Edgar Filing: Jiangbo Pharmaceuticals, Inc.

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: December 31, 2009

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ________________ to ______________

Commission file number: 000-53037

JIANGBO PHARMACEUTICALS, INC.

(Exact name of small business issuer as specified in its charter)

Florida		65-1130026
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

25 Haibe Road, Laiyang Economic Development Zone

Laiyang City, Yantai, Shandong Province, People’s Republic of China 265200

(Address of principal executive offices)

(0086) 535-7282997

(issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

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 o No o

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.

Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if smaller reporting company) 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 o No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The total shares outstanding at February 18, 2010 was 12,031,373.

INDEX

	Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of December 31, 2009 (Unaudited) and June 30, 2009	4

Consolidated Statements of Income and Other Comprehensive Income for the three months and six months ended December 31, 2009 and 2008 (Unaudited)	5

Consolidated Statements of Shareholders’ Equity	6

Consolidated Statements of Cash Flows for the six months ended December 31, 2009 and 2008 (Unaudited)	7

Notes to Consolidated Financial Statements (Unaudited)	8

Item 2. Management’s Discussion and Analysis or Plan of Operation	34

Item 3. Quantitative and Qualitative Disclosure About Market Risk	45

Item 4T. Controls and Procedures	45

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	46

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3. Defaults upon Senior Securities	47

Item 4. Submission of Matters to a Vote of Securities Holders	48

Item 5. Other Information	48

Item 6. Exhibits	48

JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2009 AND JUNE 30, 2009

	December 31,			June 30,
	2009			2009
	(Unaudited)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	88,971,243		$	104,366,117
Restricted cash		14,545,305			7,325,000
Investments		42,599			879,228
Accounts receivable, net of allowance for doubtful accounts of $1,276,843 and $694,370 as of December 31, 2009 and June 30, 2009, respectively		19,729,985			19,222,707
Inventories		3,935,239			3,277,194
Other receivables		4,447			167,012
Other receivable - related parties		161,370			-
Advances to suppliers		472,939			236,496
Financing costs - current		632,637			680,303
Total current assets		128,495,764			136,154,057

PLANT AND EQUIPMENT, net		13,661,593			13,957,397

OTHER ASSETS:
Restricted investments		129,306			1,033,463
Financing costs, net		131,278			556,365
Intangible assets, net		33,243,462			17,041,181
Total other assets		33,504,046			18,631,009

Total assets	$	175,661,403		$	168,742,463

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable	$	2,875,667		$	6,146,497
Short term bank loans		-			2,197,500
Notes payable		14,545,305			7,325,000
Other payables		2,342,231			2,152,063
Refundable security deposits due to distributors		4,107,600			4,102,000
Other payables - related parties		332,689			238,956
Accrued liabilities		368,578			1,356,898
Liabilities assumed from reorganization		525,739			1,565,036
Taxes payable		3,608,665			11,248,226
Total current liabilities		28,706,474			36,332,176

OTHER LIABILITIES:
Derivative liabilities		33,996,855			-
Convertible debt, net of discount $20,945,255 and $28,493,089 as of December 31, 2009 and June 30, 2009, respectively		8,694,745			6,346,911
Total other liabilities		42,691,600			6,346,911

Total liabilities		71,398,074			42,679,087

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
Convertible preferred stock Series A ($0.001 par value; 0 shares issued and outstanding as of December 31, 2009 and June 30, 2009, respectively		-			-
Common stock ($0.001 par value, 22,500,000 and 15,000,000 shares authorized, 11,169,546 and 10,435,099 shares issued and outstanding as of December 31, 2009 and June 30, 2009, respectively)		11,170			10,435
Additional paid-in capital		23,805,104			48,397,794
Capital contribution receivable		(11,000	)		(11,000	)
Retained earnings - unrestricted		70,427,320			67,888,667
Statutory reserves		3,253,878			3,253,878
Accumulated other comprehensive income		6,776,857			6,523,602
Total shareholders' equity		104,263,329			126,063,376
Total liabilities and shareholders' equity	$	175,661,403		$	168,742,463

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

JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2009 AND 2008

(UNAUDITED)

	For the Three Months Ended						For the Six Months Ended
	December 31,						December 31,
	2009			2008			2009			2008
REVENUES:
Sales	$	18,179,942		$	32,944,809		$	42,563,996		$	60,265,493
Sales – related parties		-			-			-			243,909
Total revenues		18,179,942			32,944,809			42,563,996			60,509,402

COST OF SALES
Cost of sales		4,667,049			7,138,166			10,927,448			12,851,210
Cost of sales - related parties		-			-			-			54,493
Total cost of sales		4,667,049			7,138,166			10,927,448			12,905,703

GROSS PROFIT		13,512,893			25,806,643			31,636,548			47,603,699

RESEARCH AND DEVELOPMENT EXPENSE		1,106,385			1,098,525			2,205,960			2,196,450

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		5,259,213			13,282,421			9,601,019			26,634,396

INCOME FROM OPERATIONS		7,147,295			11,425,697			19,829,569			18,772,853

OTHER (INCOME) EXPENSE:
Change in fair value of derivative liabilities		(6,687,085	)		-			(1,865,992	)		-
Other income - related parties		(80,668	)		(92,774	)		(161,304	)		(236,724	)
Non-operating (income) expense, net		366,685			204,001			214,271			1,193,592
Interest expense, net		6,162,640			1,549,331			8,919,818			2,902,125
Loss from discontinued operations		87,561			1,545,607			164,769			1,590,823
Total other (income) expense, net		(150,867	)		3,206,165			7,271,562			5,449,816

