Unassociated Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 Amendment No. 1

FORM 10-K/A

(Mark One)

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

For the fiscal year ended: June 30, 2009

o TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number: 000-53037

JIANGBO PHARMACEUTICALS, INC.
(Name of small business issuer in its charter)

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

25 Haihe Road, Laiyang Economic Development
Laiyang City, Yantai, Shandong Province, People’s Republic of China 265200
(Address of principle executive offices)

(0086) 535-7282997
(Issuer's telephone number)

Securities registered under Section 12(b) of the Exchange Act:
None

Securities registered under Section 12(g) of the Exchange Act: 
Common Stock, $0.001 Par Value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x

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 preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days. Yes x No  ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and smaller reporting companies in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer   ¨
Non-accelerated filer (Do not check if a 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  ¨  No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the closing sale price of the registrant’s common stock on December 31, 2008 as reported on the OTC Bulletin Board was approximately $18.2 million (4,844,009 shares at $3.75). Approximately 4,880,460 shares of common stock held by each officer and director and by each person who owns 10% or more of the outstanding common stock have been excluded because such persons may be deemed to be affiliates.

The number of outstanding shares of the registrant’s common stock on May 12, 2010 was 12,078,552.

 DOCUMENTS INCORPORATED BY REFERENCE

None.

 
 

 

Explanatory Note:
 
This Annual Report on Form 10-K/A is being filed as Amendment No. 1 to our Annual Report on Form 10-K (the “Amendment”) for the year ended June 30, 2009 to restate the diluted earnings (loss) per share for the year ended June 30, 2008 included in the consolidated Statements of Income for the year ended June 30, 2009 as originally filed with the Securities and Exchange Commission on September 28, 2009.  This Amendment is filed solely to include revision in Part IV, Item 15 in the “Exhibit, Financial Statement Schedules” to revise and update diluted earnings (loss) per share calculation for the year ended June 30, 2008 on page F-3 and certain disclosure in paragraph 1 of Note 2- Summary of significant accounting policies, pro forma consolidated results of operations for the years ended June 30, 2008 in Note 3- Acquisition, and Note 4 – “Earnings (loss) per share”. In addition, new officer certifications are filed as exhibits to this Amendment.  Except as specifically referenced herein, this Amendment does not reflect any event occurring subsequent to September 28, 2009, the filing date of the original report.

 
2

 

Table of Contents

PART IV

Item 15. Exhibits and Financial Statement Schedules
4
   
SIGNATURES
6
   
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
7

 
3

 

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
The following exhibits are filed as part of this Amendment:
 
Exhibit
Number    Description
2.1    Share Acquisition and Exchange Agreement by and among Genesis, Karmoya and Karmoya Shareholders dated October 1, 2007 (1)
3.1    Articles of Incorporation (2)
3.2    Bylaws (2)
3.3    Articles of Amendment to Articles of Incorporation (2)
3.4    Articles of Amendment to Articles of Incorporation (2)
3.5    Articles of Amendment to Articles of Incorporation (3)
3.6    Articles of Amendment to Articles of Incorporation (4)
3.7    Articles of Amendment to Articles of Incorporation (5)
4.1    Articles of Amendment to Articles of Incorporation, Preferences and Rights of Series A Preferred Stock (6)
4.2    Articles of Amendment to Articles of Incorporation, Preferences and Rights of Series B Voting Convertible Preferred Stock (7)
4.3    6% Convertible Subordinated Debenture, dated November 7, 2007 (8)
4.4    Common Stock Purchase Warrant, dated November 7, 2007 (8)
4.5    Form of 6% Convertible Note (9)
4.6    Form of Class A Common Stock Purchase Warrant (9)
10.1    Securities Purchase Agreement, dated as of November 6, 2007, between Genesis Pharmaceuticals Enterprises, Inc. and Pope Investments, LLC (8)
10.2    Registration Rights Agreement, dated as of November 6, 2007, between Genesis Pharmaceuticals Enterprises, Inc. and Pope Investments, LLC (8)
10.3    Closing Escrow Agreement, dated as of November 6, 2007, by and among Genesis Pharmaceuticals Enterprises, Inc., Pope Investments, LLC and Sichenzia Ross Friedman Ference LLP (8)
10.4    Securities Purchase Agreement, dated May 30, 2008, by and among the Company, Karmoya International Ltd., Genesis Jiangbo (Laiyang) Biotech Technologies Co., Ltd., Wubo Cao and the investors party thereto (9)
10.5    Make Good Escrow Agreement, dated May 30, 2008, by and among the Company, the investors party thereto, Pope Investments LLC, Wubo Cao and Loeb & Loeb LLP (9)
10.6    Holdback Escrow Agreement, dated May 30, 2008, by and among the Company, the investors party thereto and Loeb & Loeb LLP (9)
10.7    Registration Rights Agreement, dated May 30, 2008, by and among the Company and the investors party thereto (9)
10.8    Lock-up Agreement, dated May 30, 2008, between the Company and Wubo Cao (9)
10.9    Employment Agreement between Elsa Sung and the Company, dated June 10, 2008 (10)
10.10    Consulting Agreement between the Company and Robert Cain, dated September 10, 2008 (11)
10.11    Asset Transfer Contract between Shandong Traditional Chinese Medicine College, The Traditional Chinese Medicine College of Shandong Hongrui Pharmaceutical Factory and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated January 23, 2009.(14)
10.12    Lease Agreement between Laiyang Jiangbo Pharmaceutical Co., Ltd and Jiangbo Chinese-Western Pharmacy dated May 4, 2008 (15)
10.13    Unofficial Summary Translation of the Supplemental Asset Transfer Agreement between Shandong Traditional Chinese Medicine College, The Traditional Chinese Medicine College of Shandong Hongrui Pharmaceutical Factory and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated February 10, 2009. (16)
10.14    Letter Agreement between the Company and Pope Investments LLC dated August 10, 2009. (17)
10.15    Unofficial Summary Translation of the Technology Cooperation Agreement between Shangdon University and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated  September 16, 2007 (18)
10.16    Unofficial Summary Translation of the Pharmaceutical Industrialization Joint Base Agreement between Institute of Microbiology, Chinese Academy of Sciences and Laiyang Jiangbo Pharmaceutical Co. Ltd date November 12, 2007 (18)
14.1    Code of Business Conduct and Ethics (12)
31.1    Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) *
31.2    Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)*
32.1    Certification of the Chief Executive Officer pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
 
