs expenses and liabilities in Renminbi, the currency of the People’s Republic of China.  However, as a subsidiary of the Company, it will report its financial results in the United States in U.S. Dollars.  As a result, our financial results will be subject to the effects of exchange rate fluctuations between these currencies.  From time to time, the government of China may take action to stimulate the Chinese economy that will have the effect of reducing the value of Renminbi.  In addition, international currency markets may cause significant adjustments to occur in the value of the Renminbi.  Any such events that result in a devaluation of the Renminbi versus the U.S. Dollar will have an adverse effect on our reported results.  We have not entered into agreements or purchased instruments to hedge our exchange rate risks.
 
All of our assets are located in China.  So any dividends or proceeds from liquidation are subject to the approval of the relevant Chinese government agencies.
 
Our assets are located inside China. Under the laws governing FIEs in China, dividend distribution and liquidation are allowed but subject to special procedures under the relevant laws and rules. Any dividend payment will be subject to the decision of the board of directors and subject to foreign exchange rules governing such repatriation. Any liquidation is subject to both the relevant government agency’s approval and supervision as well the foreign exchange control. This may generate additional risk for our investors in case of dividend payment or liquidation.

We have limited business insurance coverage.
 
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.

 
8

 
 
Because our funds are held in banks which do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.

Banks and other financial institutions in the People’s Republic of China do not provide insurance for funds held on deposit. As a result, in the event of a bank failure, we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.
 
Jinzanghuang Tibet Pharmaceuticals is not likely to hold annual shareholder meetings in the next few years.
 
Management does not expect to hold annual meetings of shareholders in the next few years, due to the expense involved.  The current members of the Board of Directors were appointed to that position by the previous directors.  If other directors are added to the Board in the future, it is likely that the current directors will appoint them.  As a result, the shareholders of the Company will have no effective means of exercising control over the operations of the Company.

ITEM 1B.             UNRESOLVED STAFF COMMENTS

Not Applicable.

ITEM 2.                DESCRIPTION OF PROPERTY

 Our executive offices and marketing operations are located on Kaiyuan Avenue, Leling City, Shandong Province, P. R. China .  Our portion of the building has a total usable area of 50 square meters.    The office will be adequate for our operations for the foreseeable future.
 
On May 13, 2009 we purchased a building and land lease for 4 million Renminbi (approximately $634,920).   The building has a usable area of 2,866.23 square meters.  Our plan is to renovate the building, then locate our Research and Development Center and offices there, while retaining the use of some of the space as rental property.  To date, however, we have not obtained the approvals from the Chinese government that are necessary before we initiate this development project.
 
 ITEM 3.               LEGAL PROCEEDINGS

None.

ITEM 4.                MINE SAFETY DISCLOSURES

Not applicable.
PART II
 
ITEM 5.               MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
(a) Market Information
 
During the past two fiscal years, our common stock has been listed for quotation on either the OTC Bulletin Board or the OTCQB system maintained by OTC Markets, all under the symbol “JZHG.”  The following table sets forth for the respective periods indicated the prices of the common stock, as reported by either the OTC Bulletin Board or the OTCQB.  Such prices are based on inter-dealer prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions. 

 
9

 

Quarter Ended
 
High Bid
   
Low Bid
 
September 30, 2010
  $ 1.01     $ 0.12  
December 31, 2010
  $ 0.80     $ 0.08  
March 31, 2011
  $ 0.59     $ 0.45  
June 30, 2011
  $ 0.49     $ 0.45  
                 
September 30, 2011
  $ 0.20     $ 0.01  
December 31, 2011
  $ 1.00     $ 0.01  
March 31, 2012
  $ 0.42     $ 0.13  
June 30, 2012
  $ 0.20     $ 0.20  

 (b) Shareholders
 
On September 6, 2012 there were 288 holders of record of our common stock.

(c)  Dividends
 
Since the Company’s incorporation, no dividends have been paid on our Common Stock. We intend to retain any earnings for use in our business activities, so it is not expected that any dividends on our common stock will be declared and paid in the foreseeable future.

(d)  Securities Authorized for Issuance Under Equity Compensation Plans

The information set forth in the table below regarding equity compensation plans (which include individual compensation arrangements) was determined as of June 30, 2012.

   
Number of securities
to be issued upon
exercise of outstanding
options, warrants
and rights
 
Weighted average
 exercise price of
 outstanding options,
warrants and rights
 
Number of
 securities remaining
 available for future
 issuance under equity compensation plans
 
Equity compensation plans approved by security holders
    0  
N.A.
    0  
Equity compensation plans not approved by security holders
    0  
N.A.
    0  
         Total
    0  
N.A.
    0  

(e)  Sale of Unregistered Securities
 
Jinzanghuang did not effect any unregistered sales of equity securities during the quarter ended June 30, 2012.

 (f) Repurchase of Equity Securities
 
Jinzanghuang did not repurchase any of its equity securities that were registered under Section 12 of the Securities Act during the quarter ended June 30, 2012.  
 
ITEM 6.                SELECTED FINANCIAL DATA

Not applicable.
 
 
10

 
 
ITEM 7.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Accounting for Variable Interest
 
Jinzanghuang Tibet Pharmaceuticals, Inc. is a holding company whose only asset is an indirect 100% ownership interest in Beijing Taibodekang Management Consulting Co., Ltd. (“Beijing Taibodekang”), a Wholly Foreign Owned Entity organized under the laws of the People’s Republic of China on December 5, 2008.  On January 4, 2009, Beijing Taibodekang entered into four agreements with Leling Jinzanghuang Biotech Co. Ltd. (“Leling Jinzanghuang”) and with the equity owners in Leling Jinzanghuang.  Three of the agreements were amended as of July 24, 2009.  Collectively, the agreements provide Beijing Taibodekang exclusive control over the business of Leling Jinzanghuang.  The relationship is one that is generally identified as “entrusted management.”
 
The accounting effect of the Entrusted Management Agreements between Beijing Taibodekang and Leling Jinzanghuang is to cause the balance sheets and financial results of Leling Jinzanghuang to be consolidated with those of Beijing Taibodekang, with respect to which Leling Jinzanghuang is now a variable interest entity.  Since the parties to the Entrusted Management Agreements were both controlled by Xue Bangyi, who is CEO of both Beijing Taibodekang and Leling Jinzanghuang, the financial statements included in this report reflect the consolidation of the results of operations and cash flows of Leling Jinzanghuang since its inception.
 
Outline of Our Business

Since its formation, Leling Jinzanghuang has been involved in the distribution of Tibetan pharmaceutical and nutraceutical products manufactured by Shandong Jinzanghuang, the primary equity owner of which is Xue Bangyi.   Until October 2010 Leling Jinzanghuang served as a distributor of those products.  After achieving modest sales ($27,219) in the first quarter of fiscal 2011, Leling Jinzanghuang suspended its distribution operations in October 2010.  Since October 2010 Leling Jinzanghuang has been exclusively engaged in providing advisory services to sauna stores that purchase sauna care products from Shandong Jinzanghuang.

On October 8, 2010, Leling Jinzanghuang entered into an agency agreement with Shenyang Jintao Technology Co., Ltd. (“Jintao”), pursuant to which Jintao has introduced 158 sauna stores to Leling Jinzanghuang. Shandong Jinzanghuang sells its Tibetan medicine products to the sauna stores and Leling Jinzanghuang provides training service to each store to coach the store’s employees in methods of integrating the Shandong Jinzanghuang products into the sauna service. Leling Jinzanghuang has paid Jintao a fee, ranging from RMB 8,000 ($1,269) to RMB 8,800 ($1,396) for each store Jintao has introduced.

