Net Revenues
Net revenues are comprised of sales of 19 traditional Chinese medicines in China during the twelve months ended June 30, 2012 (we currently sell 19 medicines following our acquisition of Yantai Tianzheng on August 8, 2011). Net revenues for the twelve months ended June 30, 2012 increased by $56,043,937, or 68.9%, to $137,372,492 as compared to $81,328,555 for the twelve months ended June 30, 2011. Net revenues were $93,167,083 and $44,205,409 for Bohai and Yantai Tianzheng, respectively, for the twelve months ended June 30, 2012. The increase in Bohai's revenue was primarily due to a net increase in revenues of 17.7% from our four lead products in Bohai: Lung Nourishing Syrup, Tongbi Capsules, Tongbi Tablets, and Shantongning Tablets, which together accounted for over 82.1% of our total net revenues for Bohai. All of our lead products are listed for coverage and reimbursement under national medical insurance program starting in December 2009. The sale of our prescription drug products for the twelve months ended June 30, 2012 represented 77.5% of total net revenue compared to 60.7% for the same period in last year. The increase in prescription sales was primary due to increases in sales volume from our two prescription drugs, Tongbi Capsules and Tongbi Tablets as well as prescription product sales from Yantai Tianzheng. Yantai Tianzheng was acquired on July 1, 2011.
Cost of Revenues
Cost of revenues is comprised of raw material costs, labor cost, overhead costs associated with the manufacturing processes and related expenses which are directly attributable to our revenues. Our cost of revenues for the twelve months ended June 30, 2012 was $33,532,900 as compared to $17,293,680 for the twelve months ended June 30, 2011, representing an increase of $16,239,220, or 93.9%. Cost of revenues were $20,269,019 and $13,263,881 for Bohai and Yantai Tianzheng, respectively, for the twelve months ended June 30, 2012. The increase in overall cost of revenue was also due to cost of revenues of approximately $8.7 million from Yantai Tianzheng which was acquired on July 1, 2011. The increase in cost of revenues was also attributable to an increase in total cost of raw material, labor, and overhead as a result of an increase in overall sales from Bohai for the twelve months ended June 30, 2012 and attributable to increased unit cost mainly caused by increase raw material cost compared to the same period in last year.
Gross Profit
Gross profit represents the difference between net revenues and cost of revenues. We achieved gross profit of $103,839,592 for the twelve months ended June 30, 2012, compared to $64,034,875 for the same period in 2011, representing an increase of $39,804,717, or 62.2%, over the same periods in 2011. The increase of the gross profit is due to gross profit from Tianzheng, which was acquired on July 1, 2011, as well as due to increased revenues from Bohai.
Our overall gross profit margins as a percentage of net revenues decreased by approximately 3.1% from 78.7% to 75.6% the twelve months ended June 30, 2012 compared to the same period in 2011. The decrease of the gross profit margin is because of increased raw material cost for the twelve months ended June 30, 2012 compared to the same period last year. Meanwhile, the Company also makes the effort to improve the cost control to avoid negative inflation effect.
Operating Expenses
Our operating expenses increased by $29,689,115 to $75,468,125, for the twelve months ended June 30, 2012 compared to $45,779,010 for the same fiscal period in 2011. The overall increase in operating expenses was related to increased depreciation and amortization expenses, services supporting an overall increase in sales activities and new product promotions as well as increased activities arising from our acquisition of Yantai Tianzheng. Operating expenses amounted to $25,537,188 from Yantai Tianzheng for the twelve months ended June 30, 2012. The percentage of operating expenses to net revenues was 54.9% and 56.3% for the twelve months ended June 30, 2012 and 2011, respectively, representing a decrease of 1.4% as a percentage of net revenues.
