Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	3
Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and June 30, 2009	3
Consolidated Statements of Income and Other Comprehensive Income for the three months and nine months ended March 31, 2010 and 2009 (Unaudited)	4
Consolidated Statements of Shareholders’ Equity	5
Consolidated Statements of Cash Flows for the nine months ended March 31, 2010 and 2009 (Unaudited)	6
Notes to Consolidated Financial Statements (Unaudited)	7
Item 2. Management’s Discussion and Analysis or Plan of Operation	34
Item 3. Quantitative and Qualitative Disclosure About Market Risk	44
Item 4. Controls and Procedures	44
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3. Defaults upon Senior Securities	47
Item 4. Removed and Reserved	47
Item 5. Other Information	47
Item 6. Exhibits	48

- 2 -

---

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)

CONSOLIDATED BALANCE SHEETS

 

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

 

- 5 -

---

 

JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR NINE MONTHS ENDED MARCH 31, 2010 AND 2009

(Unaudited)

		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	22,664,082			$	17,388,546
Loss from discontinued operations			200,769				1,693,830
Income from continuing operations			22,864,851				19,082,376
Adjustments to reconcile net income to net cash, net of acquisition,
provided by operating activities:
Depreciation			615,565				464,094
Amortization of intangible assets			1,194,331				371,925
Amortization of deferred debt issuance costs			670,984				510,227
Amortization of debt discount			11,409,936				2,679,526
Loss from issuance of shares in lieu of cash interest payment			318,936				-
Interest expense payment of shares in lieu of cash			4,457				-
Bad debt expense			446,257				368,840
Realized (gain) loss on marketable securities			406,346				(106,865	)
Unrealized (gain) loss on marketable securities			(270,339	)			1,255,522
Other non-cash settlement			-				(20,000	)
Change in fair value of derivative liabilities			(13,490,071	)			-
Stock-based compensation			155,104				43,340
Changes in operating assets and liabilities
Accounts receivable			(8,813,521	)			2,353,566
Accounts receivable - related parties			-				488,646
Inventories			(86,604	)			205,471
Other receivables			154,654				63,170
Other receivables - related parties			(241,956	)			(317,303	)
Advances to suppliers and other assets			(273,373	)			1,602,693
Accounts payable			(3,926,015	)			3,171,180
Customer deposit			(1,026,480	)			4,100,600
Other payables			725,041				194,283
Other payables - related parties			712,114				(58,580	)
Accrued liabilities			3,338,193				682,145
Liabilities assumed from reorganization			(95,384	)			(1,164,323	)
Taxes payable			(6,308,625	)			5,107,831
Net cash provided by operating activities			8,484,399				41,078,364
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used in acquisition			-				(8,581,970	)
Proceeds from sale of marketable securities			531,750				167,623
Purchase of equipment			(76,977	)			(130,814	)
Purchase of land use right			(16,975,633	)			-
Net cash used in  investing activities			(16,520,860	)			(8,545,161	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in restricted cash			(4,186,572	)			4,149,305
Proceeds from bank loans			2,199,600				2,196,750
Payments for bank loans			(2,199,600	)			(2,782,550	)
Proceeds from notes payable			19,173,180				7,009,097
Principal payments on notes payable			(14,986,608	)			(9,161,912	)
Net cash provided by financing activities			-				1,410,690
EFFECTS OF EXCHANGE RATE CHANGE IN CASH			134,826				198,836
INCREASE (DECREASE) IN CASH			(7,901,635	)			34,142,729
CASH, beginning			104,366,117				48,195,798
CASH, ending		$	96,464,482			$	82,338,527
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for Interest		$	393,111			$	1,130,837
Cash paid for Income taxes		$	2,631,495			$	4,883,039
Non-cash investing and financing activities:
Common stock issued to acquire Hongrui		$	-			$	2,597,132
Common stock issued for stock based compensation		$	20,000				-
Common stock issued to offset related party payable		$	20,000				-
Common stock issued for interest payment		$	673,929			$	-
Common stock issued for convertible notes conversion		$	7,610,000			$	-
Marketable securities used to settle for
liabilities assumed from reorganization		$	1,133,807			$	-
Derivative liability reclassified to equity upon conversion		$	6,287,408			$	-