The contract among Leling Jinzanghuang, Shandong Jinzanghuang and the sauna store provides that the store will purchase products, as needed, directly from Shandong Jinzanghuang.  In compensation for Leling Jinzanghuang’s advisory services, the sauna store pays Leling Jinzanghuang a fee equal to a percentage of the resale price charged by the sauna store to its customers for the Shandong Jinzanghuang products. The fee is either 35% or 40% of the resale price, depending on the location of the sauna store. At each month end, each store sends a usage record to Leling Jinzanghuang. Leling Jinzanghuang also makes a physical inventory count quarterly to compare remaining inventory with the quantity delivered by Shandong Jinzanghuang.

This new business model provides Leling Jinzanghuang with a revenue stream for which it incurs very little direct cost, as the product manufacture and distribution is entirely the responsibility of Shandong Jinzanghuang. In addition, entry into this new market has not forced us to incur significant start-up costs, as we have used the same employees and same facilities for the sauna market as carried on our prior product distribution activities.

Results of Operations

The following tables present certain consolidated statements of operations information. Financial information is presented for the twelve months ended June 30, 2012 and 2011, respectively.
 
 
11

 
 
     
For the 12 months ended June 30
     
Change
 
     
2012
     
2011
     
Amount
     
%
 
Revenue
  $ 10,653,015     $ 3,716,529       6,936,486       187 %
Cost of goods sold
    2,219,438       720,310       1,499,128       208 %
Gross profit
    8,433,577       2,996,219       5,437,358       181 %
Operating expenses
    353,931       142,551       211,380       148 %
Operating income/(loss)
    8,079,646       2,565,373       5,514,273       215 %
Net profit/(loss)
    6,153,552       1,865,988       4,287,564       230 %

Revenues

Through September 2010, our revenue arose from the resale of Tibetan pharmaceutical and health products manufactured by Shandong Jinzanghuang. During the first quarter of fiscal year 2011 we sold health products for $27,219, and obtained a gross profit of $2,422 on the sales. At the end of that quarter, however, we suspended our resale operations and initiated the sauna store program that now provides our revenue.

Our sauna store program began in October 2010 with a trial group of 50 sauna stores.  At the end of December 2010 we added another 50 stores to our program, and then added another 50 at the end of March 2011.  As a result, during fiscal 2011, our revenue from advisory services increased from quarter to quarter.  The revenue growth was roughly proportionate to the growth in number of stores, except that the third quarter in 2011 was particularly profitable.  This occurred because the Chinese Spring Festival, which occurs during that quarter, affords most Chinese workers from one to two weeks of vacation, during which time the sauna stores experienced a sharp increase in business.

Since March 2011 we have added only eight more sauna stores, and have retained the original 150. Nevertheless our revenue grew sharply in the twelve months ended June 30, 2012 and on a quarter to quarter basis. The increase was primarily caused by a marked increase in per store revenue, which we attribute to growing awareness of our product line. As a result, during the twelve months ended June 30, 2012, our revenue from the sauna stores program was $10,653,015, an increase of $6,936,486 or189% from $3,689,310 recorded during the twelve months ended June 30, 2011.

The following table shows the elements that have contributed to the growth in our revenue over the past seven fiscal quarters.

     
Fiscal 2011
   
Fiscal 2012
 
        Q2       Q3       Q4       Q1       Q2       Q3       Q4  
Service fees from sauna stores       554,543       1,419,313       1,715,454       2,564,583       2,659,182       2,712,438       2,716,812  
Quantity of sauna stores
    50       100       150       158       158       158       158  
Average revenue per store       11,091       14,193       11,436       16,232       16,830       17,167       17,195  

We have held our market steady at 158 stores for the past year, because we recognize that the greatest danger to the success of our business plan would be careless growth. With a client base of 158 stores, we are able to analyze the effectiveness of our marketing program, our product offerings, our management controls, and our financial systems, and to rectify shortcomings in any of those areas. We have been careful to assure that demand for our products has never exceeded supply; that our clients can rely on the timely delivery of their orders. Our goal is to optimize the relationship we have with these 158 stores, then use these initial 158 sauna stores as the foundation on which our business will grow.
 
Gross profit

The change in our business model to the sauna store program has resulted in a marked improvement in our gross margin.  Because we have no cost of goods sold, our cost of sales is primarily direct labor and business taxes. As a result, during the twelve months ended June 30, 2011, we realized a gross margin of 81% (which included the minor product resale transactions in the first quarter of that fiscal year).  Our revenue during the twelve months ended June 30, 2012 yielded a gross margin of 79%. The primary reason for the reduction in our gross margin ratio is that we have committed additional sales personnel to the program in order to continue the increase in our per-store sales.  
 
 
12

 
 
Operating expenses

The Company’s general and administrative expenses increased from $142,551 for the twelve months ended June 30, 2011 to $353,931 for the twelve months ended June 30, 2012, an increase of 148%. Most of those expenses are office expenses, including wages of our administrative personnel. The fact that we have been able to increase revenue several-fold with only a modest increase in our general and administrative expenses reflects the lower costs involved in the sauna service business, where Shandong JZH and our agent provide most of the marketing services.

During the twelve months ended June 30, 2011, when we determined that we would not be engaged in reselling products during the immediate future, we recorded an inventory impairment loss of $288,295. We classified it as operating expense as well.

After deducting the aforesaid operating expenses from our gross profit, the Company recorded $8,079,646 in operating income for the twelve months ended June 30, 2012. This represented an increase of $5,514,273, or 215%, compared with the twelve months ended June 30, 2011.
 
Net income

Our Chinese operating entity, Leling Jinzanghuang, is subject to tax in China at the statutory rate of 25% of income calculated in accordance with Chinese accounting principles. Accordingly, for the twelve months ended June 30, 2012 we accrued an income tax expense of $1,946,705.  After deducting that accrual, the Company reported net income of $6,153,552 for the twelve months ended June 30, 2012. For the twelve months ended June 30, 2011, we accrued an income tax expense of $700,995 and generated net income of $1,865,988.  This represented an increase in net income of $4,287,564 or 230%.

The entrusted management agreements assign to Beijing Taibodekang only 95% of the income generated from Leling Jinzanghuang.  For that reason, we deducted a “non-controlling interest” of $303,952 before recognizing net income attributable to the Company on our Consolidated Statements of Operations and Comprehensive Income.  After that deduction and taking into account the income and expenses incurred by the parent corporation, our net income attributable to the Company for the twelve months ended June 30, 2012 was $5,849,600, representing $0.15 per share. For the twelve months ended June 30, 2011, we deducted a “non-controlling interest” of $93,688 and the net income attributable to the Company was $1,772,300, representing $0.05 per share.
 
Liquidity and Capital Resources

To date, our operations have been funded by contributions to capital by our founders and by the net cash provided by our operations.  As a result, at June 30, 2012 we had no bank debt and only a $36,630 obligation to a related party. At the same time, we had $8,584,928 in cash at June 30, 2012 as well as net working capital totaling $8,867,557, an increase of $6,254,660 since our last fiscal year ended on June 30, 2011.  We supplemented our cash reserves on July 31, 2012 by selling ten million shares of our common stock for a total of $1,000,000. So our capital resources are more than sufficient to fund our operations for the coming year as they are currently structured.

During the twelve months ended June 30, 2012, our operating activities provided $6,607,338 in net cash, compared to $2,071,542 in net cash during the twelve months ended June 30, 2011, an increase of $3,995,796 or 193%.  The net cash provided in the recent period was slightly lower than our net income for the twelve months ended June 30, 2012 due to the$407,126 increase in accounts receivable. Net cash provided by operating activities in fiscal 2011 was slightly larger than our net income for the twelve months ended June 30, 2011 due to the increase in accrued expenses.

