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:  March 31, 2010

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 May 14, 2010 was 12,078,552.

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

- 2 -
 
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)
CONSOLIDATED BALANCE SHEETS
 
   
March 31,
    
June 30,
  
   
2010
    
2009
  
   
(Unaudited)
        
             
ASSETS
            
CURRENT ASSETS:
            
Cash
   $ 96,464,482     $ 104,366,117  
Restricted cash
     11,523,285       7,325,000  
Investments
     26,362       879,228  
Accounts receivable, net of allowance for doubtful accounts of $1,141,756 and $694,370as of March 31, 2010 and June 30, 2009, respectively
     27,619,639       19,222,707  
Inventories
     3,368,308       3,277,194  
Other receivables
     12,523       167,012  
Other receivable - related parties
     242,055       -  
Advances to suppliers
     510,288       236,496  
Financing costs - current
     565,684       680,303  
Total current assets
     140,332,626       136,154,057  
                 
PLANT AND EQUIPMENT, net
     13,437,640       13,957,397  
                 
OTHER ASSETS:
                
Restricted investments
     161,471       1,033,463  
Financing costs, net of current
     -       556,365  
Intangible assets, net
     32,852,205       17,041,181  
Total other assets
     33,013,676       18,631,009  
                 
                 
Total assets
   $ 186,783,942     $ 168,742,463  
                 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES:
                
Accounts payable
   $ 2,227,240     $ 6,146,497  
Short term bank loan
     2,200,500       2,197,500  
Notes payable
     11,523,285       7,325,000  
Other payables
     2,880,338       2,152,063  
Refundable security deposits due to distributors
     3,080,700       4,102,000  
Other payables - related parties
     951,461       238,956  
Accrued liabilities
     4,045,510       1,356,898  
Liabilities assumed from reorganization
     536,614       1,565,036  
Taxes payable
     4,952,356       11,248,226  
Derivative liabilities
     20,074,873       -  
Convertible debt, net of discout $ 17,083,153 as of March, 31, 2010
     10,146,847       -  
Total current liabilities
     62,619,724       36,332,176  
                 
CONVERTIBLE DEBT, net of discount  $28,493,089 as of June 30, 2009
     -       6,346,911  
                 
Total liabilities
     62,619,724       42,679,087  
                 
COMMITMENTS AND CONTINGENCIES
                
                 
                 
SHAREHOLDERS' EQUITY:
                
Convertible preferred stock Series A ($0.001 par value; o shares isseud and outsanding as of March 31, 2010 and June 30, 2009)
     -       -  
Common stock ($0.001 par value, 22,500,000 and 15,000,000 shares authorized, 11,474,802 and 10,435,099 shares issued and outstanding as of March 31, 2010 and June 30, 2009 , respectively)
     11,475       10,435  
Paid-in-capital
     28,488,749       48,397,794  
Captial contribution receivable
     (11,000 )     (11,000 )
Retained earnings
     85,611,586       67,888,667  
Statutory reserves
     3,253,878       3,253,878  
Accumulated other comprehensive income
     6,809,530       6,523,602  
Total shareholders' equity
     124,164,218       126,063,376  
Total liabilities and shareholders' equity
   $ 186,783,942     $ 168,742,463  
 
The accompanying notes are integral part of these consolidated financial statements.
 
- 3 -
 
JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
  FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
 
   
For the Three Months Ended
    
For the Nine Months Ended
  
   
March 31,
    
March 31,
  
   
2010
    
2009
    
2010
    
2009
  
REVENUES:
                        
Sales
   $ 25,571,389     $ 25,725,837     $ 68,135,385     $ 85,991,330  
Sales - related parties
     -               -       243,943  
Total revenues
     25,571,389       25,725,837       68,135,385       86,235,273  
                                 
COST OF SALES
                                
Cost of sales
     6,974,455       6,853,810       17,901,903       19,705,020  
Cost of sales - related parties
     -       -       -       54,500  
Total cost of sales
     6,974,455       6,853,810       17,901,903       19,759,520  
                                 
GROSS PROFIT
     18,596,934       18,872,027       50,233,482       66,475,753  
                                 
RESEARCH AND DEVELOPMENT EXPENSE
     1,093,440       1,098,675       3,299,400       3,295,125  
                                 
SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES
     3,799,136       4,477,356       13,400,155       31,111,752  
                                 