INCOME BEFORE PROVISION FOR INCOME TAXES		7,298,162			8,219,532			12,558,007			13,323,037

PROVISION FOR INCOME TAXES		1,970,021			2,820,346			5,078,191			4,790,367

NET INCOME		5,328,141			5,399,186			7,479,816			8,532,670

OTHER COMPREHENSIVE INCOME:
Unrealized holding gain (loss)		32,827			(384,650	)		56,371			(1,947,617	)
Foreign currency translation adjustment		44,704			248,823			196,884			579,464

COMPREHENSIVE INCOME	$	5,405,672		$	5,263,359		$	7,733,071		$	7,164,517

BASIC WEIGHTED AVERAGE NUMBER OF SHARES		10,983,405			9,771,883			10,744,648			9,770,615

BASIC EARNINGS PER SHARE	$	0.49		$	0.55		$	0.70		$	0.87

DILUTED WEIGHTED AVERAGE NUMBER OF SHARES		15,065,301			14,148,317			14,829,605			14,173,463

DILUTED EARNINGS (LOSS) PER SHARE	$	(1.06	)	$	(1.87	)	$	(0.89	)	$	(1.61	)

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

JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

	Common Stock
	Par Value $0.001						Additional			Capital			Retained Earnings					Accumulated other
	Number						Paid-in			contribution			Statutory		Unrestricted			comprehensive
	of shares			Amount			capital			receivable			reserves		earnings			income			Totals
BALANCE, June 30, 2008		9,767,844		$	9,769		$	45,554,514		$	(11,000	)	$	3,253,878	$	39,008,403		$	7,700,905		$	95,516,469

Shares issued for adjustments for 40:1 reverse split		1,104			-																	-
Cancellation of common stock for settlement @ $8 per share		(2,500	)		(2	)		(19,998	)													(20,000	)
Common stock issued for service @ $8 per share		2,500			2			19,998														20,000
Common stock issued for service @ $9 per share		2,500			2			22,498														22,500
Common stock issued to Hongrui @ $4.035 per share		643,651			644			2,596,488														2,597,132
Conversion of convertible debt to stock		20,000			20			159,980														160,000
Stock based compensation								64,314														64,314
Net income																28,880,264						28,880,264
Change in fair value on restricted marketable equity securities																			(1,514,230	)		(1,514,230	)
Foreign currency translation gain																			336,927			336,927

BALANCE, June 30, 2009		10,435,099		$	10,435		$	48,397,794		$	(11,000	)	$	3,253,878	$	67,888,667		$	6,523,602		$	126,063,376

Cumulative effect of reclassification of warrants								(34,971,570	)							(4,941,163	)					(39,912,733	)

BALANCE, July 1, 2009 as adjusted		10,435,099			10,435			13,426,224			(11,000	)		3,253,878		62,947,504			6,523,602			86,150,643

Common stock issued for services @ $9.91 per share		1,009			1			9,999														10,000
Common stock issued for interest payment @ $8 per share		83,438			84			984,540														984,624
Conversion of convertible debt to stock		650,000			650			5,199,350														5,200,000
Reclassification of derivative liabilities to APIC due to conversion of convertible debt								4,049,887														4,049,887
Stock based compensation								135,104														135,104
Net income																7,479,816						7,479,816
Change in fair value on restricted marketable equity securities																			56,371			56,371
Foreign currency translation gain																			196,884			196,884

BALANCE, December 31, 2009 (Unaudited)		11,169,546		$	11,170		$	23,805,104		$	(11,000	)	$	3,253,878	$	70,427,320		$	6,776,857		$	104,263,329

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

JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2009 AND 2008

(Unaudited)

	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,479,816		$	8,532,670
Loss from discontinued operations		164,769			1,590,823
Income from continuing operations		7,644,585			10,123,493
Adjustments to reconcile net income to net cash, net of acquisition, provided by operating activities:
Depreciation		391,435			289,749
Amortization of intangible assets		803,234			147,120
Amortization of deferred debt issuance costs		472,753			340,151
Amortization of debt discount		7,547,834			1,646,235
Loss from issuance of shares in lieu of interest		317,124			-
Bad debt expense		581,287			111,237
Realized loss (gain) on marketable securities		406,551			(115,128	)
Unrealized (gain) loss on marketable securities		(265,747	)		1,459,656
Other non-cash settlement		-			(20,000	)
Change in fair value of derivative liabilities		(1,865,992	)		-
Stock-based compensation		135,104			38,028
Changes in operating assets and liabilities
Accounts receivable		(1,062,126	)		(1,764,421	)
Accounts receivable - related parties		-			488,580
Inventories		(653,303	)		(1,049,318	)
Other receivables		161,727			(2,175,378	)
Other receivables - related parties		(161,304	)		(236,724	)
Advances to suppliers and other assets		(235,033	)		1,608,131
Accounts payable		(3,277,854	)		569,601
Other payables		187,153			1,815,563
Other payables - related parties		93,588			66,028
Accrued liabilities		(299,688	)		153,587
Liabilities assumed from reorganization		(79,150	)		(903,600	)
Taxes payable		(7,651,766	)		13,821,621
Net cash provided by operating activities		3,190,415			26,414,211

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities		531,333			117,614
Purchase of equipment and building improvements		(76,707	)		(128,179	)
Purchase of land use right		(16,975,633	)		-
Net cash used in investing activities		(16,521,007	)		(10,565	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Change in restricted cash		(7,207,356	)		1,292,162
Proceeds from bank loans					2,196,450
Payments for bank loans		(2,199,600	)		(2,782,170	)
Proceeds from notes payable		14,539,356			704,328
Principal payments on notes payable		(7,332,000	)		-
Net cash (used in) provided by financing activities		(2,199,600	)		1,410,770