4

 

32.2    Certification of the Chief Financial Officer pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
99.1    Consulting Services Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies Co., Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September 21, 2007 (English Translation) (1)
99.2    Equity Pledge Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies Co., Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September 21, 2007 (English Translation) (1)
99.3    Operating Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies Co., Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September 21, 2007 (English Translation) (1)
99.4    Proxy Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies Co., Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September 21, 2007 (English Translation) (1)
99.5    Option Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies Co., Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September 21, 2007 (English Translation) (1)
99.6    Audit Committee Charter (13)
99.7    Compensation Committee Charter (13)

(1) Incorporated by reference to the Company’s Current Report on Form 8-K filed on October 1, 2007.
(2) Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on September 1, 1999.
(3) Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 21, 2008.
(4) Incorporated by reference to the Company’s Current Report on Form 8-K filed on September 5, 2008.
(5) Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 21, 2009.
(6) Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB filed on January 22, 2004.
(7) Incorporated by reference to the Company’s Current Report on Form 8-K filed on October 9, 2007.
(8) Incorporated by reference to the Company’s Current Report on Form 8-K filed on November 9, 2007.
(9) Incorporated by reference to the Company’s Current Report on Form 8-K filed on June 3, 2008.
(10) Incorporated by reference to the Company’s Current Report on Form 8-K filed on June 12, 2008.
(11) Incorporated by reference to the Company’s Current Report on Form 8-K filed on September 12, 2008.
(12) Incorporated by reference to the Company's Annual Report on Form 10-KSB filed on January 13, 2006.
(13) Incorporated by reference to the Company's Registration Statement on Form S-1/A filed on August 26, 2008.
(14) Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 29, 2009.
(15) Incorporated by reference to the Company’s Annual Report on Form 10-K/A filed on April 10, 2009.
(16) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on May 15, 2009.
(17) Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 14, 2009.
(18) Incorporated by reference to the Company’s Annual Report on Form 10-K filed on September 28, 2009.
* Filed herewith.

 
5

 
 
SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 14, 2010.

JIANGBO PHARMACEUTICALS, INC.
 
/s/ Cao Wubo
Cao Wubo, Chief Executive Officer and
President

In accordance with the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

NAME
 
TITLE
 
DATE
         
/s/ Cao Wubo  
Chairman of the Board, Chief Executive Officer and President
 
May 14, 2010
Cao Wubo
       
         
/s/ Xu Haibo  
Director
 
May 14, 2010
Xu Haibo
       
         
/s/ Elsa Sung  
Chief Financial Officer and Financial Accounting Officer
 
May 14, 2010
Elsa Sung
       
         
/s/ Feng Xiaowei  
Director
 
May 14, 2010
Feng Xiaowei
       
         
/s/ Huang Lei
 
Director
 
May 14, 2010
Huang Lei
       
         
/s/ Ge Jian
 
Director
 
May 14, 2010
Ge Jian
       
         
/s/ Michael Marks
 
Director
 
May 14, 2010
Michael Marks
       
         
/s/ John (Yang) Wang
 
Director
 
May 14, 2010
John (Yang) Wang
  
 
  
 
 
 
6

 
 
(a) Financial Statements and Financial Statements Schedules
 
The following financial statements of Jiangbo Pharmaceuticals, Inc. and Reports of Independent Registered Public Accounting Firms are presented in the “F” pages of this report:  

Reports of Independent Registered Public Accounting Firms
 
F-1
     
Consolidated Balance Sheets - as of June 30, 2009 and 2008
 
F-2
     
Consolidated Statements of Income and Other Comprehensive Income - for the Years ended June 30, 2009, 2008 and 2007
 
F-3
     
Consolidated Statements of Shareholders’ Equity - for the Years ended June 30, 2009, 2008 and 2007
 
F-4
     
Consolidated Statements of Cash Flows - for the Years ended June 30, 2009, 2008 and 2007
 
F-5
     
Notes to Consolidated Financial Statements
 
F-6 - F-39
 
7

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders of
Jiangbo Pharmaceuticals, Inc. and Subsidiaries
 
We have audited the consolidated balance sheets of Jiangbo Pharmaceuticals, Inc. and Subsidiaries (the "Company") as of June 30, 2009 and 2008, and the consolidated statements of income and other comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended June 30, 2009. Jiangbo Pharmaceuticals, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jiangbo Pharmaceuticals, Inc and Subsidiaries as of June 30, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2009 in conformity with accounting principles generally accepted in the United States of America.

/S/ Frazer Frost, LLP (successor entity of Moore Stephens Wurth Frazer and Torbet, LLP, see Form 8-K filed on January 7, 2009)

Brea, California
September 28, 2009
Except for paragraph 1 of Note 2, as to which the date is May 11, 2010

 
F-1

 

JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2009 AND 2008

   
2009
   
2008
 
ASSETS
           
CURRENT ASSETS:
           
Cash
  $ 104,366,117     $ 48,195,798  
Restricted cash
    7,325,000       7,839,785  
Investments
    879,228       2,055,241  
Accounts receivable, net of allowance for doubtful accounts of $694,370 and $155,662
               
as of June 30, 2009 and 2008, respectively
    19,222,707       24,312,077  
Accounts receivable - related parties
    -       673,808  
Inventories
    3,277,194       3,906,174  
Other receivables
    167,012       152,469  
Advances to suppliers
    236,496       1,718,504  
Financing costs - current
    680,303       680,303  
Total current assets
    136,154,057       89,534,159  
                 
PLANT AND EQUIPMENT, net
    13,957,397       11,225,844  
                 
OTHER ASSETS:
               
Restricted investments
    1,033,463       2,481,413  
Financing costs, net
    556,365       1,236,641  
Intangible assets, net
    17,041,181       9,916,801  
Total other assets
    18,631,009       13,634,855  
                 
Total assets
  $ 168,742,463     $ 114,394,858  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 6,146,497     $ 2,341,812  
Short term bank loans
    2,197,500       2,772,100  
Notes payable
    7,325,000       5,843,295  
Other payables
    2,152,063       3,510,864  
Refundable security deposits due to distributors
    4,102,000       -  
Other payables - related parties
    238,956       324,976  
Accrued liabilities
    1,356,898       334,439  
Liabilities assumed from reorganization
    1,565,036       1,084,427  
Taxes payable
    11,248,226       166,433  
Total current liabilities
    36,332,176       16,378,346  
                 
CONVERTIBLE DEBT, net of discount $28,493,089 and $32,499,957
               
as of June 30, 2009 and 2008, respectively
    6,346,911       2,500,043  
                 
Total liabilities
    42,679,087       18,878,389  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS' EQUITY:
               
Convertible preferred stock Series A ($0.001 par value; 0 and 20,000,000
               
shares authorized as of June 30, 2009 and 2008, respectively; 0 shares issued and outstanding as of June 30, 2009 and 2008)
    -       -  
Common stock ($0.001 par value, 22,500,000 and 15,000,000 shares authorized,
               
10,435,099 and 9,767,844 shares issued and outstanding as of June 30, 2009 and 2008, respectively)
    10,435       9,770  
Paid-in-capital
    48,397,794       45,554,513  
Captial contribution receivable
    (11,000 )     (11,000 )
Retained earnings
    67,888,667       39,008,403  
Statutory reserves
    3,253,878       3,253,878  
Accumulated other comprehensive income
    6,523,602       7,700,905  
Total shareholders' equity
    126,063,376       95,516,469  
Total liabilities and shareholders' equity
  $ 168,742,463     $ 114,394,858  
 
See report of indepdendent registered public accounting firm.

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

 
F-2

 

JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY GENESIS PHARMACEUTICALS ENTERPRISES, INC.)
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS  ENDED JUNE 30, 2009, 2008 AND 2007

   
2009
   
2008
   
2007
 
         
RESTATED
       
                   
REVENUES:
                 
Sales
  $ 117,143,950     $ 93,982,407     $ 72,259,812  
Sales - related parties
    244,026       5,564,098       3,933,881  
                         
TOTAL REVENUE, net
    117,387,976       99,546,505       76,193,693  
                         
Cost of sales
    27,854,747       21,072,674       19,961,439  
Cost of sales - related parties
    54,519       1,433,873       1,200,091  
                         
COST OF SALES
    27,909,266       22,506,547       21,161,530  
                         
GROSS PROFIT
    89,478,710       77,039,958       55,032,163  
                         
RESEARCH AND DEVELOPMENT EXPENSE
    4,395,000       3,235,715       11,143,830  
                         
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    35,315,529       41,593,197       25,579,361  
                         
INCOME FROM OPERATIONS
    49,768,181       32,211,046       18,308,972  
                         
OTHER (INCOME) EXPENSE, NET
                       
Non-operating expense
    894,014       708,338       -  
                         
Non-operating income
    (89,453 )     (1,281,149 )     (6,484,484 )
                         
Non-operating income - related party
    (382,970 )     (110,152 )     (102,472 )
Interest expense, net
    5,904,511       3,092,183       211,616  
Loss from discontinued operations
    1,781,946       380,027       -  
                         
OTHER EXPENSE (INCOME), NET
    8,108,048       2,789,247       (6,375,340 )
                         
INCOME BEFORE PROVISION FOR INCOME TAXES
    41,660,133       29,421,799       24,684,312  
                         
PROVISION FOR INCOME TAXES
    12,779,869       6,970,739       2,631,256  
                         
NET INCOME
    28,880,264       22,451,060       22,053,056  
                         
OTHER COMPREHENSIVE INCOME:
                       
Unrealized gain (loss) on marketable securities
    (1,514,230 )     1,347,852       -  
Foreign currency translation adjustment
    336,927       5,206,612       1,018,130  
                         
COMPREHENSIVE INCOME
  $ 27,702,961     $ 29,005,524     $ 23,071,186  
                         
WEIGITED AVERAGE NUMBER OF SHARES:
                       
                         
Basic
    10,061,326       9,164,127       7,494,740  
                         
Dilulted
    14,484,830       9,900,428       7,494,740  
                         
EARNINGS (LOSS) PER SHARE:
                       
                         
Basic
  $ 2.87     $ 2.45     $ 2.94  
                         
Diluted
  $ 0.09     $ (1.17 )   $ 2.94  

See report of independent registered public accounting firm.