Total Other Income (Expenses)
Total other income (expenses) are comprised of interest income (expenses), changes in fair value of derivative instruments, other income (expenses), and amortization of deferred financing fees. Total other expenses were $11,408,560 for the twelve months ended June 30, 2012 compared to total other income of $514,028 for the period ended June 30, 2011, an increase of total other expenses of $11,922,588. The increase in total other expenses were principally due to a net increase of $7,096,584 for interest expenses and a net increase in non-cash gain in fair value of warrants for $4,817,430for convertible notes in connection with our private placement on January 5, 2010. The effective interest expense for convertible notes is calculated using a constant effective interest rate, applied to the carrying value of the notes each month. As the carrying value increases, so does the interest expense. On December 31, 2011, the Company entered into an amendment to the Notes with Euro Pacific as representative of the Investors (the "Amendment") which: (i) extended the maturity date of the Notes from January 5, 2012 to April 5, 2012 (such extra three month period, the "Extended Period"); and (ii) increased the interest rate on the Notes to an annual rate of 12% (or 3% for the Extended Period). On May 14, 2011, the Company entered into an amendment to the Notes with Euro Pacific as representative of the Investors (the "Second Amendment") which: (i) extended the maturity date of the Notes from April 5, 2012 to October 5, 2012 (such extra six month period, the "Second Extended Period"); and (ii) remained the interest rate on the Notes at an annual rate of 12% (or 6% for the Second Extended Period). As of June 30, 2012, there were 5,225,000 shares of the Company's Common Stock issuable upon conversion of the outstanding convertible notes. (See Note 14).
Provision for Income Tax
Our provisions for income taxes for the twelve months ended June 30, 2012 and 2011 were $7,314,882 and $4,765,018, an increase of $2,549,864, or 53.5%, from this fiscal quarter to date over the same period last year. The increase in provision for income tax was principally due to an increase in taxable income under the PRC law from Bohai as well as income tax provision from Yantai Tianzheng (see Note 20 to the accompanying audited consolidated financial statements).
Net Income
We had a net income of $9,648,025 for the twelve months ended June 30, 2012, as compared to net income of $14,004,875 for the twelve months ended June 30, 2011, a decrease in net income of $4,356,850, or 31.1%. This translates into basic net income per common share of $0.54 and $0.81 and diluted net income per common share of $0.54 and $0.75, for the twelve months ended June 30, 2012 and 2011, respectively. The decrease in net income was primarily attributable to an increase in total gross profit of $41,062,431 offset by an increase in operating expenses of $30,946,829, an increase in total other expenses of $11,922,588 resulting from mostly effective interest charges and change in fair value of derivative liabilities, and an increase in the tax provision of $2,549,864 this fiscal year compared to the same period in prior year.
Net income margin was 7.0% for the twelve months ended June 30, 2012 compared to 17.2% for the same period last year, a decrease of 59.2%. The decrease in net income margin for the twelve months ended June 30, 2012 over the same period in the previous fiscalyear was principally due to a net increase in certain non-cash related activities such as amortization of beneficial conversion features on convertible notes converted and change in fair value of warrants for a total of $13,105,840, as well as a non-cash net decrease in deferred tax expense of $1,240,227. If we excluded such net gains, the net income margin would be 13.9% this fiscal year.
We had Non-GAAP net income of $19,113,232for the twelve months ended June 30, 2012, as compared to Non-GAAP net income of $11,769,996 for the twelve months ended June 30, 2011, an increase in Non-GAAP net income of $7,343,236, or 62.4%. This translates into basic Non-GAAP net income per common share of $1.07 and $0.68, and Non-GAAP diluted net income per common share of $1.07and $0.66, for the twelve months ended June 30, 2012 and 2011, respectively (See Use of Non-GAAP Financial Measures above).
Total other income included a non-cash charge in effective interest expenses of $9,317,897 for the twelve months ended June 30, 2012 compared to $1,029,487 for the same period in 2011.
Total other income included a non-cash charge for the twelve months ended June 30, 2012 and 2011 also comprised of a non-cash debit expense for fair value of warrants of $273,369 and income of $4,544,061, respectively.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate adequate amounts of cash to meet its needs for cash. As of June 30, 2012, we had cash and cash equivalents of $18,386,288 and restricted cash of $9,449,905, substantially almost all of which is located in financial institutions in China. The following table provides detailed information about our net cash flow for financial statement periods presented in this report:
