Dk Sinopharma (PINK:DKSP)

On April 8, 2011, DK Sinopharma, Inc. was notified that its principal independent accountant, MaloneBailey LLP (“MaloneBailey”), had resigned its engagement with the Company, effective immediately.

The board of directors engaged MaloneBailey on December 20, 2010 and MaloneBailey did not report on the Company’s financial statements during the Company’s two most recent fiscal years ended December 31, 2009 and 2008. On April 1, 2011, MaloneBailey provided an electronic communication to the Company, advising that it had encountered issues and concerns during the audit, specifically irregularities in the books and records of the Company, that, in MaloneBailey’s view, required additional information and procedures, including the initiation of an independent investigation, in order to verify the accuracy of the books and records recorded on the Company’s financial statements and records for the year ended December 31, 2010.

On April 8, 2011, the Company received a notice of resignation from MaloneBailey indicating that it had resigned its engagement with the Company, effective immediately. In its letter of resignation, MaloneBailey based its resignation on what it believes are accounting irregularities noted during the audit of the Company’s financial statements for the fiscal year ended December 31, 2010. The issues encountered during the audit of the Company’s financial statements for the fiscal year ended December 31, 2010, in MaloneBailey’s view, included the following:

(1) issues related to the authenticity of a set of bank statements and a loss of confidence in bank confirmation procedures;

(2) issues concerning the validity and existence of a material revenue transaction with a certain customer and

(3) issues concerning that management tampered with the process of auditors’ independent confirmation of bank statements and revenue.

The Company believes that it was taking appropriate steps to respond to MaloneBailey’s recommendations for further investigation prior to the resignation of MaloneBailey, but MaloneBailey does not agree with the Company’s assertion in this regard.

Dong Ke Pharmaceutical, Inc. became a public company on May 10, 2010 via a reverse merger.

Company Snapshot:

Dong Ke Pharmaceutical is in the business of manufacturing, marketing and sales of pharmaceuticals in China.

Industry Snapshot:

• The pharmaceutical industry within China is intensely competitive and is characterized by rapid and significant technological progress, and our operating environment is increasingly competitive. Our competitors include large pharmaceutical companies, including Xi’an Jingxi Shuanghe Pharmaceuticals Co., Ltd., that currently engage in or may engage in efforts related to the discovery and development of new pharmaceuticals.
  
• Western pharmaceutical products have more than half of the market share of medications used in China to treat similar medical conditions that our pharmaceutical products treat, with Chinese pharmaceutical products making up the next largest part of the market. Western medicine is all made from chemosynthesis products, while Chinese medicine is made from botanical, animal and mineral components.
  
• With approximately one-fifth of the world’s population and a fast-growing gross domestic product, China represents a significant potential market for the pharmaceutical industry.

Post Merger Share Calculation:

• 10,255,000: Pre reverse merger outstanding shares  
• 10,015,000: Shares cancelled as part of the Share Exchange
• 1,941,818: Newly issued shares of Common Stock
• 145,454: Shares from warrants associated with consulting agreements at a $13.75 exercise price adjusted for any forward or reverse splits.

GeoTeam® best effort calculation of total post reverse merger shares assuming full conversions:  2,327,272

Note: Pursuant to the Share Exchange Agreement, the Company is also obligated to use its best commercially reasonable efforts to effect a 1 for 13.75 forward share split within 90 days after Closing.

Financial Snapshot:

• Revenue for the year ended December 31, 2009 was $18,943,917, an increase of 6,884,480 or approximately 57% as compared to revenue of $12,059,437 for year ended December 31, 2008.
  
• For the year ended December 31, 2009 as compared to the year ended December 31, 2008 net income increased approximately 98% from $2,437,927 to $4,827,608.

• Price = $8.05
• Trailing GAAP EPS = $0.89
• Geo Calculated Fully-Taxed Trailing Non-GAAP EPS = $0.68
• Fully-Taxed EPS Estimate = $1.08
• P/E based on Fully-Taxed Trailing Non-GAAP EPS = 11.83
• Geo Calculated PEG Ratio: $0.59
  
  Reasons for Optimism

1. MRM meets 8 out of 10 GeoBargain® Requirements.
   
   

   	Requirement	Comments
   	Recent 52-week High(generally within 3 months)	Must Reach $13.38
   	30% EPS Growth Rate	2nd Qtr. 2009 EPS increased 425.0% Full year 2009 Geo estimates implies a Non-GAAP EPS growth rate of 391.0%
   	10% Revenue Growth	2nd Qtr. 2009 revenue increased 8.0%. Full year 2009 Geo estimate implies a revenue growth rate of 20.7%
   	Strong Balance Sheet	As of 2nd Qtr 2009
   yes	Positive Operating Cash Flow	$612 K as of 6 Mo.. 2009
   yes	L-T Debt to Equity Ratio less than 20%	14.37%
   yes	Current Ratio is at least 2:1	4.48:1
   	Tax-Adjusted Return on Equity is at least 15%	11.3%
   	Minimum Pre-tax Non-GAAP Operating Margins of 8%	11.9% as of 2nd Qtr. 2009
   	Preferably Under 50 Million Shares	3.0 Million shares as of 2nd Qtr. 2009
   	High Insider Ownership (generally greater than 15%)	23.9%
   	Limited Institutional Ownership (generally less than 20%)	>20%
   	P/E Divided by Growth Rate (PEG Ratio) is Less Than 1.	0.59

   
   
2. Restructuring efforts are paying off; In 1997 under new management direction, MRM embarked on an ongoing mission to refocus the company's efforts.
   