 

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

 

- 6 -

---

- 39 -

---

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities for the nine months ended March 31, 2010 was $8.5 million as compared to net cash provided by operating activities of $41.1 million for the nine months ended March 31, 2009. The decrease in cash provided by operating activities is primarily attributable to a change in fair value of derivative liabilities of $13.5 million,  an increase in  accounts receivable and accounts receivable-related parties of $8.8 million, a decrease in accounts payable of $3.9 million and a decrease in taxes payable of $6.3 million and partially offset by add back of amortization of debt discount of $11.4 million and decrease in accrued liabilities of $3.3 million.

 

Net cash used in investing activities for the nine months ended March 31, 2010 was $16.5 million, and was mainly attributable to purchase of land use right for future factory expansion of $17 million.

  

We did not have any cash provided by or used in financing activities for the nine months ended March 31, 2010. We had a change in restricted cash of $4.2 million, payments for bank loans of $2.2 million, and principal payments on notes payable of $15.0 million and offset by proceeds from notes payable of $19.2 million and proceeds from bank loans of $2.2 million. Net cash provided by financing activities was $1.4 million for the nine months ended March 31, 2009 and was primarily attributable to decrease in restricted cash of $4.1 million, proceeds from bank loans of $2.2 million and offset by decrease on notes payable of $2.2 million and the principal payments on short term bank loans of $2.8 million.

We reported a net decrease in cash for the nine months ended March 31, 2010 of $7.9 million as compared to a net increase in cash of $34.1 million for the nine months ended March 31, 2009.

We have historically financed our operations and capital expenditures principally through private placements of debt and equity offerings, bank loans, and cash provided by operations. At March 31, 2010, the majority of our liquid assets were held in RMB denominations deposited in banks within the PRC. The PRC has strict rules for converting RMB to other currencies and for movement of funds from the PRC to other countries. Consequently, in the future, we may face difficulties in moving funds deposited within the PRC to fund working capital requirements in the U.S. The Company’s management is currently evaluating the situation. Our working capital position is $77.7 million at March 31, 2010 and $99.8 million at June 30, 2009. The decrease in working capital at March 31, 2010 was primarily due to decrease in cash of $7.9 million increase in derivative liabilities of $20.1 million, increase in notes payable of 4.2 million, increase in accrued liabilities of $2.6 million and the reclassification of convertible debentures from long term to short term liabilities of $10.1 million and offset by the increase in restricted cash of $4.2 million, increase in net accounts receivable of $8.4 million, decrease in accounts payable of $3.9 million, , decrease in refundable security deposits due to distributors of $1.0 million, decrease in liabilities assumed from reorganization of $1.0 million and decrease in taxes payable of $6.3 million.

We anticipate that our working capital requirements may increase as a result of our anticipated business expansion plan, potential increases in the price of our raw materials, competition and our relationship with suppliers or customers. We believe that our existing cash, cash equivalents and cash flows from operations will be sufficient to meet our present anticipated future cash needs for at least the next 12 months. We may, however, require additional cash resources due to foreign currency exchange restrictions imposed by the P.R.C. government, changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue.

Contractual Obligations and Off-Balance Sheet Arrangements

 

Contractual Obligations

 

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amount of payments.

 

Off-balance Sheet Arrangements

 

- 40 -

---

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Risk Factors

Interest Rates. Our exposure to market risk for changes in interest rates primarily relates to our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. At March 31, 2010, we had approximately $108.0 million in cash and cash equivalent and restricted cash. A hypothetical 2% increase or decrease in interest rates would not have a material impact on our earnings or loss, or the fair market value or cash flows of these instruments.