 
13

 
 
Over the long term, our expectation is that we will utilize our capital resources as well as any additional investments that we secure in order to expand our presence in the market for Tibetan medicine.  At the present time, however, we are able to operate profitably without significant additional investment.  Moreover, our observation of the equity markets indicates that we would be unlikely to obtain financing on favorable terms at this time.  Accordingly, our near term plan is to continue the program that we initiated during the past year, utilizing the resources available to us.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

Critical Accounting Policies and Estimates

In preparing our financial statements we are required to formulate working policies regarding valuation of our assets and liabilities and to develop estimates of those values.  In our preparation of the financial statements for the year ended June 30, 2012, there were two estimates made which were (a) subject to a high degree of uncertainty and (b) material to our results.  These were:

·
Our determination to record no allowance for bad debts.  We made that determination based on the fact that all of our client sauna stores have accounts for at least nine months, each has paid its account in a timely fashion in the past, and all accounts at June 30, 2012 were in compliance with our credit terms.
·
Our determination to record the real property that we purchased for future development at its purchase price.  We made the determination based on our expectation that we will, within a reasonable time, develop the property and devote it to productive use.
 
In addition, the Company considers the following accounting principles to be of particular importance.

Variable Interest Entity

For the reasons set forth in the introduction to this Item, we consolidate the financial condition and results of operations of Leling JZH in the Company’s financial statements because Leling JZH meets the definition of a variable interest entity set forth in ASC 810.  We report as a non-controlling minority interest the allocation of earnings to the VIE owners who are not at risk for the majority of losses of Leling JZH.

Revenue recognition

On October 8, 2010, the Company entered into an agency agreement with Shenyang Jintao Technology Co., Ltd. (“Jintao”), pursuant to which Jintao has introduced sauna stores to Leling JZH and Shandong JZH. Shandong products are marketed by the sauna stores to their customers as part of a sauna-based beauty and health regimen. The Company primarily provides information flow between the sauna stores and Shandong JZH. The Company recognizes revenue from provision of services to sauna stores based on units of the sauna store’s product usage, which is the contractual method of determining the right to revenue. The revenue is recognized at 35% or 40% of sauna stores’ revenue from sale of Shandong JZH products. The percentage is depending on the location of the sauna store.  Payments are made to the Company directly from the sauna stores a month after the end of the month in which the sales occurred.

Impact of Accounting Pronouncements

There were no recent accounting pronouncements that have had a material effect on the Company’s financial position or results of operations.

 
14

 
 
Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

ITEM 7A.            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 8.                FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
Index to the Consolidated Financial Statements

Page
F-1
Report of Independent Registered Public Accounting Firm - 2012.
   
F-2
Report of Independent Registered Public Accounting Firm - 2011.
   
F-3
Condensed Consolidated Balance Sheets as of June 30, 2012 and 2011.
   
F-4
Condensed Consolidated Statements of Operations and Comprehensive Income for the Fiscal Years Ended June 30, 2012 and 2011.
   
F-5
Consolidated Statements of Changes in Stockholders’ Equity for the Fiscal Years Ended June 30, 2012 and 2011.
   
F-6
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2012 and 2011.
   
F-7 to F-15
Notes to Consolidated Financial Statements.
 
 
15

 

Stan J.H. Lee, CPA
2160 North Central Rd, Suite 209 * Fort Lee * NJ 07024
P.O. Box 436402 *  San Diego * CA * 92143-6402
619-623-7799 Fax 619-564-3408 E-mail) stan2u@gmail.com


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
Jinzanghuang Tibet Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheets of Jinzanghuang Tibet Pharmaceuticals, Inc. (the Company) as of June 30, 2012 , and the related consolidated  statements of operation, shareholders’ equity and cash flows for the fiscal year then ended . These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Jinzanghuang Tibet Pharmaceuticals, Inc. as of June 30, 2011, were audited by other auditors whose report dated  October 13, 2011  expressed an unqualified opinion on those statements.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Jinzanghuang Tibet Pharmaceuticals, Inc. as of June 30, 2012 , and the results of its operation and its cash flows for the fiscal year then ended in conformity with U.S. generally accepted accounting principles.
 
 
/s/ Stan J.H. Lee, CPA
----------------------------------
Stan J.H. Lee, CPA
Fort Lee, NJ, 07024 US
September 12, 2012


 
F - 1

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Jinzanghuang Tibet Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheet of Jinzanghuang Tibet Pharmaceuticals, Inc. (the Company) as of June 30, 2011 and the related statements of operations and comprehensive income (loss), stockholders’ equity and cash flows for the year ended June 30, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Jinzanghuang Tibet Pharmaceuticals, Inc. as of June 30, 2011 and the results of its operations and cash flows for the year ended June 30, 2011 in conformity with accounting principles generally accepted in the United States of America.

/s/ De Joya Griffith & Company, LLC
Henderson, Nevada
October 13, 2011


 
F - 2

 
 
JINZANGHUANG TIBET PHARMACEUTICALS, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Audited)
 
 
 
   
  ASSETS  
June 30,
   
June 30,
 
   
2012
   
2011
 
CURRENT ASSETS:
           
Cash
  $ 8,584,928     $ 2,176,655  
Accounts receivable
    899,957       482,263  
Due from related party
    -       265,102  
Contract deposit
    -       135,376  
Prepaid expenses and other current assets
    3,997       24,744  
Deferred tax assets
    10,974       91,177  
TOTAL CURRENT ASSETS
    9,499,856       3,175,317  
                 
Property and equipment, net of accumulated depreciation
    403,477       409,554  
Intangible assets, net of accumulated amortization
    188,612       188,739  
                 
TOTAL  ASSETS
  $ 10,091,945     $ 3,773,610  
                 
                 
  LIABILITIES AND STOCKHOLDERS' EQUITY                
                 
CURRENT LIABILITIES:
               
Due to related party
  $ 36,630     $ 35,910  
Accrued expenses and other current liabilities
    595,669       526,510  
                 
TOTAL CURRENT LIABILITIES AND TOTAL LIABILITIES
    632,299       562,420  
                 
STOCKHOLDERS' EQUITY:
               
Common stock, $0.001 par value, 300,000,000 shares authorized, 40,665,063 and 40,665,063 shares issued and outstanding at June 30, 2012 and June 30, 2011, respectively
    40,665       40,665  
Additional paid-in capital
    1,264,427       1,264,427  
Retained earnings
    7,493,615       1,644,015  
Accumulated other comprehensive income
    189,704       100,657  
                 
TOTAL STOCKHOLDERS' EQUITY OF THE COMPANY
    8,988,411       3,049,764  
                 
Non-controlling interests
    471,235       161,426  
                 
TOTAL STOCKHOLDERS' EQUITY
    9,459,646       3,211,190  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 10,091,945     $ 3,773,610  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
F - 3

 

JINZANGHUANG TIBET PHARMACEUTICALS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 
(Audited)
 
             
   
The year Ended June 30,
 
   
2012
   
2011
 
REVENUE
           
    Pharmaceutical products
  $ -     $ 27,219  
    Services
    10,653,015       3,689,310  
      10,653,015       3,716,529  
COST OF SALES
               
    Pharmaceutical products
    -       24,797  
    Services
    1,636,392       475,023  
    Business and sales related tax
    583,046       220,490  
      2,219,438       720,310  
                 