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

 
F-3

 

JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
   
Common Stock
                                                 
   
Par Vaule $0.001
   
Treasury Stock
   
Additional
   
Capital
   
Retained Earnings
   
Accumulated other
       
   
Number
   
Common
 
Number
   
Treasury
   
Paid-in
   
contribution
   
Statutory
   
Unrestricted
   
comprehensive
       
   
of shares
   
stock
   
of shares
   
stock
   
capital
   
receivable
   
reserves
   
earnings
   
income
   
Totals
 
BALANCE, June 30, 2006
   
7,494,740
   
$
7,495
     
10,000
   
$
(2,805
)
 
$
13,216,309
   
$
(12,011,000
)
 
$
648,667
   
$
7,453,498
   
$
128,311
   
$
9,440,475
 
                                                                             
-
 
Capital contribution
                                   
5,128,000
                                     
5,128,000
 
Dividend distribution
                                                           
(10,344,000
)
           
(10,344,000
)
Net income
                                                           
22,053,056
             
22,053,056
 
Adjustment to statutory reserve
                                                   
1,508,970
     
(1,508,970
)
           
-
 
Foreign currency translation gain
                                                                   
1,018,130
     
1,018,130
 
BALANCE, June 30, 2007
   
7,494,740
   
$
7,495
     
10,000
   
$
(2,805
)
 
$
18,344,309
   
$
(12,011,000
)
 
$
2,157,637
   
$
17,653,584
   
$
1,146,441
   
$
27,295,661
 
                                                                                 
Recapitalization of Company
   
2,131,603
     
2,132
                     
3,815,813
                                     
3,817,959
 
Common stock Issued for conversion of options
   
44,031
     
44
                     
(44
)
                                   
0
 
Issuance of common stock @ $4.80 per share
   
37,500
     
38
                     
179,963
                                     
180,001
 
Exercise of stock options to common stock @ $4.20 per share
   
37,500
     
38
                     
157,463
                                     
157,501
 
Conversion of convertible preferred stock A to common stock
   
16,595
     
17
                     
(2
)
                                   
-
 
Capital contribution registered
                                   
(12,000,000
)
   
12,000,000
                             
-
 
Sales of treasury stock
                   
(10,000
)
   
2,805
     
(830
)
                                   
1,975
 
Grant of warrants and beneficial conversion feature in connection with convertible debt
                                   
35,000,000
                                     
35,000,000
 
Common stock issued for service @ $8.00 per share
   
5,875
     
6
                     
46,994
                                     
47,000
 
Stock option compensation
                                   
10,847
                                     
10,847
 
Net income
                                                           
22,451,060
             
22,451,060
 
Adjustment to statutory reserve
                                                   
1,096,241
     
(1,096,241
)
           
-
 
Change in fair value on restricted marketable equity securities
                                                                   
1,347,852
     
1,347,852
 
Foreign currency translation gain
                                                                   
5,206,612
     
5,206,612
 
BALANCE, June 30, 2008
   
9,767,844
   
$
9,770
     
-
   
$
-
   
$
45,554,513
   
$
(11,000
)
 
$
3,253,878
   
$
39,008,403
   
$
7,700,905
   
$
95,516,469
 
                                                                                 
Shares issued for adjustments for 1:40 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
 
Stock-based compensation
                                   
64,314
                                     
64,314
 
Conversion of convertible debt to stock
   
20,000
     
20
                     
159,980
                                     
160,000
 
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
 
 
See report of indepdendent registered public accounting firm.
The accompanying notes are an integral part of these consolidated financial statements.

 
F-4

 

JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2009, 2008 AND 2007

   
2009
   
2008
   
2007
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
Net income
 
$
28,880,264
   
$
22,451,060
   
$
22,053,056
 
Loss from discontinued operations
   
1,781,946
     
380,027
     
-
 
Income from continued operations
   
30,662,210
     
22,831,087
     
22,053,056
 
Adjustments to reconcile net income to cash
                       
provided by operating activities:
                       
Depreciation
   
679,507
     
517,863
     
364,417
 
Amortization of intangible assets
   
735,427
     
184,465
     
122,126
 
Amortization of debt issuance costs
   
680,276
     
123,964
     
-
 
Amortization of debt discount
   
4,006,868
     
2,500,043
     
-
 
Bad debt (recovery) expense
   
538,069
     
(27,641
)
   
-
 
Loss on sale of marketable securities
   
473,303
     
-
     
-
 
Unrealized loss on investments
   
229,425
     
696,528
     
-
 
Other non-cash settlement income expense
   
(20,000
)
   
-
     
-
 
Common stock issued for services
   
-
     
46,994
         
Amortization of stock option compensation
   
106,815
     
10,847
     
-
 
Gain on forgiveness of debt
   
-
     
(86,752
)
   