EFFECTS OF EXCHANGE RATE CHANGE IN CASH		135,318			369,646

(DECREASE) INCREASE IN CASH		(15,394,874	)		28,184,062

CASH and CASH EQUIVALENTS, beginning		104,366,117			48,195,798

CASH and CASH EQUIVALENTS, ending	$	88,971,243		$	76,379,860

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for Interest	$	390,861		$	1,110,572
Cash paid for Income taxes	$	1,289,849		$	128,329

Non-cash investing and financing activities:
Common stock issued for interest payment	$	667,500		$	-
Common stock issued for convertible notes conversion, net of discount	$	5,200,000		$	160,000
Derivative liability reclassified to equity upon conversion	$	4,049,887		$	-
Transfer of investments to settle liabilities assumed from reorganization	$	1,124,916		$	-

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

JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS GENESIS PHARMACEUTICALS ENTERPRISES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

(UNAUDITED)

Note 1 – Organization and business

Jiangbo Pharmaceuticals, Inc. (the “Company” or “Jiangbo”) was originally incorporated in the state of Florida on August 15, 2001, under the name Genesis Technology Group, Inc.

Pursuant to a Certificate of Amendment to the Amended and Restated Articles of Incorporation filed with the state of Florida which took effect as of April 16, 2009, the Company's name was changed from "Genesis Pharmaceuticals Enterprises, Inc." to "Jiangbo Pharmaceuticals, Inc." (the "Corporate Name Change"). The Corporate Name Change was approved and authorized by the Board of Directors of the Company as well as the holders of a majority of the outstanding shares of the Company’s voting stock by written consent. As a result of the Corporate Name Change, the stock symbol changed to "JGBO" with the opening of trading on May 12, 2009, on the OTCBB.

Our primary operations consist of the business and operations of our direct and indirect subsidiaries and Variable Interest Entity (“VIE”), which produce and sell western pharmaceutical products in China and focuses on developing innovative medicines to address various medical needs for patients worldwide.

Note 2 - Summary of significant accounting policies

Basis of presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") for interim financial information and pursuant to the requirements for reporting on Form 10-Q. Accordingly, they do not include all the information and footnotes required by US Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. In the opinion of management, the accompanying consolidated balance sheets, and related interim consolidated statements of income and other comprehensive income, stockholders’ equity, and cash flows, include all adjustments, consisting only of normal recurring items. However, these consolidated financial statements are not indicative of a full year of operations. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended June 30, 2009 included in the Company’s Annual Report on Form 10-K.

Principles of consolidation

The accompanying consolidated financial statements include the accounts of the following entities, and all significant intercompany transactions and balances have been eliminated in consolidation:

Consolidated entity name:	Percentage of ownership
Karmoya International Ltd.		100	%
Union Well International Ltd.		100	%
Genesis Jiangbo (Laiyang) Biotech Technology Co., Ltd.		100	%
Laiyang Jiangbo Pharmaceuticals Co., Ltd.	Variable Interest Entity

The Financial Accounting Standards Board’s (“FASB”) accounting standards address whether certain types of entities, referred to as VIE’s, should be consolidated in a company’s consolidated financial statements. In accordance with the provisions of the accounting standard, the Company has determined that Laiyang Jiangbo is a VIE and that the Company is the primary beneficiary, and accordingly, the financial statements of Laiyang Jiangbo are consolidated into the financial statements of the Company.

Reverse stock split

In July 2008, the board of directors of the Company approved a 40-to-1 reverse stock split, effective September 4, 2008, and a new trading symbol “GNPH” also became effective on that day. The accompanying consolidated financial statements have been retroactively adjusted to reflect the reverse stock split. All share representations are on a post-split basis. In April, 2009, in connection with the Company's name change, the Company’s trading symbol changed to “JGBO.”

Foreign currency translation

The reporting currency of the Company is the U.S. dollar. The functional currency of the Company is the local currency, the Chinese Renminbi (“RMB”). In accordance with the FASB’s accounting standard governing foreign currency translation, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rates as quoted by the People’s Bank of China at the end of the period, and equity is translated at historical exchange rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Asset and liability accounts at December 31, 2009, were translated at 6.82 RMB to $1.00 as compared to 6.83 RMB to $1.00 at June 30, 2009. Equity accounts were stated at their historical rates. The average translation rates applied to statements of income for the six months ended December 31, 2009 and 2008 were 6.82 RMB and 6.83 RMB to $1.00, respectively.

Use of estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The significant estimates made in the preparation of the Company’s consolidated financial statements relate to the assessment of the carrying values of accounts receivable and related allowance for doubtful accounts, allowance for obsolete inventory, sales returns, accrual for estimated advertising costs, fair value of warrants and beneficial conversion features related to the convertible notes, fair value of derivative liability and fair value of options granted to employees. Actual results could be materially different from these estimates upon which the carrying values were based.

Revenue recognition

Product sales are generally recognized when title to the product has transferred to customers in accordance with the terms of the sale. In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.

The Company is generally not contractually obligated to accept returns. However, on a case by case negotiated basis, the Company permits customers to return their products. Therefore, revenue is recorded net of an allowance for estimated returns. Such reserves are based upon management's evaluation of historical experience and estimated costs. The amount of the reserves ultimately required could differ materially in the near term from amounts included in the accompanying consolidated statements of income.

Financial instruments

The accounting standard governing financial instruments adopted on July 1, 2008, defines financial instruments and requires fair value disclosures about those instruments. It defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. Investments, receivables, payables, short term loans and convertible debt all qualify as financial instruments. Management concluded the receivables, payables and short term loans approximate their fair values because of the short period of time between the origination of such instruments and their expected realization and, if applicable, their stated rates of interest are equivalent to rates currently available.