GROSS PROFIT
    8,433,577       2,996,219  
                 
COSTS AND EXPENSES
               
    General and administrative expenses
    353,931       142,551  
    Loss on inventory impairment
    -       288,295  
OPERATING INCOME
    8,079,646       2,565,373  
                 
OTHER INCOME
    20,611       1,610  
                 
INCOME BEFORE INCOME TAX
    8,100,257       2,566,983  
                 
INCOME TAX
    1,946,705       700,995  
                 
NET INCOME
    6,153,552       1,865,988  
                 
LESS: NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS
    303,952       93,688  
                 
NET INCOME ATTRIBUTABLE TO THE COMPANY
    5,849,600       1,772,300  
                 
OTHER COMPREHENSIVE INCOME
               
    Foreign currency translation gain, net of tax
    89,047       97,582  
                 
COMPREHENSIVE INCOME
    5,938,647       1,869,882  
                 
LESS: OTHER COMPREHENSIVE INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS
    5,857       3,767  
                 
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE COMPANY
  $ 5,932,790     $ 1,866,115  
                 
Basic and diluted earnings per common share
  $ 0.15     $ 0.05  
                 
Weighted average number of shares outstanding
    40,665,063       40,665,063  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
F - 4

 

JINZANGHUANG TIBET PHARMACEUTICALS, INC.
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
 
(Audited)
 
                                   
           
ADDITIONAL
 
RETAINED
 
OTHER
 
TOTAL
         
   
COMMON
     
PAID-IN
 
EARNINGS
 
COMPREHENSIVE
 
SHAREHOLDERS'
 
NON-CONTROLLING
     
   
STOCK
 
AMOUNT
 
CAPITAL
 
(DEFICIT)
 
INCOME (LOSS)
 
EQUITY
 
INTERESTS
 
TOTAL
 
                                   
BALANCE - JUNE 30, 2010
    40,665,063     $ 40,665     $ 1,264,427     $ (128,285 )   $ 6,842     $ 1,183,649     $ 63,971     $ 1,247,620  
                                              -               -  
Net profit
                            1,772,300               1,772,300       93,688       1,865,988  
Foreign currency translation gain, net of tax
                                    93,815       93,815       3,767       97,582  
                                                                 
BALANCE - JUNE 30, 2011
    40,665,063     $ 40,665     $ 1,264,427     $ 1,644,015     $ 100,657     $ 3,049,764     $ 161,426     $ 3,211,190  
                                                                 
Net profit
                            5,849,600               5,849,600       303,952       6,153,552  
Foreign currency translation gain, net of tax
                                    89,047       89,047       5,857       94,904  
                                                                 
BALANCE -June 30, 2012
    40,665,063     $ 40,665     $ 1,264,427     $ 7,493,615     $ 189,704     $ 8,988,411     $ 471,235     $ 9,459,646  

The accompanying notes are an integral part of these consolidated financial statements.


 
F - 5

 

JINZANGHUANG TIBET PHARMACEUTICALS, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOW
 
(Unaudited)
 
             
             
   
THE YEAR ENDED JUNE 30,
 
   
2012
   
2011
 
OPERATING ACTIVITIES:
           
Net income
  $ 6,153,552     $ 1,865,988  
Adjustments to reconcile net income to net cash provided by operating activities:
               
     Depreciation and amortization
    22,563       19,643  
     Inventory impairment
    -       288,295  
     Deferred tax
    81,961       (72,074 )
Changes in operating assets and liabilities:
               
     Accounts receivable
    (407,126 )     (482,263 )
     Inventory
    -       25,418  
     Advance to supplier
    -       (10,471 )
     Contract deposit
    148,540       3,867  
     Accrued expenses and other current liabilities
    67,848       433,139  
NET CASH PROVIDED BY OPERATING ACTIVITIES
    6,067,338       2,071,542  
                 
INVESTING ACTIVITIES:
               
    Due from related party
    272,512       (14,926 )
    Acquisition of property and equipment
    (3,320 )     (12,632 )
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    269,192       (27,558 )
                 
FINANCING  ACTIVITIES:
               
    Due to related party
            35,910  
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    -       35,910  
                 
EFFECT OF EXCHANGE RATE ON CASH
    71,744       54,577  
                 
INCREASE IN CASH
    6,408,274       2,134,471  
                 
CASH - BEGINNING OF PERIOD
    2,176,655       42,184  
                 
CASH - END OF PERIOD
  $ 8,584,929     $ 2,176,655  
                 
Supplemental disclosures of cash flow information:
               
   Cash paid for income tax
  $ 1,783,203     $ 572,292  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
F - 6

 

JINZANGHUANG TIBET PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2012 AND 2011


1              BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES

Business description

Jinzanghuang Tibet Pharmaceuticals, Inc. (“the Company”) is engaged in providing consulting services to facilitate the distribution of Tibetan pharmaceutical and nutraceutical products in the People’s Republic of China (“PRC”).  The Company’s operations are carried out through Beijing Taibodekang Consulting Co., Ltd. (“BTC”) and Leling Jinzanghuang Biotech Co., Ltd. (Leling JZH).
 
On January 12, 2009 Jinzanghuang Tibet Pharmaceuticals, Inc.  acquired all of the outstanding capital stock of Tibet Medicine, Inc. (“TMI”), a Delaware corporation, in exchange for 36,401,462 shares of its common stock issued to the shareholders of TMI, representing 89.6% of the issued and outstanding shares of the Company.
 
For accounting purposes, the above transaction was accounted for as a reverse merger. TMI became the surviving entity for accounting purposes, whereas the Company is recognized as the surviving entity for legal purposes.
 
TMI was organized under the laws of Delaware on September 4, 2008 and is the 100% owner of the registered capital of BTC.
 
BTC is a Wholly Foreign Owned Entity that was organized under the laws of the People’s Republic of China on December 5, 2008. On January 4, 2009, BTC entered into four ten-year agreements (the “Entrusted Management Agreements”) with Leling JZH and its registered equity holders.  Three of the agreements were amended as of July 24, 2009.  The purpose of these agreements is to transfer to BTC full responsibility for the management of Leling JZH, as well as 95% of the financial benefits that arise from the business of Leling JZH. As a result, BTC now has control over the business of Leling JZH and is considered a variable interest entity.  For that reason, the results of operations of Leling JZH have been included with the Company’s condensed consolidated financial statements.
 
Leling JZH was incorporated under the laws of PRC as a limited liability company on November 20, 2008. 
 
Basis of presentation
 
The audited consolidated financial statements presented herein include the accounts of Jinzanghuang Tibet Pharmaceuticals, Inc., its wholly owned subsidiary (BTC) and variable interest entity (Leling JZH).  All inter-company transactions and balances among the Company and its subsidiaries are eliminated upon consolidation.  In the opinion of management, all adjustments and normal recurring accruals considered necessary for a fair statement of the results for the period have been included.

The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) and are presented in U.S. Dollars.

Uses of estimates in the preparation of financial statements

The preparation of financial statements in conformity with generally accepted accounting principles 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 revenue and expenses during each reporting period.  Actual results could differ from those estimates.

 
F - 7

 

JINZANGHUANG TIBET PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2012 AND 2011
 

1              BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Variable Interest Entity

Effective January 1, 2009, the Consolidation Topic, ASC 810-10-45-16, revised the accounting treatment for non-controlling minority interests of partially-owned subsidiaries.  Non-controlling minority interests represent the allocation of earnings to the VIE owners who are not at risk for the majority of losses of the VIE, which have been accounted for by using the consolidation method of accounting.