-
 
Changes in operating assets and liabilities
                       
Accounts receivable
   
4,651,284
     
(10,534,270
)
   
(1,534,814
)
Accounts receivable - related parties
   
676,579
     
(113,465
)
   
(62,599
)
Notes receivables
   
-
     
60,694
     
(26,626
)
Inventories
   
792,293
     
1,686,090
     
1,727,215
 
Other receivables
   
(21,038
)
   
(111,571
)
   
(20,889
)
Advances to suppliers
   
1,495,805
     
(1,259,254
)
   
(66,821
)
Other assets
   
-
     
92,996
     
1,563,800
 
Accounts payable
   
3,795,084
     
55,085
     
(2,027,968
)
Accrued liabilities
   
1,182,018
     
211,362
     
45,567
 
Other payables
   
(1,534,740
)
   
2,033,689
     
(827,498
)
Other payables - related parties
   
(86,692
)
   
(822,155
)
   
(3,848,086
)
Refundable security deposits due to distributors
   
4,102,000
     
-
     
-
 
Liabilities assumed from reorganization
   
(1,301,337
)
   
(1,172,816
)
   
-
 
Taxes payable
   
11,081,110
     
169,790
     
(2,168,912
)
Net cash provided by operating activities
   
62,924,266
     
17,093,573
     
15,291,968
 
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Acquisition of Hongrui
   
(8,584,900
)
   
-
     
-
 
Proceeds from sale of investments
   
407,005
     
1,034,028
     
-
 
Proceeds from sale of restricted investments
   
-
     
155,000
     
-
 
Purchase of equipment
   
(156,702
)
   
(453,718
)
   
(183,237
)
Purchase of intangible assets
   
-
     
(8,870,631
)
   
-
 
Cash proceeds from sale of equipment
   
15,615
     
-
     
-
 
Cash proceeds from reverse acquisition
   
-
     
534,950
         
Net cash used in investing activities
   
(8,318,982
)
   
(7,600,371
)
   
(183,237
)
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Change in restricted cash
   
538,815
     
3,292,168
     
435,022
 
Proceeds from notes payable
   
13,896,990
     
-
     
-
 
Principal payments on notes payable
   
(12,439,315
)
   
(3,292,168
)
   
(435,022
)
Borrowings on short term bank loans
   
2,197,500
     
2,616,110
     
4,471,600
 
Principal payments on short term bank loans
   
(2,783,500
)
   
(4,819,150
)
   
(5,688,450
)
Proceeds from sale of common stock
   
-
     
337,500
     
-
 
Proceeds from sale of treasury stock
   
-
     
1,975
     
-
 
Payment to escrow acount
   
-
     
(1,996,490
)
   
-
 
Payments for dividend
   
-
     
(10,608,000
)
   
-
 
Proceeds from convertible debt
   
-
     
32,974,500
     
-
 
Payments for debt issuance cost
   
-
     
(15,408
)
   
-
 
Net cash provided by (used in) financing activities
   
1,410,490
     
18,491,037
     
(1,216,850
)
                         
EFFECTS OF EXCHANGE RATE CHANGE IN CASH
   
154,545
     
2,474,351
     
473,729
 
                         
NET INCREASE IN CASH
   
56,170,319
     
30,458,590
     
14,365,610
 
                         
CASH, beginning of the year
   
48,195,798
     
17,737,208
     
3,371,598
 
                         
CASH, end of the year
 
$
104,366,117
   
$
48,195,798
   
$
17,737,208
 
                         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
                       
Cash paid for interest
 
$
2,255,809
   
$
493,781
   
$
280,628
 
Cash paid for taxes
 
$
6,167,810
   
$
7,001,264
   
$
447,911
 
Non-cash investing and financing activities:
 
$
     
$
     
$
   
Capital contribution made bia contribution of land use rights and buildings
 
$
     
$
     
$
51,280,000
 
Common stock issued to acquire Hongrui
 
$
2,597,132
   
$
     
$
   
 
See report of independent registered public accounting firm.
The accompanying notes are an integral part of these consolidated financial statements.

 
F-5

 

JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS GENESIS PHARMACEUTICALS ENTERPRISES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
JUNE 30, 2009
 
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. with the principal business objective of operating as a business development and marketing firm that specializes in advising and providing  a turnkey solution for small and mid-sized Chinese companies entering western markets. On October 12, 2007, after a share exchange transaction, the Company’s corporate name was changed to Genesis Pharmaceuticals Enterprises, Inc (“Genesis”).
 
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, our stock symbol changed to "JGBO" with the opening of trading on May 12, 2009 on the OTCBB.
 
On October 1, 2007, Genesis executed a Share Acquisition and Exchange Agreement (“Exchange Agreement”) by and among Genesis, Karmoya International Ltd. (“Karmoya”), a British Virgin Islands (“BVI”) company, and the shareholders of 100% of Karmoya’s capital stock (the “Karmoya Shareholders”). After the closing of the share exchange transaction, Karmoya became the Company’s wholly-owned subsidiary, and the Company’s primary operations now consist of the business and operations of Karmoya and its subsidiaries.