INCOME FROM OPERATIONS
     13,704,358       13,295,996       33,533,927       32,068,876  
                                 
                                 
OTHER (INCOME) EXPENSE:
                                
Change in fair value of derivative liabilities
     (11,624,079 )     -       (13,490,071 )     -  
Other income - related parties
     (80,652 )     (76,552 )     (241,956 )     (313,276 )
Non-operating (income) expense
     5,790       (131,104 )     220,061       1,062,488  
Interest expense, net
     6,643,163       1,241,843       15,562,981       4,143,968  
Loss from discontinued operations
     36,000       103,008       200,769       1,693,830  
Total other income (expense), net
     (5,019,778 )     1,137,195       2,251,784       6,587,010  
                                 
INCOME BEFORE PROVISION FOR INCOME TAXES
     18,724,136       12,158,801       31,282,143       25,481,866  
                                 
PROVISION FOR INCOME TAXES
     3,539,870       3,302,953       8,618,061       8,093,320  
                                 
NET INCOME
     15,184,266       8,855,848       22,664,082       17,388,546  
                                 
OTHER COMPREHENSIVE INCOME:
                                
Unrealized holding  gain (loss)
     32,164       (200,025 )     88,535       (2,147,642 )
Foreign currency translation adjustment
     509       (201,173 )     197,393       378,284  
                                 
COMPREHENSIVE INCOME
   $ 15,184,775     $ 8,454,650     $ 22,950,010     $ 15,619,188  
                                 
BASIC WEIGHTED AVERAGE NUMBER OF SHARES
     11,419,991       10,277,762       10,965,346       9,937,189  
                                 
BASIC EARNINGS PER SHARE
   $ 1.33     $ 0.86     $ 2.07     $ 1.75  
                                 
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
     15,235,811       14,632,762       15,234,156       14,305,589  
                                 
DILUTED EARNINGS PER SHARE
   $ 0.02     $ (1.49 )   $ 0.57     $ (0.86 )
 
The accompanying notes are integral part of these consolidated financial statements.
 
- 4 -
 
JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
   
Common Stock
                            
Accumulated
       
   
Par Vaule $0.001
          
Capital
    
Retained Earnings
    
other
        
   
Number
          
Paid-in
    
contribution
    
Statutory
    
Unrestricted
    
comprehensive
        
   
of shares
    
Amount
    
capital
    
receivable
    
reserves
    
earnings
    
income
    
Totals
  
                                                 
BALANCE, June 30, 2008
     9,767,844     $ 9,770     $ 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       643       2,596,488                                       2,597,131  
Conversion of convertible debt to stock
     20,000       20       159,980                                       160,000  
Stock based compensation
                     64,315                                       64,315  
Net income
                                             28,880,264               28,880,264  
Adjustment to statutory reserve
                                                             -  
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 payment for other payable-related party @ $8.75 per share
     2,286       2       19,998                                       20,000  
Common stock issued for services @ $8.75 per share
     1,143       1       9,999                                       10,000  
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
     84,015       85       990,968                                       991,053  
Conversion of convertible debt to stock
     951,250       951       7,609,049                                       7,610,000  
Reclassification of derivative liabilites to APIC due to conversion of convertible debt
                     6,287,408                                       6,287,408  
Stock based compensation
                     135,104                                       135,104  
Net income
                                             22,664,082               22,664,082  
Change in fair value on restricted marketable equity securities
                                                     88,535       88,535  
Foreign currency translation gain
                                                     197,393       197,393  
BALANCE, March 31, 2010 (Unaudited)
     11,474,802     $ 11,475     $ 28,488,749     $ (11,000 )   $ 3,253,878     $ 85,611,586     $ 6,809,530     $ 124,164,218  
 
The accompanying notes are integral part of these consolidated financial statements.
 