Foreign Exchange Rates. All of our sales are denominated in the Chinese Renminbi (“RMB”). As a result, changes in the relative values of U.S. Dollars and RMB affect our reported levels of revenues and profitability as the results are translated into U.S. Dollars for financial reporting purposes. In particular, fluctuations in currency exchange rates could have a significant impact on our financial stability due to a mismatch among various foreign currency-denominated sales and costs. Fluctuations in exchange rates between the U.S. Dollar and RMB affect our gross and net profit margins and could result in foreign exchange and operating losses.

Our exposure to foreign exchange risk primarily relates to currency gains or losses resulting from timing differences between signing of sales contracts and settling of these contracts. Furthermore, we translate monetary assets and liabilities denominated in other currencies into RMB, the functional currency of our operating business. Our results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in our statements of shareholders’ equity. We recorded net foreign currency gains (loss) of approximately $0.2 million and $0.4 million for the nine months ended March 31, 2010 and 2009, respectively. We have not used any forward contracts, currency options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future. As our sales denominated in foreign currencies, such as RMB and Euros, continue to grow, we will consider using arrangements to hedge our exposure to foreign currency exchange risk.

Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is the RMB. The value of your investment in our stock will be affected by the foreign exchange rates between the U.S. dollar and the RMB. To the extent we hold assets denominated in U.S. dollars, any appreciation of the RMB against the U.S. dollar could result in a change to our statements of operations and a reduction in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of RMB against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our company and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the price of our stock.

Credit Risk. We have not experienced significant credit risk, as most of our customers are long-term customers with excellent payment records. We review our accounts receivable on a regular basis to determine if the allowance for doubtful accounts is adequate at each quarter-end. We typically extend 30 to 90 day trade credit to our largest customers and we have not seen any of our major customers’ accounts receivable go uncollected beyond the extended period of time or experienced any material write-off of accounts receivable in the past.

 

Inflation Risk. In recent years, China has not experienced significant inflation, and thus inflation has not had a material impact on our results of operations. According to the National Bureau of Statistics of China (NBS) (www.stats.gov.cn), the change in Consumer Price Index (CPI) in China was 1.5%, 4.7% and 5.9% in 2006, 2007 and 2008, respectively. Inflationary factors, such as increases in the cost of our products and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs.

- 41 -

---

Related Party Transactions

Other receivable - related parties

The Company leases two of its buildings to Jiangbo Chinese-Western Pharmacy, a company owned by the Company’s Chief Executive Officer and other majority shareholders. For the three months ended March 31, 2010 and 2009, the Company recorded other income of approximately $81,000 and $77,000 from leasing the two buildings to this related party. For the nine months ended March 31, 2010 and 2009, the Company recorded other income of approximately $242,000 and $313,000 from leasing the two buildings to this related party.  As of March 31, 2010 and June 30, 2009, amount due from this related party was approximately $242,000 and $0, respectively.

Other payables - related parties

Other payables-related parties primarily consist of accrued salary payable to the Company’s officers and directors, and advances from the Company’s Chief Executive Officer. These advances are short-term in nature and bear no interest. The amounts are expected to be repaid in the form of cash.

- 42 -

---

Other payables - related parties consisted of the following:

 

		March 31,				June 30,
		2010				2009
		(Unaudited)
Payable to Cao Wubo, Chief Executive Officer and Chairman of the Board		$	901,029			$	184,435
Payable to Haibo Xu, Director			33,688				33,688
Payable to Elsa Sung, Chief Financial Officer			11,744				18,333
Payable to John Wang, Director			5,000				2,500
Total other payable - related parties		$	951,461			$	238,956

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant judgments and estimates on the part of management. Our critical accounting policies and estimates present an analysis of the uncertainties involved in applying a principle, while the accounting policies note to the financial statements (Note 2) describe the method used to apply the accounting principle.

Recent Accounting Pronouncements

In December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.The amendments in this Accounting Standards Update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. This ASU did not have a material impact on its consolidated financial statements.