Contemporaneous with the share exchange agreement in October 2007, the Company discontinued the business development and marketing segment of the Company, which had been the Company’s principal business objective prior to the reverse merger as described in Note 6. (The business development and marketing segment represented 100% of the Company’s activities prior to October 1, 2007.) Liabilities of the business development and marketing segment are reclassified as liabilities assumed from reorganization in the accompanying consolidated balance sheets. The results of operations and cash flows of the business development and marketing segment of the Company have been reflected as loss from discontinued operations in the consolidated statements of income and consolidated statements of cash flows, respectively, for the years ended June 30, 2009 and 2008. Except for Jiangbo Pharmaceuticals, Inc., all other entities that were consolidated into the Company prior to October 1, 2007, have been administratively dissolved.

Karmoya was established on July 18, 2007, under the laws of British Virgin Islands. Karmoya was established as a “special purpose vehicle” for the foreign capital raising activities of Laiyang Jiangbo Pharmaceutical Co., Ltd. (“Laiyang Jiangbo”), a limited liability company formed under the laws of the People’s Republic of China (the “PRC” or “China”). China’s State Administration of Foreign Exchange (“SAFE”) requires the shareholders of any Chinese companies to obtain SAFE’s approval before establishing any offshore holding company structure for foreign financing as well as subsequent acquisition matters under an official notice known as “Circular 106” in the PRC. On September 19, 2007, Karmoya was approved by the local Chinese SAFE as a “special purpose vehicle” offshore company.

On September 20, 2007, Karmoya acquired 100% of Union Well International Limited (“Union Well”), a Cayman Islands corporation established on May 9, 2007. On September 17, 2007, Union Well established a wholly-owned subsidiary, Genesis Jiangbo (“Laiyang”) Biotech Technology Co., Ltd. (“GJBT”), in the PRC as a wholly-owned foreign limited liability company with an original registered capital of $12 million. GJBT develops, manufactures, and sells health medicines. The Company increased its registered capital in GJBT to $30,000,000 in June 2008. In August 2008, the PRC government approved for GJBT to increase its registered capital from $30 million to $58 million. In August 2008, the PRC government approved for GJBT to increase its registered capital from $30 million to $58 million. The PRC laws require Union Well, the 100% owner of GJBT to contribute at least 20% of the registered capital within 30 days of the approval and the remaining balance was required to be contributed within two years of the approval date. In August 2008, GJBT received additional registered capital in the amount of $1,996,001.
 
See report of independent registered public accounting firm.

 
F-6

 

Laiyang Jiangbo was formed under laws of the PRC in August 2003, with registered capital of $1,210,000 (RMB 10,000,000). On December 1, 2006, Laiyang Jiangbo’s registered capital increased to $6,664,000 (RMB 50,000,000), and on December 22, 2006, the registered capital was funded by the contribution of certain buildings to the Company. Laiyang Jiangbo produces and sells western pharmaceutical products in China and focuses on developing innovative medicines to address various medical needs for patients worldwide. Laiyang Jiangbo operates in 26 provinces in the PRC, and is headquartered in Laiyang City, Shandong province, China.
 
On September 21, 2007, GJBT entered into a series of contractual arrangements (“Contractual Arrangements”) with Laiyang Jiangbo and its shareholders. Under the terms of the Contractual Arrangements, GJBT took control over the management of the business activities of Laiyang Jiangbo and holds a 100% variable interest in Laiyang Jiangbo. The Contractual Arrangements are comprised of a series of agreements, including a Consulting Services Agreement and an Operating Agreement, through which GJBT has the right to advise, consult, manage, and operate Laiyang Jiangbo, and collect and own all of their respective net profits. Additionally, Laiyang Jiangbo’s shareholders have granted their voting rights over Laiyang Jiangbo to GJBT. In order to further reinforce GJBT’s rights to control and operate Laiyang Jiangbo, Laiyang Jiangbo and its shareholders have granted GJBT the exclusive right and option to acquire all of their equity interests in Laiyang Jiangbo or, alternatively, all of the assets of Laiyang Jiangbo. Further Laiyang Jiangbo’s shareholders have pledged all of their rights, titles, and interests in Laiyang Jiangbo to GJBT. GJBT is 100% owned by Union Well International Ltd. (“Union Well”) which is 100% owned Karmoya. The Company’s CEO and Chairman, Mr. Cao Wubo and his wife, Mrs. Xun Guihong, jointly owned 74.4 % of Karmoya prior to October 1, 2007.  Remaining 25.6% of Karmoya ownership was transferred to Genesis Technology Group, Inc. (now known as Genesis Pharmaceuticals Enterprises, Inc.) from various parties on October 1, 2007. As Karmoya, Union Well, and GJBT all have the same sole executive director, Mr. Cao Wubo, and the voting ownership of Laiyang Jiangbo and GJBT meet the criteria for common control for accounting purposes, Laiyang Jiangbo and GJBT have been operated under the common control.

Karmoya used the contractual arrangements to gain control of Laiyang Jiangbo, instead of using a complete acquisition of Laiyang Jiangbo’s assets or equity to make Laiyang Jiangbo a wholly-owned subsidiary of Karmoya, due to the following: (i) PRC laws governing share exchanges with foreign entities, which became effective on September 8, 2006, make the consequences of such acquisitions uncertain and (ii) other than by share exchange, PRC’s laws would require Karmoya to acquire Laiyang Jiangbo in cash, and at the time of the acquisition, Karmoya was unable to raise sufficient funds to pay the full appraised cash fair value for Laiyang Jiangbo’s assets or shares as required under PRC laws.