The three levels of valuation hierarchy are defined as follows:

·	Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
·	Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
·	Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company analyzes all financial instruments with features of both liabilities and equity under the FASB’s accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Depending on the product and the terms of the transaction, the fair value of notes payable and derivative liabilities were modeled using a series of techniques, including closed-form analytic formula, such as the Black-Scholes option-pricing model.

Effective July 1, 2009, as a new accounting standard took effect, the Company’s two convertible notes with principal amounts totaling $34,840,000 and 2,275,000 warrants previously treated as equity pursuant to the derivative treatment exemption are no longer afforded equity treatment because the strike price of the warrants is denominated in US dollar, a currency other than the Company’s functional currency, the Chinese Renminbi. As a result, those financial instruments are not considered indexed to the Company’s own stock, and as such, all future changes in the fair value of these convertible notes and warrants will be recognized currently in earnings until such time as the convertible notes and warrants are converted, exercised or expired.

As such, effective July 1, 2009, the Company reclassified the fair value of the conversion features on the convertible notes and warrants from equity to liability, as if these conversion features on the convertible notes and warrants were treated as a derivative liability since their initial issuance dates. On July 1, 2009, the Company reclassified approximately $35 million from additional paid-in capital and approximately $4.9 million from beginning retained earnings to warrant liabilities, as a cumulative effect adjustment, to recognize the fair value of the conversion features on the convertible notes and warrants. For the six months ended December 31, 2009, $5.2 million of convertible notes were converted. As of December 31, 2009, the Company has $29,640,000 convertible notes and 2,275,000 warrants outstanding. The fair value of the conversion features on the convertible notes was approximately $19.7 million and the fair value of the warrants was approximately $14.3 million. The Company recognized $1.9 million gain from the change in fair value of the conversion features on the convertible notes and warrants for the six months ended December 31, 2009.

These common stock purchase warrants do not trade in an active securities market, and as such, the Company estimates the fair value of the conversion features on the convertible notes and warrants using the Black-Scholes option pricing model using the following assumptions:

	December 31, 2009										July 1, 2009
	Annual dividend yield		Expected term (years)		Risk-free interest rate			Expected volatility			Annual dividend yield		Expected term (years)		Risk-free interest rate			Expected volatility
Conversion feature on the $5 million convertible notes		-		0.85		0.47	%		64.00	%		-		1.35		1.11	%		95.8	%
Conversion feature on the $30 million convertible notes		-		1.42		1.14	%		88.43	%		-		1.92		1.11	%		102	%
400,000 warrants issued in November 2007		-		0.85		0.47	%		64.00	%		-		1.35		1.11	%		95.8	%
1,875,000 warrants issued in May 2008		-		3.42		2.31	%		86.91	%		-		3.92		2.54	%		97.51	%

Expected volatility is based primarily on historical volatility. Historical volatility was computed using weekly pricing observations for recent periods that correspond to the term of the warrants. The Company’s management believes this method produces an estimate that is representative of the expectations of future volatility over the expected term of these warrants. The Company has no reason to believe future volatility over the expected remaining life of these warrants will likely differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities according to the remaining term of the financial instruments.

The following table sets forth by level within the fair value hierarchy the financial assets and liabilities that were accounted for at fair value on a recurring basis.

	Carrying Value at December 31, 2009		Fair Value Measurements at December 31, 2009, Using Fair Value Hierarchy
			Level 1		Level 2		Level 3
Investments	$	42,599	$	42,599	$	-	$	-
Investments, restricted		129,306		129,306		-		-
Conversion options - $4M Convertible Debt (November 2007)		2,010,359		-		-		2,010,359
Conversion options - $25.6M Convertible Debt (May 2008)		17,708,382		-		-		17,708,382
400,000 warrants issued in November 2007		1,608,287		-		-		1,608,287
1,875,000 warrants issued in May 2008		12,669,826		-		-		12,669,826
$4M Convertible Debt (November 2007)		4,192,195						4,192,195
$25.6M Convertible Debt (May 2008)		26,558,365						26,558,365

Total	$	64,919,319	$	171,905	$	-	$	64,747,414

The Company did not identify any other non-recurring assets and liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with the relevant accounting standards.

An accounting standard became effective for the Company on July 1, 2008 which provides the Company with the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis with the difference between the carrying value before election of the fair value option and the fair value recorded upon election as an adjustment to beginning retained earnings. The Company chose not to elect the fair value option.

Stock-based compensation

The Company records stock-based compensation expense pursuant to the governing accounting standard which requires companies to measure compensation cost for stock-based employee compensation plans at fair value at the grant date and recognize the expense over the employee's requisite service period. The Company estimates the fair value of the awards using the Black-Scholes option pricing model. Under this accounting standard, the Company’s expected volatility assumption is based on the historical volatility of Company’s stock or the expected volatility of similar entities. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

Stock-based compensation expense is recognized based on awards expected to vest, and there were no estimated forfeitures as the Company has a short history of issuing options.

The Company uses the Black-Scholes option-pricing model which was developed for use in estimating the fair value of options. Option-pricing models require the input of highly complex and subjective variables including the expected life of options granted and the Company’s expected stock price volatility over a period equal to or greater than the expected life of the options. Because changes in the subjective assumptions can materially affect the estimated value of the Company’s employee stock options, it is management’s opinion that the Black-Scholes option-pricing model may not provide an accurate measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with the accounting standards using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

Comprehensive income

FASB’s accounting standard regarding comprehensive income establishes standards for reporting and display of comprehensive income and its components in financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The accompanying consolidated financial statements include the provisions of this accounting standard.