In December, 2009, FASB issued ASU No. 2009-17,Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entity’s involvement in variable interest entities, which will enhance the information provided to users of financial statements. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

- 43 -

---

In January 2010, FASB issued ASU No. 2010-01 Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments in this Update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. This ASU did not have a material impact on its consolidated financial statements.

In January 2010, FASB issued ASU No. 2010-02 Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments in this Update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity.  The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In January 2010, FASB issued ASU No. 2010-06 Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2.  A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.  2)  Activity in Level 3 fair value measurements.  In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Thos disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

In February 2010, the FASB issued Accounting Standards Update 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements,” or ASU 2010-09. ASU 2010-09 primarily rescinds the requirement that, for listed companies, financial statements clearly disclose the date through which subsequent events have been evaluated. Subsequent events must still be evaluated through the date of financial statement issuance; however, the disclosure requirement has been removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted in February 2010. The adoption of ASU 2010-09 did not have a material impact on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required for smaller reporting companies.

1.

We have started training our internal accounting staff on U.S. GAAP and financial reporting requirements. Additionally, we are also taking steps to hire additional accounting personnel to ensure we have adequate resources to meet the requirements of segregation of duties.

2.

We plan on involving both internal accounting and operations personnel and outside consultants with U.S. GAAP technical accounting expertise, as needed, early in the evaluation of a complex, non-routine transaction to obtain additional guidance as to the application of generally accepted accounting principles to such a proposed transaction. During the nine months ended March 31, 2010, we have continued working with our outside internal control consultants; a reputable independent accounting firm has been engaged as internal control consultants to provide advice and assistance on improving our internal controls. The internal control consultants have begun working with our internal audit department to implement new policies and procedures within the financial reporting process with adequate review and approval procedures.

3.

We have continued to evaluate the internal audit function in relation to the Company’s financial resources and requirements. During the nine months ended March 31, 2010, our staff from the internal audit department has started working with our internal control consultants and our accounting staff to evaluate the Company’s current internal control over financial reporting process. To the extent possible, we will provide necessary trainings to our internal audit staff and implement procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals.

 

We believe that the foregoing steps will remediate the significant deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate to insure that the foregoing do not become material weaknesses. We plan to fully implement the above remediation plan by September 30, 2010.

- 45 -

---

A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting.

 

Our management is not aware of any material weaknesses in our internal control over financial reporting, and nothing has come to the attention of management that causes them to believe that any material inaccuracies or errors exist in our financial statements as of March 31, 2010.  The reportable conditions and other areas of our internal control over financial reporting identified by us as needing improvement have not resulted in a material restatement of our financial statements, nor are we aware of any instance where such reportable conditions or other identified areas of weakness have resulted in a material misstatement or omission in any report we have filed with or submitted to the Commission.

 

Because of its 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.

(b)     Changes in internal controls over financial reporting. During the three months covered by this quarterly report, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Such limitations include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures, such as simple errors or mistakes or intentional circumvention of the established process.

PART II

 

Item 1. Legal Proceedings

 

The Company is involved in various legal matters arising in the ordinary course of business. The following summarizes the Company’s pending  legal proceedings as of March 31, 2010:

China West II, LLC and Genesis Technology Group, Inc., n/k/a Jiangbo Pharmaceuticals, Inc. (Arbitration)

In April 2010, China West II, LLC (“CW II”) filed a Demand For Arbitration with the American Arbitration Association the case of  CW II and Genesis Technology Group, Inc. n/k/a Jiangbo Pharmaceuticals, Inc. In that matter, CW II seeks repayment and interest of a $190,000 promissory note dated August 3, 2007 made by Genesis Equity Partners II LLC (“GEP”), a subsidiary of the Company prior to the October 2007 reverse merger, and guaranteed by the Company. The Company believes the promissory note has been paid in full by members of GEP and CWII’s demand is without merit and plans to vigorously defend its position. As of the date of these consolidated financial statements, the Company is unable to estimate a loss, if any, the Company may incur related expenses to this lawsuit.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

In January 2010, the Company issued 301,250 shares of its common stock in connection with the conversions of $2,410,000 of convertible debt. In connection with the conversion, the Company recorded $1,822,111 of interest expense to fully amortize the unamortized discount and deferred financing costs related to the converted dentures. In connection with one of the conversions, the Company issued 577 shares of its common stock for the final interest payment. The Company valued the 577 shares at the fair market value on the date of issuance of $11.4 per share and recorded $ 6,429 interest expense in total. Each of the recipients of those shares was an accredited investor, and each of the issuances of these shares was exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(2) of that Act.