In October 2007, the Company recapitalized the Company to give effect to the Exchange Agreement.  Under generally accepted accounting principles, the acquisition by the Company of Karmoya is considered to be capital transactions in substance, rather than a business combination. That is, the acquisition is equivalent to the acquisition by Karmoya of the Company, then known as Genesis Technology Group, Inc., with the issuance of stock by Karmoya for the net monetary assets of the Company.  This transaction is reflected as a recapitalization, and is accounted for as a change in capital structure.  Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition. Under reverse acquisition accounting, the comparative historical financial statements of the Company, as the legal acquirer, are those of the accounting acquirer, Karmoya. Since Karmoya, Union Well and GJBT did not have any business activities, the Company’s accompanying financial statements prior to the closing on the reverse acquisition reflect only the business activities of Laiyang Jiangbo.  The financial statements reflect the recapitalization of the shareholders’ equity as if the transactions occurred as of the beginning of the first period presented.  
 
See report of independent registered public accounting firm.

 
F-7

 

Pursuant to the Exchange Agreement, the shareholders of Karmoya transferred to the Company all of the outstanding shares of Karmoya in exchange for 597 shares of the Company’s common stock, and 5,995,780 shares of the Company’s Series B convertible voting preferred stock and convertible into 299,789,000 common shares of the Company. The 594 shares of common stock and 5,995,780 shares of preferred stocks issued to the former Karmoya stockholders are deemed to be outstanding for all periods reported prior to the date of the reverse acquisition. Upon the preferred stock conversion, as of the closing date, the holder of the preferred stock would hold approximately 75% of the Company’s issued and outstanding common stock.  As a result, Karmoya became the Company’s wholly-owned subsidiary. As a result of the transaction pursuant to the Exchange Agreement, the Company’s business has become the business of Laiyang Jiangbo. The sole director and officer of Karmoya is Mr. Wubo Cao, who, as a result of the exchange, became the Chief Executive Officer, President and Chairman of the Board of the Company.
 
Note 2 - Summary of significant accounting policies

Restatement

The Company previously excluded the dilutive effect of its May 2008 convertible debentures from the diluted earnings per share calculation for the year ended June 30, 2008. The Company has revised its accounting to include the dilutive effect    of   the May 2008 convertible debentures in its diluted earnings per share calculation. The interest expense and amortization expenses on the financing costs and note discounts were added back and all the unamortized financing costs and debt discounts at beginning of the period were subtracted from the 2008 diluted earnings per shares calculation.

The restatement had no effect on the Company’s consolidated financial statements as of and for the year ended June 30, 2009 and the Company’s consolidated balance sheet, consolidated statement of cash flow, and consolidated statements of shareholders’ equity as of and for the year ended June 30, 2008. The Company’s consolidated statement of income and other comprehensive income for the year ended June 30, 2008 has been restated as follows:

Diluted earnings (loss) per share
   
Original
   
Increase
(Decrease)
   
Restated
 
For the years ended June 30,2008:
                 
Net income for basic earnings per share
 
$
22,451,060
   
$
   
$
22,451,060
 
Add: interest expense
   
195,833
     
150,000
     
345,833
 
Add: financing cost amortization
   
71,708
     
52,255
     
123,963
 
Add: note discount amortization
   
545,359
     
1,954,684
     
2,500,043
 
Subtract: unamortized financing cost at beginning of the period
   
(349,000
)
   
(1,691,907
)
   
(2,040,907
Subtract: unamortized debt discount at beginning of the period
   
(5,000,000
)
   
(30,000,000
)
   
(35,000,000
 
Net income for diluted earnings per share
   
17,914,960
     
(29,534,968
   
(11,620,008
Weighted average shares used in basic computation
   
9,164,127
     
-
     
9,164,127
 
Diluted effect of stock options
   
87,910
     
(87,910
)    
-
 
Diluted effect of warrants
   
79,973
     
(79,973
)    
-
 
Diluted effect of convertible notes
   
405,822
     
330,479
     
736,301
 
Weighted average shares used in diluted computation
   
9,737,832
     
162,596
     
9,900,428
 
                         
Earnings (loss) per share:
                       
Basic
 
$
2.45
   
$
-
   
$
2.45
 
Diluted
 
$
1.84
   
$
(3.01
 
$
(1.17
)

 
F-8

 

Basis of presentation

The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). All significant inter-company accounts and transactions have been eliminated in consolidation.

Principles of consolidation

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

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

Financial Accounting Standards Board (“FASB”) Interpretation Number (“FIN”) 46 (revised December 2003), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46R”), addresses whether certain types of entities, referred to as variable interest entities should be consolidated in a company’s consolidated financial statements. In accordance with the provisions of FIN 46R, Laiyang Jiangbo is considered variable interest entities, and the Company is the primary beneficiary. The Company’s relationships with Laiyang Jiangbo and its shareholders are governed by a series of contractual arrangements between GJBT, the Company’s wholly foreign-owned enterprise in the PRC, and Laiyang Jiangbo, which is the operating company of the Company in the PRC. Under PRC laws, each of GJBT and Laiyang Jiangbo is an independent legal entity and neither of them is exposed to liabilities incurred by the other parties. The contractual arrangements constitute valid and binding obligations of the parties of such agreements. Each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of the PRC.