Cash and cash equivalents

Cash and cash equivalents include cash on hand and demand deposits in accounts maintained with state-owned banks within the PRC. The Company considers all highly liquid instruments with original maturities of three months or less, and money market accounts to be cash and cash equivalents.

The Company maintains cash deposits in financial institutions that exceed the amounts insured by the U.S. government. Balances at financial institutions or state-owned banks within the PRC are not covered by insurance. Non-performance by these institutions could expose the Company to losses for amounts in excess of insured balances. As of December 31, 2009 and June 30, 2009, the Company’s bank balances, including restricted cash balances, exceeded government-insured limits by approximately $103,516,548 and $111,684,000, respectively.

Restricted cash

Restricted cash represents amounts set aside by the Company in accordance with the Company’s debt agreements with certain financial institutions. These cash amounts are designated for the purpose of paying down the principal amounts owed to the financial institutions, and these amounts are held at the same financial institutions with which the Company has debt agreements. Due to the short-term nature of the Company’s debt obligations to these banks, the corresponding restricted cash balances have been classified as current in the consolidated balance sheets.

Investment and restricted investments

Investments are comprised of marketable equity securities of publicly traded companies and are stated at fair value based on the quoted price of these securities. These investments are classified as trading securities based on the Company’s intent and ability to sell them within the year. Restricted investments are marketable equity securities of publicly traded companies that were acquired through the reverse merger and contained certain SEC Rule 144 restrictions on the securities. These securities are classified as available-for-sale and are reflected as restricted and noncurrent, as the Company intends to hold them beyond one year. Restricted investments are carried at fair value based on the trade price of these securities.

The following is a summary of the components of the gain/loss on investments and restricted investments for the three and six months ended December 31, 2009 and 2008:

	For the Three Months Ended					For the Six Months Ended
	December 31,					December 31,
	2009			2008		2009			2008
Realized (gain) loss on trading securities	$	425,616		$	9,395	$	406,551		$	(115,128	)
Unrealized (gain) loss on trading securities		(14,743	)		415,573		(265,747	)		1,459,656
Unrealized (gain) loss on restricted investments – available-for-sale securities		(32,827	)		384,650		(56,371	)		1,947,617

All unrealized gains and losses related to available-for-sale securities have been properly reflected as a component of accumulated other comprehensive income.

Accounts receivable

During the normal course of business, the Company extends credit to its customers without requiring collateral or other security interests. Management reviews its accounts receivables at each reporting period to provide for an allowance against accounts receivable for an amount that could become uncollectible. This review process may involve the identification of payment problems with specific customers. The Company estimates this allowance based on the aging of the accounts receivable, historical collection experience, and other relevant factors, such as changes in the economy and the imposition of regulatory requirements that can have an impact on the industry. These factors continuously change, and can have an impact on collections and the Company’s estimation process. These impacts may be material.

Certain accounts receivable amounts are charged off against allowances after unsuccessful collection efforts. Subsequent cash recoveries are recognized as income in the period when they occur.

The activities in the allowance for doubtful accounts are as follows for the periods ended December 31, 2009 and June 30, 2009:

	December 31, 2009		June 30, 2009
	(Unaudited)
Beginning allowance for doubtful accounts	$	694,370	$	155,662
Bad debt additions		581,287		538,068
Foreign currency translation adjustments		1,186		640
Ending allowance for doubtful accounts	$	1,276,843	$	694,370

Inventories

Inventories, consisting of raw materials, work-in-process, packing materials and finished goods related to the Company’s products, are stated at the lower of cost or market utilizing the weighted average method. The Company reviews its inventory periodically for possible obsolete goods or to determine if any reserves are necessary. As of December 31, 2009 and June 30, 2009, the Company determined that no reserves were necessary.

Advance to suppliers

Advances to suppliers represent partial payments or deposits for future inventory and equipment purchases. These advances to suppliers are non-interest bearing and unsecured. From time to time, vendors require a certain amount of money to be deposited with them as a guarantee that the Company will receive their purchase on a timely basis.

Plant and equipment

Plant and equipment are stated at cost less accumulated depreciation. Additions and improvements to plant and equipment accounts are recorded at cost. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in the results of operations in the year of disposition. Maintenance, repairs, and minor renewals are charged directly to expense as incurred. Major additions and betterments to plant and equipment accounts are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows:

	Useful Life
Building and building improvements		5 – 40 Years
Manufacturing equipment		5 – 20 Years
Office equipment and furniture		5 – 10 Years
Vehicles		5 Years

Intangible assets

All land in the PRC is owned by the PRC government and cannot be sold to any individual or company. The Company has recorded the amounts paid to the PRC government to acquire long-term interests to utilize land underlying the Company’s facilities as land use rights. This type of arrangement is common for the use of land in the PRC. Land use rights are amortized on the straight-line method over the terms of the land use rights, which range from 20 to 50 years. The Company acquired land use rights in August 2004, October 2007 and November 2009 in the amounts of approximately $879,000, $8,871,000 and $17,000,000, respectively, which are included in intangible assets.

Patents and licenses include purchased technological know-how, secret formulas, manufacturing processes, technical and procedural manuals, and the certificate of drugs production and is amortized using the straight-line method over the expected useful economic life of 5 years, which reflects the period over which those formulas, manufacturing processes, technical and procedural manuals are kept secret to the Company as agreed between the Company and the selling parties.