- 5 -
 
JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR NINE MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)

   
2010
    
2009
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net income
   $ 22,664,082     $ 17,388,546  
Loss from discontinued operations
     200,769       1,693,830  
Income from continuing operations
     22,864,851       19,082,376  
Adjustments to reconcile net income to net cash, net of acquisition,
                
provided by operating activities:
                
Depreciation
     615,565       464,094  
Amortization of intangible assets
     1,194,331       371,925  
Amortization of deferred debt issuance costs
     670,984       510,227  
Amortization of debt discount
     11,409,936       2,679,526  
Loss from issuance of shares in lieu of cash interest payment
     318,936       -  
Interest expense payment of shares in lieu of cash
     4,457       -  
Bad debt expense
     446,257       368,840  
Realized (gain) loss on marketable securities
     406,346       (106,865 )
Unrealized (gain) loss on marketable securities
     (270,339 )     1,255,522  
Other non-cash settlement
     -       (20,000 )
Change in fair value of derivative liabilities
     (13,490,071 )     -  
Stock-based compensation
     155,104       43,340  
Changes in operating assets and liabilities
                
Accounts receivable
     (8,813,521 )     2,353,566  
Accounts receivable - related parties
     -       488,646  
Inventories
     (86,604 )     205,471  
Other receivables
     154,654       63,170  
Other receivables - related parties
     (241,956 )     (317,303 )
Advances to suppliers and other assets
     (273,373 )     1,602,693  
Accounts payable
     (3,926,015 )     3,171,180  
Customer deposit
     (1,026,480 )     4,100,600  
Other payables
     725,041       194,283  
Other payables - related parties
     712,114       (58,580 )
Accrued liabilities
     3,338,193       682,145  
Liabilities assumed from reorganization
     (95,384 )     (1,164,323 )
Taxes payable
     (6,308,625 )     5,107,831  
Net cash provided by operating activities
     8,484,399       41,078,364  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Cash used in acquisition
     -       (8,581,970 )
Proceeds from sale of marketable securities
     531,750       167,623  
Purchase of equipment
     (76,977 )     (130,814 )
Purchase of land use right
     (16,975,633 )     -  
Net cash used in  investing activities
     (16,520,860 )     (8,545,161 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Change in restricted cash
     (4,186,572 )     4,149,305  
Proceeds from bank loans
     2,199,600       2,196,750  
Payments for bank loans
     (2,199,600 )     (2,782,550 )
Proceeds from notes payable
     19,173,180       7,009,097  
Principal payments on notes payable
     (14,986,608 )     (9,161,912 )
Net cash provided by financing activities
     -       1,410,690  
                 
EFFECTS OF EXCHANGE RATE CHANGE IN CASH
     134,826       198,836  
                 
 INCREASE (DECREASE) IN CASH
     (7,901,635 )     34,142,729  
                 
CASH, beginning
     104,366,117       48,195,798  
                 
CASH, ending
   $ 96,464,482     $ 82,338,527  
                 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
                
Cash paid for Interest
   $ 393,111     $ 1,130,837  
Cash paid for Income taxes
   $ 2,631,495     $ 4,883,039  
                 
Non-cash investing and financing activities:
                
Common stock issued to acquire Hongrui
   $ -     $ 2,597,132  
Common stock issued for stock based compensation
   $ 20,000       -  
Common stock issued to offset related party payable
   $ 20,000       -  
Common stock issued for interest payment
   $ 673,929     $ -  
Common stock issued for convertible notes conversion
   $ 7,610,000     $ -  
Marketable securities used to settle for
                
liabilities assumed from reorganization
   $ 1,133,807     $ -  
Derivative liability reclassified to equity upon conversion
   $ 6,287,408     $ -  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
- 6 -
JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS GENESIS PHARMACEUTICALS ENTERPRISES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(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.

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

Restatement

The Company previously excluded the dilutive effect of its May 2008 convertible debentures from the diluted earnings (loss) per share calculation for the periods ended March 31, 2009 in its Form 10-Q filed on May 15, 2009. The Company has revised its accounting to include the dilutive effect of the November 2007 and May 2008 convertible debentures in its diluted earnings per share calculation in its Amendment No. 1 to Form 10-Q/A filed on May 14, 2010. 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 periods were subtracted from the March 31, 2009 diluted earnings per share calculation.