On September 21, 2007, the Company entered into the following contractual arrangements with Laiyang Jiangbo:

Consulting Services Agreement: Pursuant to the exclusive consulting services agreement between GJBT and Laiyang Jiangbo, GJBT has the exclusive right to provide to Laiyang Jiangbo general consulting services related to pharmaceutical business operations, as well as consulting services related to human resources and technological research and development of pharmaceutical products and health supplements (the “Services”). Under this agreement, GJBT owns the intellectual property rights developed or discovered through research and development while providing the Services for Laiyang Jiangbo. Laiyang Jiangbo pays a quarterly consulting service fee in Chinese Renminbi (“ RMB ”) to GJBT that is equal to all of Laiyang Jiangbo's revenue for such quarter.

See report of independent registered public accounting firm.

 
F-9

 

Operating Agreement: Pursuant to the operating agreement among GJBT, Laiyang Jiangbo and the shareholders of Laiyang Jiangbo who collectively hold 100% of the outstanding shares of Laiyang Jiangbo (collectively, the “ Laiyang Shareholders ”), GJBT provides guidance and instructions on Laiyang Jiangbo's daily operations, financial management and employment issues. The Laiyang Shareholders must appoint the candidates recommended by GJBT as members of Laiyang Jiangbo's board of directors. GJBT has the right to appoint senior executives of Laiyang Jiangbo. In addition, GJBT agrees to guarantee Laiyang Jiangbo's performance under any agreements or arrangements relating to Laiyang Jiangbo's business arrangements with any third party. Laiyang Jiangbo, in return, agreed to pledge its accounts receivable and all of its assets to GJBT. Moreover, Laiyang Jiangbo agrees that without the prior consent of GJBT, Laiyang Jiangbo will not engage in any transactions that could materially affect the assets, liabilities, rights or operations of Laiyang Jiangbo, including, but not limited to, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a third party, or transfer of any agreements relating to its business operation to any third party. The term of this agreement is ten (10) years from September 21, 2007, unless early termination occurs in accordance with the provisions of the agreement and may be extended only upon GJBT's written confirmation prior to the expiration of the this agreement, with the extended term to be mutually agreed upon by the parties.

  Equity Pledge Agreement: Pursuant to the equity pledge agreement among GJBT, Laiyang Jiangbo and the Laiyang Shareholders, the Laiyang Shareholders pledged all of their equity interests in Laiyang Jiangbo to GJBT to guarantee Laiyang Jiangbo's performance of its obligations under the consulting services agreement. If either Laiyang Jiangbo or any of the Laiyang Shareholders breaches its respective contractual obligations, GJBT, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The Laiyang Shareholders also granted GJBT an exclusive, irrevocable power of attorney to take actions in the place and stead of the Laiyang Shareholders to carry out the security provisions of the equity pledge agreement and take any action and execute any instrument that GJBT may deem necessary or advisable to accomplish the purposes of the equity pledge agreement. The Laiyang Shareholders agreed, among other things, not to dispose of the pledged equity interests or take any actions that would prejudice GJBT's interest. The equity pledge agreement will expire two (2) years after Laiyang Jiangbo obligations under the exclusive consulting services agreement have been fulfilled.

Option Agreement: Pursuant to the option agreement among GJBT, Laiyang Jiangbo and the Laiyang Shareholders, the Laiyang Shareholders irrevocably granted GJBT or its designated person an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in Laiyang Jiangbo for the cost of the initial contributions to the registered capital or the minimum amount of consideration permitted by applicable PRC law. GJBT or its designated person has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement is ten (10) years from September 21, 2007, unless early termination occurs in accordance with the provisions of the agreement and may be extended only upon GJBT's written confirmation prior to the expiration of the this agreement, with the extended term to be mutually agreed upon by the parties.

  Proxy Agreement: Pursuant to the proxy agreement among GJBT and the Laiyang Shareholders, the Laiyang Shareholders agreed to irrevocably grant and entrust all the rights to exercise their voting power to the person(s) appointed by GJBT. GJBT may from time to time establish and amend rules to govern how GJBT shall exercise the powers granted to it by the Laiyang Shareholders, and GJBT shall take action only in accordance with such rules. The Laiyang Shareholders shall not transfer their equity interests in Laiyang Jiangbo to any individual or company (other than GJBT or the individuals or entities designated by GJBT). The Laiyang Shareholders acknowledged that they will continue to perform this agreement even if one or more than one of them no longer hold the equity interests of Laiyang Jiangbo. This agreement may not be terminated without the unanimous consent of all of the parties, except that GJBT may terminate this agreement by giving thirty (30) days prior written notice to the Laiyang Shareholders.
 
See report of independent registered public accounting firm.

 
F-10

 

These contractual arrangements obligate GJBT to absorb a majority of the risk of loss from Laiyang Jiangbo’s  activities and enable GJBT  to receive a majority of its expected residual returns.  GJBT also has the right to appoint senior executives and members of Laiyang Jiangbo’s board of directors, and Laiyang Jiangbo also agrees that without the prior consent of GJBT, Laiyang Jiangbo will not engage in any transactions that could materially affect the assets, liabilities, rights or operations of Laiyang Jiangbo. Because of the contractual arrangements, the Company has a pecuniary interest in Laiyang Jiangbo that requires consolidation of the Company’s and Laiyang Jiangbo’s financial statements.

Reverse stock split

In July 2008, the Company approved a 40-to-1 reverse stock split, effective on September 4, 2008. The accompanying consolidated financial statements have been retroactively adjusted to reflect the reverse split. All share representations are on a post-split basis.

Foreign currency translation

The reporting currency of the Company is the U.S. dollar (“USD”). The functional currency of the Company is the local currency, the Chinese Renminbi (“RMB”). In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, “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 cur