The accounts of Leling JZH have been consolidated with the accounts of the Company because Leling JZH is a variable interest entity with respect to Beijing Taibodekang, which is a wholly-owned subsidiary of the Company.  Beijing Taibodekang has a contractual obligation to provide management services to Leling JZH, and the management of the operations of Leling JZH is carried out by Company personnel in fulfillment of that obligation.  Beijing Taibodekang also has a contractual obligation to reimburse Leling JZH for any losses incurred as a result of the operations of Leling JZG, and the Company’s principal shareholders caused funds to be contributed to Leling JZG during the years ended June 30, 2010 and 2009 in satisfaction of that obligation.  The carrying amount and classification of Leling JZH’s assets and liabilities included in the Condensed Consolidated Balance Sheets are as follows:

   
June 30, 2012
   
June 30, 2011
 
Total current assets
 
$
9,418,343
   
$
3,127,466
 
Total assets
   
10,010,432
     
3,805,962
 
Total current liabilities
   
589,677
     
557,999
 
Total liabilities
   
589,677
     
557,999
 

The amounts shown in the above table as of June 30, 2011 include intercompany payables and receivables that have been eliminated in consolidating Leling JZH with the Company. As of June 30, 2012, Leling JZH has settled all its payables and receivables with TMI and Beijing Taibodekang. As of June 30, 2012 and June 30, 2011, $0 and $66,883 were receivable from TMI for expenses paid by Leling JZH. As of June 30, 2012 and June 30, 2011, $0 and $51,675 were payable to Beijing Taibodekang for management fees.

The Consulting Agreement between Leling Jinzanghuang and Beijing Taibodekang requires that, in payment for the consulting services provided by Beijing Taibodekang, Leling Jinzanghuang will pay fees to Beijing Taibodekang equal to:
 
 
·
10,000 RMB per month, plus
 
·
95% of the annual gross profit of Leling Jinzanghuang.
 
The Consulting Agreement also provides, however, that Beijing Taibodekang will reimburse Leling Jinzanghuang for the amount of any net loss incurred by Leling Jinzanghuang during the period when it is managed by Beijing Taibodekang.

Revenue recognition

The Company recognizes revenue from provision of services to sauna stores based on units of the sauna store’s product usage, which is the contractual method of determining the right to revenue. The revenue is recognized at 35% or 40% of sauna stores’ revenue from sale of Shandong JZH products. The percentage is depending on the location of the sauna store.  Payments are made to the Company directly from the sauna stores a month after the end of the month in which the sales occurred.

 
F - 8

 

JINZANGHUANG TIBET PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2012 AND 2011

1              BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cash

The Company maintains cash with financial institutions in the People’s Republic of China (“PRC”) which are not insured or otherwise protected.  Should any of these institutions holding the Company’s cash become insolvent, or if the Company is unable to withdraw funds for any reason, the Company could lose the cash on deposit with that institution.

Accounts Receivable

Accounts receivable represent receivables from customers. Reserves for bad debts are based on a combination of current sales, historical charge-offs and specific accounts identified as high risk. Uncollectible accounts receivable are charged against the allowance for doubtful accounts when all reasonable efforts to collect the amounts due have been exhausted. Such allowances, if any, would be recorded in the period the impairment is identified. There is no bad debt expense recorded for the years ended June 30, 2012 or 2011. The balance of allowance for bad debts was $0 and $0 for the years ended June 30, 2012 and 2011, respectively. The accounts receivable balance as of June 30, 2012 is in compliance with the Company’s credit terms.

Property and equipment

Property and equipment are recorded at cost. Depreciation is provided in amounts sufficient to amortize the cost of the related assets over their useful lives using the straight line method.

Long-Lived Assets and Other Acquired Intangible Assets
 
The Company reviews property and equipment and certain identifiable intangibles for impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property and equipment and certain identifiable intangibles are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value. The Company did not record any impairments during the year ended June 30, 2012

Income tax

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires the Company to use the assets and liability method of accounting for income taxes. Under the assets and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forward. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized.


 
F - 9

 

JINZANGHUANG TIBET PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2012 AND 2011
 

1              BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income tax (continued)

ASC 740-10, Accounting for Uncertainty in Income Taxes, defines uncertainty in income taxes and the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.

Enterprise income tax

Under the Provisional Regulations of PRC Concerning Income Tax on Enterprises promulgated by the PRC, income tax is payable by enterprises at a rate of 25% of their taxable income.

Business Taxes and Sales-related Taxes

Pursuant to the tax law and regulations of PRC, Leling JZH is obligated to pay 5% of revenue for business taxes, and 7% and 4% (5% effective in May, 2011) of the annual business taxes paid as tax on maintaining and building cities and education additional fee, both of which belong to sales-related taxes. Sales-related taxes are recorded when revenue is recognized. For the year ended June 30, 2012 and 2011, business taxes and sales-related taxes were $583,046 and $220,490, respectively.
.
Stock-based compensation

The Company records stock-based compensation in accordance with the guidance in ASC Topic 718 which requires the Company to recognize expense related to the fair value of its share-based compensation. This eliminates accounting for share-based compensation transactions using the intrinsic value and requires instead that such transactions be accounted for using a fair-value-based method.

Currency translation

Since the Company operates primarily in the PRC, the Company’s functional currency is the Chinese Yuan (“RMB”).  The Company’s financial statements have been translated into the reporting currency, the United States Dollar (“USD”). Assets and liabilities of the Company are translated at the prevailing exchange rate at each reporting period end date. Contributed capital accounts are translated using the historical rate of exchange when capital is injected. Income and expense accounts are translated at the average rate of exchange during the reporting period. Translation adjustments resulting from translation of these condensed consolidated financial statements are reflected as accumulated other comprehensive income in stockholders’ equity.

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.

 
F - 10

 

JINZANGHUANG TIBET PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2012 AND 2011

 1              BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Statement of Cash Flows
 
In accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the Company’s condensed consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the condensed consolidated balance sheet.

Fair value of financial instruments

The Company adopted the provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
 
The carrying amounts reported in the consolidated balance sheets for cash, due to related party, and accrued expenses, approximate their fair market value based on the short-term maturity of these instruments. The Company did not identify any other assets or liabilities that are required to be presented in the consolidated balance sheets at fair value in accordance with ASC 820.

Earnings per share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share is computed similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.  There are no such additional common shares available for dilution purposes as of June 30, 2012 and 2011.

New Accounting Pronouncements

In December 2011, the FASB issued ASU No.2011-12, deferral of the effective date for Amendments to the presentation of reclassifications of items out of accumulated other comprehensive income in ASU 2011-05. ASU2 2011-12 defers the requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) in both net income and other comprehensive income (“OCI”) on the face of financial statements. All other requirements in ASU No. 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

 
F - 11

 

JINZANGHUANG TIBET PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2012 AND 2011

 1              BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

New Accounting Pronouncements (continued)

In July 2012, the FASB issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” This ASU simplifies how entities test indefinite-lived intangible assets for impairment, which improves consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of indefinite-lived intangible assets is less than their carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  Early adoption is permitted. The company will adopt this ASU beginning with its Quarterly Report on Form 10-Q for the three months ending September 30, 2012. There should be no material impact on the consolidated financial statements upon adoption.

In addition to the ASUs above, in the period ended August 31, 2012, the FASB has issued ASU 2012-03 through ASU 2011-02, which are not expected to have a material impact on the consolidated financial statements upon adoption.