The estimated useful lives of intangible assets are as follows:

	Useful Life
Land use rights	50 Years
Patents	5 Years
Licenses	5 Years
Customer list and customer relationships	3 Years
Trade secrets - formulas and know how technology	5 Years

Impairment of long-lived assets

Long-lived assets of the Company are reviewed periodically or more often if circumstances dictate, to determine whether their carrying values have become impaired. The Company considers assets to be impaired if the carrying values exceed the future projected cash flows from related operations. The Company also re-evaluates the periods of depreciation to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of December 31, 2009, the Company expects these assets to be fully recoverable.

Beneficial conversion feature of convertible notes

In accordance with accounting standards governing the beneficial conversion feature of convertible notes, the Company has determined that the convertible notes contained a beneficial conversion feature because on November 6, 2007, the effective conversion price of the $5,000,000 convertible note was $5.81 when the market value per share was $16.00, and on May 30, 2008, the effective conversion price of the $30,000,000 convertible note was $5.1 when the market value per share was $12.00. Total value of beneficial conversion feature of $2,904,092 for the November 6, 2007 convertible note and $19,111,323 for the May 30, 2008 convertible debt was discounted from the carrying value of the convertible notes. The beneficial conversation feature is amortized using the effective interest method over the term of the note. As of December 31, 2009 and June 30, 2009, a total of $13,216,956 and $17,955,637, respectively, remained unamortized for the beneficial conversion feature.

Income taxes

The Company accounts for income taxes in accordance with the accounting standard for income taxes. 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 the financial statement carrying amounts and the tax bases of existing assets and liabilities. 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. As of December 31, 2009 and June 30, 2009, the Company did not have any net deferred tax assets or liabilities.

The accounting standards clarify the accounting and disclosure for uncertain tax positions and prescribe a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. The accounting standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Under this accounting standard, 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 likely 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.

The Company’s operations are subject to income and transaction taxes in the United States and in the PRC jurisdictions. Significant estimates and judgments are required in determining the Company’s worldwide provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations, and as a result the ultimate amount of tax liability may be uncertain. However, the Company does not anticipate any events that would lead to changes to these uncertainties.

Value added tax

The Company is subject to value added tax (“VAT”) for manufacturing products and business tax for services provided. The applicable VAT rate is 17% for products sold in the PRC. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). Under the commercial practice of the PRC, the Company pays VAT based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty, which can range from zero to five times the amount of the taxes which are determined to be late or deficient, and will be charged to operations in the period if and when a determination is made by the taxing authorities that a penalty is due.

VAT on sales and VAT on purchases amounted to approximately $3,090,000 and $894,000 for the three months ended December 31, 2009, respectively, and approximately $5,603,000 and $781,000 for the three months ended December 31, 2008, respectively. VAT on sales and VAT on purchases amounted to approximately $7,236,000 and $1,738,000, respectively, for the six months ended December 31, 2009, respectively, and approximately $10,287,000 and $1,155,000, respectively, for the six months ended December 31, 2008. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government. VAT taxes are not impacted by the income tax holiday.

Shipping and handling

Shipping and handling costs related to costs of goods sold are included in selling, general and administrative expenses. Shipping and handling costs amounted to approximately $113,000 and $130,000, respectively, for the three months ended December 31, 2009, and 2008, respectively. Shipping and handling costs amounted to approximately $264,000 and $252,000 for the six months ended December 31, 2009, and 2008, respectively.

Advertising

Expenses incurred in the advertising of the Company and the Company’s products are charged to operations. Advertising expenses amounted to approximately $2,190,431 and $24,000 for the three months ended December 31, 2009 and 2008, respectively. Advertising expenses amounted to approximately $3,257,000 and $928,000 for the six months ended December 31, 2009 and 2008, respectively.

Research and development

Research and development costs are expensed as incurred. These costs primarily consist of cost of materials used and salaries paid for the development of the Company’s products, and fees paid to third parties to assist in such efforts.

Recent accounting pronouncements

In April 2009, the FASB issued an accounting standard for accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. It amends and clarifies a previously issued accounting standard in regards to the initial recognition and measurement, subsequent measurement and accounting, and disclosures of assets and liabilities arising from contingencies in a business combination. The accounting standard applies to all assets acquired and liabilities assumed in a business combination that arise from contingencies. The accounting standard will be effective for the first annual reporting period beginning on or after December 15, 2008. The accounting standard will apply prospectively to business combinations for which the acquisition date is after fiscal years beginning on or after December 15, 2008. The adoption of the accounting standard did not have a material impact on the Company’s results of operations or financial condition.

In April 2009, the FASB issued an accounting standard to make the other-than-temporary impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This standard will replace the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. This standard provides increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold and also requires increased and more frequent disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. Although this standard does not result in a change in the carrying amount of debt securities, it does require that the portion of an other-than-temporary impairment not related to a credit loss for a held-to-maturity security be recognized in a new category of other comprehensive income and be amortized over the remaining life of the debt security as an increase in the carrying value of the security. This standard became effective for interim and annual periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued an accounting standard that requires disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as in annual financial statements. Prior to this accounting standard, fair values for these assets and liabilities were only disclosed annually. This standard applies to all financial instruments within its scope and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. This standard does not require disclosures for earlier periods presented for comparative purposes at initial adoption, but in periods after the initial adoption, this standard requires comparative disclosures only for periods ending after initial adoption. The adoption of this standard did not have a material impact on the disclosures related to its consolidated financial statements.