- 46 -

---

In March 2010, the Company issued 1,143 shares of common stock to a Company’s current director, Mr. John Wang as part of his compensation for services and 2,286 shares of common stock to a Company’s officer, Ms. Elsa Sung to pay off part of her accrued compensation. The Company valued these shares at the fair market value on the date of grant of $8.75 per share, or $30,000 in total, based on the trading price of common stock. For the nine months ended March 31, 2010, the Company recorded stock based compensation expense of $10,000 and reduced $20,000 of other payable-related parties accordingly. The recipient of those shares was an accredited investor, and each of the issuances of these shares was exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(2) of that Act.

Item 3. Defaults Upon Senior Securities

 

As a result of the delay in its ability to transfer cash out of PRC (partially due to the stricter foreign exchange restrictions and regulations imposed in the PRC starting in December 2008), the Company became delinquent on the payment of interest under the 6% Convertible Subordinated Debenture of the Company dated November 6, 2007 (the “2007 Notes”) and the 6% Convertible Notes of the Company dated May 30, 2008 (collectively, the “2008 Notes”) in December 2009.

On February 15, 2010, the Company and Pope Investments LLC (“Pope”) entered into a Letter Agreement (the “Letter Agreement”), whereby Pope agreed (i) to waive certain provisions set forth in the Securities Purchase Agreement, by and between the Company and Pope Asset Management LLC, dated as of November 6, 2007 (the “2007 Securities Purchase Agreement”) with respect to the 2007 Notes, and (ii) to waive certain provisions set forth in the Securities Purchase Agreement, by and between the Company and the investors who are parties thereto (collectively, the “Investors”), dated as of May 30, 2008 (the “2008 Securities Purchase Agreement”) with respect to the “2008 Notes. Pope is the holder of $4,000,000 principal amount of the 2007 Notes and the holder of $15,000,000 aggregate principal amount of 2008 Notes.

 

Pursuant to the Letter Agreement, Pope (i) agreed to waive until February 25, 2010 the Events of Default (as defined in the 2007 Notes and 2008 Notes) that have occurred as a result of the Company’s failure to timely make interest payments on the 2007 Notes and 2008 Notes that were due and payable on November 30, 2009, and agreed not to provide written notice to the Company with respect to the occurrence of either of such Events of Default provided that the Company has made such interest payment to the holders of the 2007 Notes and the holders of the 2008 Notes on or prior to February 25, 2010. If the interest payments are not made by February 25, 2010, all rights and remedies of the holders of the 2007 Notes and the holders of the 2008 Notes , as set forth  in the 2007 Securities Purchase Agreement , the 2008 Securities Purchase Agreements, the 2007 Notes and the 2008 Notes, respectively, shall remain in full force and effect as if the Letter Agreement had not been executed.  The Company was unable to make the required interest payments by February 25, 2010 due to continued difficulties encountered in obtaining approvals for converting RMB into USD and transfering cash out of P.R.C., and, to date, remains unable to make these payments. The Company has continued dialogue with the holders of the 2007 Notes and the 2008 Notes. To date, no acceleration notice has been received by the Company from the holders of the 2007 Notes or the 2008 Notes. Accrued interest and related interest penalties with respect to the 2007 Notes and the 2008 Notes as of March 31, 2010 amounted to $3,958,836.

 

Item 4. Removed and Reserved.

 

Item 5. Other Information.

 

None.