2              CONTRACT DEPOSIT
 
In August 2009, Leling JZH entered into a 10 year contract with the Leling BaiCaoYuan Honeysuckle Planting Cooperative.  Pursuant to the contract, Leling JZH advanced RMB 1,000,000 ($149,031) to be used by the farmers in the Cooperative to plant honeysuckle on 300 acres of land.  As Leling JZH changed its business from distributing Chinese traditional medicines to providing professional service to its customers in October 2010, Leling JZH entered into an oral agreement with Leling BaiCaoYuan to terminate the contract and Leling BaiCaoYuan agreed to refund RMB 1,000,000 ($149,031) back to Leling JZH. As of June, 2012, the Company has received the refund of the contract deposit.

3              RELATED PARTY TRANSACTIONS

Until October 2010 the Company’s business consisted exclusively of the distribution of products manufactured by one supplier, Shandong Jinzanghuang (Tibet) Pharmaceutical Co., Ltd. (“Shandong Jinzanghuang”).  Xue Bangyi, who is the Company’s CEO, owns 91% of the registered capital of Shandong Jinzanghuang and also serves as CEO of that entity.  The Company entered into a three-year distribution contract with Shandong Jinzanghuang on November 21, 2008, which provided Leling JZH marketing rights.  This agreement expired without renewal on November 21, 2011.

Since the Company has changed its business from distribution of products manufactured by Shandong Jinzanghuang to providing training and services to sauna stores in October 2010, the Company did not make any payment to Shandong Jinzanghuang after October 2010. The Company has reclassified the total balance outstanding in “advance to supplier – related party” of $265,102 as of June 30, 2011 to “due from related party”. The Company received the “due from related party” balance in 2012.

As of June, 2012, the Company has an aggregate of $36,630 in “due to related party” for expenses paid by a related party on behalf of the Company.  This is unsecured, bears no interest and is due on demand.  

 
F - 12

 

JINZANGHUANG TIBET PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2012 AND 2011
 
4              PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consists of the following:

   
June 30, 2012
   
June 30, 2011
 
             
Buildings
  $ 431,785     $ 422,527  
Office equipment
    17,881       14,248  
      449,666       436,775  
                 
Less: accumulated depreciation
    46,189       27,221  
                 
Property, plant and equipment, net
  $ 403,477     $ 409,554  

Depreciation expense charged to operations was $18,314 and $14,817 for the year ended June 30, 2012 and 2011, respectively.

5              INTANGIBLE ASSETS, NET

Intangible assets, net, consists of the following:

   
June 30,2012
   
June 30,2011
 
             
Land use right
  $ 200,636     $ 196,333  
Software
    3,004       2,940  
      203,640       199,273  
                 
Less: accumulated amortization
    15,028       10,534  
                 
Intangible assets, net
  $ 188,612     $ 188,739  

Amortization expense charged to operations was $4,250 and $5,643 for the year ended June 30, 2012 and 2011, respectively.

The future minimum amortization expense charged to operations for the coming years is as follows:
 
Years ending June 30:
     
2013
   
4,013
 
2014
   
4,013
 
2015
   
 4,013
 
2016
   
4,013
 
2017
   
4,013
 
Remaining operating lease payments
   
168,534
 
Total future minimum operating lease payments
 
$
188,599
 

 
F - 13

 

JINZANGHUANG TIBET PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2012 AND 2011
 

6             ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

   
June 30, 2012
   
June 30, 2011
 
             
Accrued payroll
 
$
16,445
   
$
26,271
 
Taxes payable
   
 550,028
     
451,076
 
Accrued expenses
   
24,905
     
43,579
 
Other payables
   
 4,292
     
 5,584
 
                 
Accrued expenses and other current liabilities
 
$
595,669
   
$
526,510
 

7              INCOME TAX

Taxes payable consisted of the following:

   
As of June 30,
 
   
2012
   
2011
 
             
Income tax payable
 
$
493,394
   
$
401,147
 
Property and land taxes payable
   
7,538
     
12,292
 
Business taxes payable
   
45,946
     
33,604
 
City and supplement taxes
   
3,150
     
4,033
 
     
  550,028
     
  451,076
 

The provision for income taxes is summarized as follows:

   
June 30, 2012
 
June 30, 2011
 
Current provision
 
$
1,866,502
   
$
773,069
 
Deferred provision
   
80,203
     
(72,074)
 
Total
 
$
1,946,705
   
$
700,995
 

The deferred provision is attributable to the inventory impairment, which is different between financial statement carrying amounts and tax bases. During the year ended June 30, 2012, the China tax bureau failed to  approve the Company’s position that inventory impairment can be a pre-tax deduction.  Accordingly, the balance of the deferred asset has been written off.

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate:

   
June 30, 2012
 
June 30, 2011
 
U.S. statutory rates
   
35%
     
35%
 
Foreign income not recognized in the U.S.
   
(35%)
     
(35%)
 
PRC statutory rates
   
25%
     
25%
 
Effective income tax rates
   
25%
     
25%
 


 
F - 14

 

JINZANGHUANG TIBET PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2012 AND 2011

8              COMMITMENTS AND CONTINGENCIES

(a)          Operating lease commitment
 
The Company leases buildings under non-cancelable operating lease agreements. Based on the current rental lease agreements, the future minimum rental payments required for the coming years are as follows:
 
Years ending June 30:
     
2013
   
884
 
         
Remaining operating lease payments
   
-
 
Total future minimum operating lease payments
 
$
884
 

(b)          Vulnerability due to Operations in PRC

The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC.  Although the PRC government has been pursuing economic reform policies for more than twenty years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRCs political, economic and social conditions.  There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

Substantially all of the Company’s businesses are transacted in RMB, which is not freely convertible.  The Peoples Bank of China or other banks are authorized to buy and sell foreign currencies at the exchange rates quoted by the Peoples Bank of China.  Approval of foreign currency payments by the Peoples Bank of China or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.

Since the Company has its operations in the PRC, all of its revenues will be settled in RMB, not U.S. Dollars. Due to certain restrictions on currency exchanges that exist in the PRC, the Company’s ability to use revenue generated in RMB to pay any dividend payments to its shareholders outside of China may be limited.

9              SUBSEQUENT EVENT

On July 31, 2012 the Company sold 10,000,000 shares of common stock to seven unrelated individuals in a private offering.  The purchase price for the shares was $.10 per share, or a total of $1 million.


 
F - 15

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

Not applicable.

ITEM 9A.            CONTROLS AND PROCEDURES

(a)           Evaluation of Disclosure Controls and Procedures.
 
The term “disclosure controls and procedures” (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report (the “Evaluation Date”). That evaluation disclosed that the Company has material defects in its disclosure controls and procedures.  Specifically they determined that there is a lack of expertise in U.S. GAAP among the Company’s management personnel.  They also determined that the size of the Company’s accounting staff and low number of supervisory personnel prevented an appropriate segregation of accounting functions.  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were not effective.

(b)           Changes in Internal Controls.
 
The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of the year covered by this annual report, and they have concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

(c)            Management’s Report on Internal Control over Financial Reporting.
 
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.  We have assessed the effectiveness of those internal controls as of June 30, 2012, using the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control – Integrated Framework as a basis for our assessment.
 
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.  All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
 
 
16

 
                      
 A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. In the course of making our assessment of the effectiveness of internal controls over financial reporting, we identified two material weaknesses in our internal control over financial reporting.  These material weaknesses consisted of:
 
a.           Lack of expertise in U.S accounting principles among the personnel in our Chinese headquarters.  Our books are maintained and our financial statements are prepared by the personnel employed at our executive offices in the City of Leling.  Few of our management personnel or employees have experience or familiarity with U.S accounting principles.  The lack of personnel in our Leling office who are trained in U.S. accounting principles is a weakness because it could lead to improper classification of items and other failures to make the entries and adjustments necessary to comply with U.S. GAAP.
 
b.           Inadequate staffing and supervision within the accounting operations of our company.  The relatively small number of employees who are responsible for accounting functions prevents us from segregating duties within our internal control system.  The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews.
 