The restatement had no effect on the Company’s consolidated balance sheets, consolidated statements of cash flow, and consolidated statements of shareholders’ equity as of and for the periods March 31, 2009. The Company’s diluted earnings (loss) per share in its consolidated statement of income and other comprehensive income for the periods ended March 31, 2009 have been restated as follows:

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Diluted earnings (loss) per share
   
Original
    
Increase (Decrease)
    
Restated
  
For the three months ended March 31,2009:
                  
Net income for basic earnings per share
  
$
8,855,848
    
$
-
    
$
 
8,855,848
  
Add: interest expense
    
75,000
    
447,600
522,600
  
Add: financing cost amortization
    
29,534
      
140,542
      
170,076
  
Add: note discount amortization
    
219,362
      
813,929
      
1,033,291
  
Subtract: unamortized financing cost at beginning of the period
    
(218,223
)
    
(1,358,570
) 
    
(1,576,793
)
Subtract: unamortized debt discount at beginning of the period
    
(4,134,724
)
    
(26,718,998
 )
    
(30,853,722
)
Net income (loss) for diluted earnings per share
  
 $
4,826,797
    
 $
(26,675,497
) 
  
 $
(21,848,700
)
Weighted average shares used in basic computation
    
10,277,762
      
--
      
10,277,762
  
Diluted effect of stock options and warrants
    
4,481
      
(4,481
)
    
-
  
Diluted effect of convertible notes
    
625,000
      
3,730,000
      
4,355,000
  
Weighted average shares used in diluted computation
    
10,907,243
      
3,725,519
      
  14,632,762
  
                         
Earnings (Loss) per share:
                        
Basic
  
$
0.86
    
$
-
    
$
0.86
  
Diluted
  
$
0.44
    
$
(1.93
)
  
$
(1.49
)
 
   
Original
    
Increase (Decrease)
    
Restated
  
For the nine months ended March 31,2009:
                  
Net income for basic earnings per share
  
$
17,388,546
    
$
-
    
$
17,388,546
  
Add: interest expense
    
225,000
    
1,370,932
  
1,595,932
  
Add: financing cost amortization
    
88,602
      
421,625
      
510,227
  
Add: note discount amortization
    
539,279
      
2,140,247
      
2,679,526
  
Subtract: unamortized financing cost at beginning of the period
    
(277,291
)
    
(1,639,652
) 
    
(1,916,943
)
Subtract: unamortized debt discount at beginning of the period
    
(4,454,641
)
    
(28,045,316
 )
    
(32,499,957
)
Net income (loss) for diluted earnings per share
  
 $
13,509,495
    
 $
(25,752,164
) 
  
 $
(12,242,669
)
Weighted average shares used in basic computation
    
9,937,189
      
--
      
9,937,189
  
Diluted effect of stock options and warrants
    
37,429
      
(37,429
)
    
-
  
Diluted effect of convertible notes
    
625,000
      
3,743,000
      
4,368,400
  
Weighted average shares used in diluted computation
    
10,599,618
      
3,705,971
      
  14,305,589
  
                         
Earnings (loss) per share:
                        
Basic
  
$
1.75
    
$
-
    
$
1.75
  
Diluted
  
$
1.27
    
$
(2.13
)
  
$
(0.86
)

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.
 
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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 VIEs, 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 Pharmaceuticals Co., Ltd. (“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.
 

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 March 31, 2010, were translated at 6.82 RMB to $1.00 as compared to 6.83 RMB to $1.00 at June 30, 2009. The average translation rates applied to statements of income for the nine months ended March 31, 2010 and 2009 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

Revenue from 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.  

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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. Cash, investments, receivables, payables, short term loans and convertible debt all qualify as financial instruments.  Management concluded cash, 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 are 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 nine months ended March 31, 2010, $7,610,000 million of convertible notes were converted. As of March 31, 2010, the Company has $27,230,000 convertible notes and 2,275,000 warrants related to the convertible debentures outstanding. The fair value of the conversion features on the convertible notes was approximately $10 million and the fair value of the warrants was approximately $10.1 million.  The Company recognized $13.5 million and $11.7 million gains from the change in fair value of the conversion features on the convertible notes and warrants for the nine months and three months ended March 31, 2010, respectively.