   
   • Reduced target customer count from 1000 to approximately 100. This made it easier for Merrimac to track and focus on its strongest customers, while giving them added attention.
   • Visibility - Working closely with a more defined list of companies allows Merrimac to better assess the future project pipelines of its customers and efficiently deploy resources.
   • Made a strategic decision to reduce its reliance on speculative commercial projects.
   • Focus on military and Satellite customers who are increasingly seeing the benefits that multi mix technology offers.
     
     
3. Customer Loyalty.
   
   
   • Merrimac works closely with its customers to meet product goals. This can happen at several steps in the development process including RD and manufacturing.
   • Once a company has found a reliable "partner" such as Merrimac, it would rather stay with the Company than have to restart the development process.
   • Once Merrimac has successfully worked with a division of a particular client, attracting other inter-company divisions becomes a natural occurrence.
     
     
4. The Company is the pioneer of Multi-Mix(R) technology allowing for a reduction in size and weight of subassemblies while maintaining reliability and performance.
   
   
   • Offers greater flexibility than old technology.
   • Performance efficiencies.
   • Lighter weight .
   • Ultimately saves companies money.
   
   Note: The GeoTeam encourages investors to familiarize themselves with Merrimac 's multi-mix technology in order to fully understand its numerous growth opportunities.
   
   
5. Positive outlook
   
   
   • Positive comments in 2nd quarter 2009 conference call.
     
     "We are in pricing negotiations on large pieces of business that we expect to be booking in Q3 and Q4 respectively. If this timing holds up in the third quarter it will set a new quarterly booking record."
     
     "For the year 2009 we expect that the book to bill ratio will exceed 1-to-1. We are pleased with our six months 2009 operating results. We are clearly executing our new strategy well, as reflected in our financial highlights. As mentioned earlier, we anticipate our Q3 bookings will be a record and we also anticipate a strong Q3 operating performance."
     
     
   • Multi-Mix technology is still in its infancy and just beginning to gain industry wide awareness.

Potential Valuation Scenarios if the company can achieve its EPS growth goals

Short-Term Potential value based on fully taxed adjusted trailing EPS

P/E 25 * $0.68 = $17.00
P/E 20 * $0.68 = $13.60

Short-term Potential Value based on GeoTeam Fully-Taxed EPS Estimate

P/E 15 * $1.08 = $16.20

^a MRM is not paying a full U.S. tax rate. Therefore, all EPS numbers have been adjusted by the GeoTeam to reflect a U.S. tax rate of 36%
^b Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information. The GeoTeam® Non-GAAP figures may, from time to time, differ from company supplied figures.
^c Based on GeoTeam® implied 2009 revenue growth rate of 20%, as previously stated.

These scenarios are not intended to be investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions.

The GeoTeam® participated in Merrimac's 2009 second quarter conference call.   The Company reported solid financial results.

Sales increased 8.0% to $8.1 million
GAAP EPS from continuing operations increased to$0.23 from $0.01
Geo calculated Fully-taxed adjusted non-GAAP EPS increased to $0.21 from $0.04

The GeoTeam® had two minor concerns going into the call

1.  Why the slight sequential decease in 2009 GAAP EPS from the first quarter?

Answer Per Conference Call:  "We had certain non-recurring charges in the second quarter that will probably bring us down to a running rate on SG&A about $180,000 (close to $0.06 a share)." 

2.  Although commentary in the press release was positive, the following comment leaves the door open to a wide degree of interpretation:

First half of fiscal year 2009 was very strong and with new orders meeting or exceeding our internal targets.  We are well positioned to finish the second half of 2009 with profitable results."

A more specific outlook would have been ideal

Answer Per Conference Call:  We are in pricing negotiations on large pieces of business that we expect to be booking in Q3 and Q4 respectively. If this timing holds up in the third quarter it will set a new quarterly booking record.  For the year 2009 we expect that the book to bill ratio will exceed 1-to-1.

We are pleased with our six months 2009 operating results. We are clearly executing our new strategy well, as reflected in our financial highlights. As mentioned earlier, we anticipate our Q3 bookings will be a record and we also anticipate a strong Q3 operating performance.

Investors may start to take notice of Merimac's stock once this commentary filters through to the masses.