Management is currently reviewing its staffing and their training in order to remedy the weaknesses identified in this assessment.  To date, we are not aware of significant accounting problems resulting from these weaknesses; so we have to weigh the cost of improvement against the benefit of strengthened controls.  However, because of the above conditions, management’s assessment is that the Company’s internal controls over financial reporting were not effective as of June 30, 2012.
 
ITEM 9B.             OTHER INFORMATION

None.
PART III

ITEM 10.             DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The executive officers and directors of the Company are:
 
Name
 
       Age
 
Positions with the Company
 
Director Since
 
Xue Bangyi
    54  
Chairman, Chief Executive Officer
    2009  
Eva Deng
    46  
Director, Chief Financial Officer
    2010  
Luan Dahai
    48  
Director, Vice President
    2010  
Wang Shuxiang
    55  
Executive Vice President
    --  
Liu Min
    52  
Vice President
    --  
Bai Xiaosong
    50  
Vice President
    --  
 
XUE BANGYI. Since 2006 Mr. Xue has been employed as Chairman of Shandong Jinzanghuang (Tibet) Pharmaceuticals Co., Ltd., which is involved in the manufacture and distribution of pharmaceutical and nutraceutical products based on traditional Tibetan medical principles. Shandong Jinzanghuang is the principal supplier of the products marketed by the Company’s subsidiary.  From 1996 until 2006 Mr. Xue was employed as General Manager of Qunming Railway Resources Co., which manufactured equipment in China. Mr. Xue was awarded a degree in Economics and Management by the Wuhan College of Finance.

 EVA DENG.  Ms. Deng brings to the Company nearly twenty years experience in financial management and accounting.  Since 2008 Ms. Deng has been employed as Chief Financial Officer of Beijing Lepro Seva Technology Development Co., Ltd.  From 2006 to 2008 Ms. Deng was employed as Chief Financial Officer of Ambow Education Holding, Ltd. in China.  From 2004 to 2006 she was employed as Chief Financial Officer of Global InfoTech Company, a software developer.  From 1994 to 2003 Ms. Deng was employed as in the Beijing Office of Deloitte China, first as Senior Auditor and then as Auditing Manager.  Ms. Deng is a member of The Association of Chartered Certified Accountants.  In 1991 she was awarded a Bachelor Degree with concentrations in economics and management by Beijing University of Agriculture.

 
17

 
 
LUAN DAHAI.  Since 2010 Mr. Luan has been employed as President by both Leling Jinzanghuang and Shandong Jinzanghuang.  From 1998 to 2007 Mr. Luan was employed as General President of Liaoning Jiangfeng Co., Ltd.  Prior to undertaking that position, Mr. Luan had 15 years of executive experience in China.  He brings to the board extensive experience in marketing and sales, both domestically and internationally.  In 1984 Mr. Luan was awarded a Bachelor Degree with a concentration in Enterprise Management by the Northeast Normal University.

WANG SHUXIANG. From November 2008 until July 2009, Mr. Wang was employed as Chief Executive Officer of Leling Jinzanghuang, the Company’s subsidiary. Mr. Wang also served as a member of the Company’s Board of Directors from 2009 until 2012. Since 2002, Mr. Wang has been employed as Operational Manager of Shandong Jinzanghuang. From 1998 to 2002, Mr. Wang was the Ethics Chair for the Discipline Division of the Health Department of Leling City, Shandong Province. In 1994, Mr. Wang was awarded a degree in Finance Accounting by Shandong College of Economics.

 LIU MIN.  Since 2009 Ms. Liu has been employed as Vice President by both Leling Jinzanghuang and Shandong Jinzanghuang.  Ms. Liu also served as a member of the Company’s Board of Directors from 2009 until 2012.From 2007 to 2009 Ms. Liu was employed as Vice President by Jilin Huangfeng Ginseng Group Corporation.  From 2005 to 2007 Ms. Liu was employed as Vice President by Tianshanqi Pharmaceutical Group Corporation.  From 2003 to 2005 she was employed as Marketing Director by Chengzi Group of Singapore.  From 2000 to 2002 Ms. Liu was employed as Business Controller by the Amway Corporation in the United States.  Prior to taking that position, Ms. Liu had several years of employment as an accountant.   In 1986 Ms. Liu was awarded a degree with a concentration in industrial accounting by the Broadcast and Television University of Jilin Province.

BAI XIAOSONG.  Mr. Bai joined Leling Jinzanghuang in 2010 as Vice President of Sales.  Mr. Bai also served as a member of the Company’s Board of Directors from 2009 until 2012.From 2007 to 2010 he was employed as Vice President by Shanghai Ruiying Chemical Co., Ltd.  From 1992 to 2001 Mr. Bai was employed by Hengfa Property Company as Engineer, with responsibilities for property management.  In 1989 Mr. Bai was awarded a degree with a concentration in mechanics by the Harbin University of Science and Technology (formerly Harbin College of Electrical Engineering.

All of our directors hold offices until the next annual meeting of the shareholders of the Company, and until their successors have been qualified after being elected or appointed.  Officers serve at the discretion of the board of directors.

Audit Committee; Compensation Committee; Nominating Committee.

Our Board of Directors has not yet constituted an audit committee, a compensation committee or a nominating committee.  Decisions regarding nominations to the Board will be made by all currently-serving members of the Board.  The Board has determined that Eva Deng meets the qualifications to serve as our audit committee financial expert, by reason of her experience in public accounting.

Code of Ethics

The Board of Directors has not adopted a code of ethics applicable to the Company’s executive officers.  The Board believes that the small number of individuals involved in the Company’s management makes such a code unnecessary.

 
18

 

Section 16(a) Beneficial Ownership Reporting Compliance

None of the officers, directors or beneficial owners of more than 10% of the Company’s common stock failed to file on a timely basis the reports required by Section 16(a) of the Exchange Act during the year ended June 30, 2011 except that none of our officers or directors other than Xue Bangyi and Wang Shuxiang, has filed a Form 3.

ITEM 11.             EXECUTIVE COMPENSATION

The following table sets forth all compensation awarded to, earned by, or paid by the companies that are currently subsidiaries of Jinzanghuang to Xue Bangyi for services rendered in all capacities to the Company during the years ended June 30, 2012, 2011 and 2010.  There was no officer whose salary and other compensation for the year ended June 30, 2012 exceeded $100,000.

 
Year
 
Salary
   
Bonus
   
Stock
Awards
   
Option
Awards
   
Other
Compensation
 
Xue Bangyi
2012
  $ 4,863       --       --       --       --  
 
2011
  $ 8,772       --       --       --       --  
 
2010
  $ 8,772       --       --       --       --  
 
Employment Agreements

            All of our officers and directors serve on an at-will basis, and none has entered into employment contracts with the company.

Compensation of Directors

The Board of Directors has not adopted any compensation arrangements for its members.

Equity Grants

The following tables set forth certain information regarding the stock options acquired by the Company’s Chief Executive Officer during the year ended June 30, 2012 and those options held by him on June 30, 2012.
 