In June 2009, the FASB issued an accounting standard amending the accounting and disclosure requirements for transfers of financial assets. This accounting standard requires greater transparency and additional disclosures for transfers of financial assets and the entity’s continuing involvement with them and changes the requirements for derecognizing financial assets. In addition, it eliminates the concept of a qualifying special-purpose entity (“QSPE”). This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009. The Company believes the adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB also issued an accounting standard amending the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes the exception from applying the consolidation guidance within this accounting standard. Further, this accounting standard requires a company to perform a qualitative analysis when determining whether or not it must consolidate a VIE. It also requires a company to continuously reassess whether it must consolidate a VIE. Additionally, it requires enhanced disclosures about a company’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the company’s financial statements. Finally, a company will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009. The Company has not completed their assessment of the impact that this pronouncement will have on the Company’s financial condition, results of operations or cash flows.

In June 2009, the FASB issued an accounting standard which establishes the FASB Accounting Standards Codification™ (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. Pursuant to the provisions of the Codification, the Company updated references to GAAP in the Company’s consolidated financial statements. The Codification did not change GAAP and therefore did not impact the Company’s consolidated financial statements other than the change in references.

In August 2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of valuation techniques, as defined. This ASU is effective for the first reporting period, including interim periods, beginning after the issuance of this ASU. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued an ASU regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

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. The Company does not expect the adoption of this ASU to 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.

In January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for decreases in ownership of a subsidiary. Under this guidance, an entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. In contrast, an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies the scope of the decrease in ownership provisions, and expands the disclosures about the deconsolidation of a subsidiary or de-recognition of a group of assets. This ASU is effective for beginning in the first interim or annual reporting period ending on or after December 31, 2009. 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 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. The Company does not expect the adoption of this ASU to 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.

Note 3 - Earnings per share

The FASB’s accounting standard for earnings per share requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.

All shares and per share amounts used in the Company’s financial statements and notes thereto have been retroactively restated to reflect the 40-to-1 reverse stock split, which occurred on September 4, 2008.

The following is a reconciliation of the basic and diluted earnings per share computations for the three months ended December 31, 2009 and 2008:

Basic earnings per share

	2009		2008

Net income for basic and diluted earnings per share	$	5,328,141	$	5,399,186

Weighted average shares used in basic computation		10,983,405		9,771,883
Earnings per share:
Basic	$	0.49	$	0.55

Diluted earnings (loss) per share

	2009			2008

Net income for basic earnings per share	$	5,328,141			$	5,399,186
Add: Interest expense		469,885				536,666
Subtract: Loan issuance cost		(763,914	)			(1,576,792	)
Subtract: Debt discount if converted		(20,945,255	)			(30,853,722	)
Net income for diluted EPS		(15,911,143	)			(26,494,662	)

Weighted average shares used in basic computation		10,983,405				9,771,883
Diluted effect of stock options and warrants		376,896				21,434
Diluted effect of $4,000,000 convertible notes		500,000				625,000
Diluted effect of $25,600,000 convertible notes		3,205,000				3,730,000
Weighted average shares used in diluted computation		15,065,301				14,148,317

Loss per share-Diluted	$	(1.06	)			(1.87	)

The following is a reconciliation of the basic and diluted earnings per share computations for the six months ended December 31, 2009 and 2008:

Basic earnings per share

	2009		2008

Net income for basic earnings per share	$	7,479,816	$	8,532,670

Weighted average shares used in basic computation		10,744,648		9,770,615

Earnings per share – Basic	$	0.70	$	0.87

Diluted earnings (loss) per share

	2009			2008

Net income for basic earnings per share	$	7,479,816		$	8,532,670
Add: Interest expense		990,715			1,073,332
Subtract: Loan issuance cost		(763,914	)		(1,576,792	)
Subtract: Debt discount if converted		(20,945,255	)		(30,856,722	)

Net income for diluted EPS		(13,238,638	)		(22,827,512	)

Weighted average shares used in basic computation		10,744,648			9,770,615
Diluted effect of stock options and warrants		379,957			47,848
Diluted effect of $ 4,000,000 convertible notes		500,000			625,000
Diluted effect of $25,600,000 convertible notes		3,205,000			3,730,000
Weighted average shares used in diluted computation		14,829,605			14,173,463

Loss per share-Diluted	$	(0.89	)	$	(1.61	)

For the three and six months ended December 31, 2009, 7,500 vested stock options with an average exercise price of $17.93 were not included in the diluted earnings per share calculation because of the anti-dilutive effect. For the three months and six months ended December 31, 2008, 2,000 stock options and 1,875,000 warrants with an average exercise price of $12.00 and $10.00, respectively, were not included in the diluted earnings per share calculation because of the anti-dilutive effect.

Note 4 - Inventories

Inventories consisted of the following:

	December 31, 2009		June 30, 2009
	(Unaudited)
Raw materials	$	2,045,408	$	1,539,602
Work-in-process		-		55,992
Packing materials		740,660		483,297
Finished goods		1,149,171		1,198,303
Total	$	3,935,239	$	3,277,194

Note 5 - Plant and equipment

Plant and equipment consisted of the following:

	December 31, 2009			June 30, 2009
	(Unaudited)
Buildings and building improvements	$	12,838,821		$	12,798,375
Manufacturing equipment		2,771,754			2,715,223
Office equipment and furniture		221,165			219,979
Vehicles		478,044			477,396
Total		16,309,784			16,210,973
Less: accumulated depreciation		(2,648,191	)		(2,253,576	)
Total	$	13,661,593		$	13,957,397

For the three months ended December 31, 2009 and 2008, depreciation expense amounted to approximately $195,000 and $143,000, respectively. For the six months ended December 31, 2009 and 2008, depreciation expense amounted to approximately $391,000 and $290,000, respectively.