Option Grants in the Last Fiscal Year
   
 
Number of
securities
underlying
option
   
 
Percent
of total
options
granted to
employees
in fiscal
   
 
Exercise
Price
   
Expiration
   
 
Potential realizable
value at assumed
annual rates of
appreciation
for option term
 
   
granted
   
year
   
($/share)
   
Date
      5 %     10 %
Xue Bangyi
    --       --       --       --       --       --  
 
 
 
19

 
 
The following tables set forth certain information regarding the stock grants received by the executive officers named in the table above during the year ended June 30, 2012 and held by them unvested at June 30, 2012.
 
Unvested Stock Awards in the Last Fiscal Year
 
   
Number of
Shares That
Have Not
Vested
   
Market Value
of Shares That
Have Not
Vested
 
Xue Bangyi
    --       --  
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The following table sets forth information known to us with respect to the beneficial ownership of our common stock as of the date of this prospectus by the following:

 
·
each shareholder known by us to own beneficially more than 5% of our common stock;
 
 
·
Xue Bangyi, our Chief Executive Officer
 
 
·
each of our directors; and
 
 
·
all directors and executive officers as a group.
 
There are 50,665,063 shares of our common stock outstanding on the date of this report.  Except as otherwise indicated, we believe that the beneficial owners of the common stock listed below have sole voting power and investment power with respect to their shares,  subject to community property laws where applicable.  Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission.
 
In computing the number of shares beneficially owned by a person and the percent ownership of that person, we include shares of common stock subject to options or warrants held by that person that are currently exercisable or will become exercisable within 60 days. We do not, however, include these “issuable” shares in the outstanding shares when we compute the percent ownership of any other person.
 
Name  o
Beneficial Owner
 
Amount and Nature
of Beneficial
Ownership(1
   
Percentage
of Class
 
Xue Bangyi
   
4,429,359
     
8.7
%
Wang Shuxiang
   
2,648,935
     
5.2
%
Eva Deng
   
0
     
-
 
Luan Dahai
   
0
     
-
 
Liu Min
   
0
     
-
 
Bai Xiaosong
   
0
     
-
 
All officers and directors as a group (6 persons)
   
7,078,294
     
14.0
%
________________________________
(1)           Except as otherwise noted, all shares are owned of record and beneficially.
  
 
20

 
 
ITEM 13.             CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
Certain Relationships and Related Transactions
 
Xue Bangyi is the Chairman of the Board of Jinzanghuang Tibet Pharmaceuticals.  Xue Bangyi is also the President of Shandong Jinzanghuang.  Details regarding the relationship between the companies is set forth earlier, in the description of the business of Leling Jinzanghuang.

Director Independence
 
None of the members of the Company’s Board of Directors is an independent director, pursuant to the definition of “independent director” under the Rules of The NASDAQ Stock Market.

 ITEM 14.             PRINCIPAL ACCOUNTANT FEES AND SERVICES

Stan Jeong-Ha Lee, CPA was appointed to serve as the Company’s independent registered public accounting firm on June 21, 2012.  Previously De Joya Griffith & Company, LLC has been the company’s independent registered public accounting firm.

Audit Fees

Stan Jeong-Ha Lee, CPA billed $35,000 to the Company for professional services rendered for the audit of financial statements for the fiscal year ended June 30, 2012.  De Joya Griffith & Company, LLC billed $40,000 to the Company for professional services rendered for the audit of financial statements for the fiscal year ended June 30, 2011.

Audit-Related Fees

Stan Jeong-Ha Lee, CPA billed $0 to the Company during fiscal 2012 for assurance and related services that are reasonably related to the performance of the 2012 audit or review of the quarterly financial statements.  De Joya Griffith & Company, LLC billed $0 to the Company during fiscal 2011 for assurance and related services that are reasonably related to the performance of the 2011 audit or review of the quarterly financial statements.

Tax Fees

Stan Jeong-Ha Lee, CPA billed $0 to the Company during fiscal 2012 for professional services rendered for tax compliance, tax advice and tax planning.  De Joya Griffith & Company, LLC billed $0 to the Company during fiscal 2011 for professional services rendered for tax compliance, tax advice and tax planning.

All Other Fees

Stan Jeong-Ha Lee, CPA billed $0 to the Company in fiscal 2012 for services not described above.  De Joya Griffith & Company, LLC billed $0 to the Company in fiscal 2011 for services not described above.
 
 It is the policy of the Company that all services other than audit, review or attest services must be pre-approved by the Board of Directors.  No such services have been performed by either Stan Jeong-Ha Lee, CPA or De Joya Griffith & Company, LLC
 
Subcontracted Services

All work on Stan Jeong-Ha Lee, CPA’s engagement to audit the Company’s financial statements for the year ended June 30, 2012 was performed by full-time permanent employees of Stan Jeong-Ha Lee, CPA. All work on De Joya Griffith & Company, LLC’s engagement to audit the Company’s financial statements for the year ended June 30, 2011 was performed by full-time permanent employees of De Joya Griffith & Company, LLC.

 
21

 
 
ITEM 15.              EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

3-a
Certificate of Incorporation - filed as an exhibit to the Registration Statement on Form 10 filed on May 22, 2008 and incorporated herein by reference.

3-a(1)
Certificate of Amendment to Certificate of Incorporation - filed as an exhibit to the Current Report on Form 8-K filed on March 27, 2009 and incorporated herein by reference.

3-b
Amended and Restated Bylaws - filed as an exhibit to the Registration Statement on Form 10 filed on May 22, 2008 and incorporated herein by reference.

10-a 
Exclusive Technical Service and Business Consulting Agreement dated January 4, 2009 between Beijing Taibodekang Co., Ltd. and Leling Jinzanghuang Biotech Co., Ltd. - filed as Exhibit 10-b to the Current Report on Form 8-K filed on January 20, 2009 and incorporated herein by reference.
 
10-b
Amended and Restated Share Pledge Agreement dated July 24, 2009 among Beijing Taibodekang Co., Ltd., the equity owners in Leling Jinzanghuang Biotech Co., Ltd. and Leling Jinzanghuang Biotech Co., Ltd.
 
10-c
Amended and Restated Call Option Agreement dated July 24, 2009 among Beijing Taibodekang Co., Ltd. and the equity owners in Leling Jinzanghuang Biotech Co., Ltd.
 
10-d
Amended and Restated Proxy Agreement dated July 24, 2009 among Beijing Taibodekang Co., Ltd., the equity owners in Leling Jinzanghuang Biotech Co., Ltd., and Leling Jinzanghuang Biotech Co., Ltd.
  
21
Subsidiaries –  Tibet Medicine, Inc., a Delaware corporation

 
Beijing Taibodekang Co., Ltd., a  PRC corporation
 
31.1
Rule 13a-14(a) Certification – CEO

31.2
Rule 13a-14(a) Certification – CFO

32
Rule 13a-14(b) Certifications
   
101 INS
XBRL Instance Document*
   
101 SCH
XBRL Schema Document*
   
101 CAL
XBRL Calculation Linkbase Document*
   
101 DEF
XBRL Definition Linkbase Document*
   
101 LAB
XBRL Labels Linkbase Document*
   
101 PRE
XBRL Presentation Linkbase Document*

*           The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
 
 
22

 
 
SIGNATURES

           Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
JINZANGHUANG TIBET PHARMACEUTICALS, INC.
   
Date: September 28, 2012
/s/ Xue Bangyi
 
Xue Bangyi, Chief Executive Officer

           Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ Xue Bangyi                           
 
September 28, 2012
Xue Bangyi
   
Director, Chief Executive Officer
   
     
     
 /s/ Eva Deng___________
 
September 28, 2012
Eva Deng, Chief Financial and Accounting Officer, Director
   
     
     
/s/ Luan Dahai                  
 
September 28, 2012
Luan Dahai
   
Director
   
 
 
23
 

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