Note 6 - Intangible assets

Intangible assets consisted of the following:

	December 31, 2009			June 30, 2009
	(Unaudited)
Land use rights	$	29,232,319		$	11,245,938
Patents		4,941,768			4,937,050
Customer lists and customer relationships		1,124,654			1,123,580
Trade secrets, formulas and manufacture process know-how		1,026,480			1,025,500
Licenses		23,389			23,368
Total		35,348,610			18,355,436
Less: accumulated amortization		(2,105,148	)		(1,314,255	)
Total	$	33,243,462		$	17,041,181

Amortization expense for the three months ended December 31, 2009, and 2008 amounted to approximately $401,000, and $74,000, respectively. Total amortization expense for the six months ended December 31, 2009 and 2008 amounted to approximately $803,000 and $147,000, respectively.

Note 7 - Debt

Short term bank loan

Short term bank loan represents an amount due to a bank that is due within one year. This loan can be renewed with the bank upon maturity. The Company’s short term bank loan consisted of the following:

	December 31, 2009		June 30, 2009
	(Unaudited)

Loan from Communication Bank; due December 2009; interest rate of 6.37% per annum; monthly interest payment; guaranteed by related party, Jiangbo Chinese-Western Pharmacy.	$	-	$	2,197,500
Total	$	-	$	2,197,500

Interest expense related to the short term bank loan amounted to approximately $37,000 and $0 for three months ended December 31, 2009 and 2008, respectively. Interest expense amounted to approximately $73,000 and $59,000 for the six months ended December 31, 2009 and 2008, respectively.

Notes Payable

Notes payable represents amounts due to a bank which are secured and typically renewed. All notes payable are secured by the Company’s restricted cash. The Company’s notes payables consist of the following:

	December 31, 2009		June 30, 2009
	(Unaudited)
Commercial Bank, various amounts, non-interest bearing, due from January 2010 to June 2010; 100% of restricted cash deposited	$	14,545,305	$	7,325,000
Total	$	14,545,305	$	7,325,000

Note 8 - 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 December 31, 2009 and 2008, the Company recorded other income of approximately $81,000 and $93,000 from leasing the two buildings to this related party. For the six months ended December 31, 2009 and 2008, the Company recorded other income of approximately $161,000 and $237,000 from leasing the two buildings to this related party. As of December 31, 2009 and June 30, 2009, amount due from this related party was approximately $161,000 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.

Other payables - related parties consisted of the following:

	December 31,		June 30,
	2009		2009
	(Unaudited)
Payable to Cao Wubo, Chief Executive Officer and Chairman of the Board	$	252,581	$	184,435

Payable to Haibo Xu, Chief Operating Officer and Director		33,688		33,688

Payable to Elsa Sung, Chief Financial Officer		23,920		18,333

Payable to John Wang, Director		12,500		2,500

Total other payable - related parties	$	332,689	$	238,956

Note 9 – Concentration of major customers, suppliers, and products

For the three months ended December 31, 2009 and 2008, three products accounted for 88% and 92%, respectively, of the Company’s total sales. For the six months ended December 31, 2009 and 2008, three products accounted for 87% and 95%, respectively, of the Company’s total sales.

For the three months ended December 31, 2009 and 2008, five suppliers accounted for approximately 66% and 69%, respectively, of the Company's purchases. For the six months ended December 31, 2009 and 2008, five suppliers accounted for approximately 67% and 70%, respectively, of the Company's purchases. These five suppliers represented 73% and 82% of the Company's total accounts payable as of December 31, 2009 and June 30, 2009, respectively.

Note 10 - Taxes payable

The Company is subject to the United States federal income tax at a tax rate of 34%. No provision for U.S. income taxes has been made as the Company had no U.S. taxable income during the six months ended December 31, 2009 and 2008.

The Company’s wholly owned subsidiaries Karmoya International Ltd. (“Karmoya”) and Union Well International Ltd. (“Union Well”) were incorporated in the British Virgin Island (“BVI”) and the Cayman Islands, respectively. Under the current laws of the BVI and Cayman Islands, the two entities are not subject to income taxes.

On March 16, 2007, the National People's Congress of China passed the new Enterprise Income Tax Law ("EIT Law"), and on November 28, 2007, the State Council of China passed the Implementing Rules for the EIT Law ("Implementing Rules") which became effective on January 1, 2008. The EIT Law and Implementing Rules impose a unified EIT rate of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than benefiting from the EIT Law and its associated preferential tax treatments, beginning January 1, 2008.

In addition to the changes to the current tax structure, under the EIT Law, an enterprise established outside of China with "de facto management bodies" within China is considered a resident enterprise and will normally be subject to an EIT of 25.0% on its global income. The Implementing Rules define the term "de facto management bodies" as "an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise." If the PRC tax authorities subsequently determine that the Company should be classified as a resident enterprise, then the organization's global income will be subject to PRC income tax of 25.0%. Laiyang Jiangbo and GJBT were subject to 25% income tax rate since January 1, 2008.

The table below summarizes the differences between the U.S. statutory federal rate and the Company’s effective tax rate for the six months ended December 31, 2009 and 2008:

	2009			2008
	(Unaudited)			(Unaudited)
U.S. Statutory rates		34.0	%		34.0	%
Foreign income not recognized in the U.S		(34.0	)%		(34.0	)%
China income taxes		25.0	%		25.0	%
China income tax exemptions		-			-
Other items(a)		14.7	%		11.6	%
Total provision for income taxes		39.7	%		36.6	%

(a) The14.7% and 11.6% represent the expenses incurred by the Company that are not deductible for PRC income tax purpose for the six months ended December 31, 2009 and 2008, respectively.

Taxes payable

	December 31,		June 30,
	2009		2009
	(Unaudited)
Value added taxes	$	777,654	$	4,090,492
Income taxes		2,527,828		6,689,199
Other taxes		303,183		468,535

Total	$	3,608,665