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:
 
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March 31, 2010
    
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
     -       0.60       0.24 %     65.17 %     -       1.35       1.11 %     95.80 %
Conversion feature on the $30 million convertible notes
     -       1.17       0.41 %     69.99 %     -       1.92       1.11 %     102.00 %
400,000 warrants issued in November 2007
     -       0.60       0.24 %     65.17 %     -       1.35       1.11 %     95.80 %
1,875,000 warrants issued in May  2008
     -       3.17       1.60 %     86.28 %     -       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 March 31, 2010
    
Fair Value Measurements at March 31, 2010, Using Fair Value Hierarchy
  
   
 
    
Level 1
    
Level 2
    
Level 3
  
Investments
   $ 26,362     $ 26,362     $ -     $ -  
Investments, restricted
     161,471       161,471       -       -  
Conversion options - $4M Convertible Debt (November 2007)
     1,118,920       -       -       1,118,920  
Conversion options - $23.23M Convertible Debt (May 2008)
     8,861,691       -       -       8,861,691  
400,000 warrants issued in November 2007
     895,136       -       -       895,136  
1,875,000 warrants issued in May 2008
     9,199,126       -       -       9,199,126  
Total
   $ 20,262,706     $ 187,833     $ -     $ 20,074,873  

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 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.

- 11 -
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 March 31, 2010 and June 30, 2009, the Company’s bank balances, including restricted cash balances, exceeded government-insured limits by approximately $107,698,000 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 trading price of these securities.

- 12 -
The following is a summary of the components of the gain/loss on investments and restricted investments for the three and nine months ended March 31, 2010 and 2009:
 
   
For the Three Months Ended
    
For the Nine Months Ended
  
   
March 31,
    
March 31,
  
   
2010
    
2009
    
2010
    
2009
  
Realized (gain) loss on trading securities
   $ (205 )   $ 8,263     $ 406,345     $ (106,865 )
Unrealized (gain) loss on trading securities
     (4,592 )     (204,134 )     (270,339 )     1,255,522  
Unrealized (gain) loss on restricted investments – available-for-sale securities
     (32,164 )     200,025       (88,535 )     2,147,642  
 

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 receivable 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 March 31, 2010 and June 30, 2009:
   
March 31, 2010
    
June 30, 2009
  
   
(Unaudited)
        
Beginning allowance for doubtful accounts
   $ 694,370     $ 155,662  
Bad debt additions
     446,255       538,068  
Foreign currency translation adjustments
     1,131       640  
Ending allowance for doubtful accounts
   $ 1,141,756     $ 694,370  

- 13 -
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 March 31, 2010 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 period 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

- 14 -
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 March 31, 2010, 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 $5.10 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 March 31, 2010 and June 30, 2009, a total of $10,781,153 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.

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. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the year incurred.  No significant penalties or interest relating to income taxes have been incurred during the nine months ended March 31, 2010 and 2009.  GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.

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.

- 15 -
VAT on sales and VAT on purchases amounted to approximately $4,347,000 and $924,000 for the three months ended March 31, 2010, respectively, and approximately $4,372,000 and $712,000 for the three months ended March 31, 2009, respectively. VAT on sales and VAT on purchases amounted to approximately $11,583,000 and $2,662,000, respectively, for the nine months ended March 31, 2010, respectively, and approximately $14,659,000 and $1,867,000, respectively, for the nine months ended March 31, 2009. 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 $146,000 and $153,000, respectively, for the three months ended March 31, 2010 and 2009, respectively. Shipping and handling costs amounted to approximately $411,000 and $405,000 for the nine months ended March 31, 2010 and 2009, respectively.

Advertising

Expenses incurred in the advertising of the Company and the Company’s products are charged to operations. Advertising expenses amounted to approximately $1,077,000 and $1,192,000 for the three months ended March 31, 2010 and 2009, respectively. Advertising expenses amounted to approximately $4,346,000 and $2,120,000 for the nine months ended March 31, 2010 and 2009, 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 December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of Financial Assets. This 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 ASU improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. This ASU did not have a material impact on the accompanying consolidated financial statements.

In December 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This ASU 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 ASU 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 ASU 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. This ASU is effective for the Company for the fiscal year ending June 30, 2011, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

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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. This ASU did not have a material impact on the accompanying 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 ASU clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. This ASU did not have a material impact on the accompanying 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 ASU 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 ASU 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.

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


The following is a reconciliation of the basic and diluted earnings per share computations for the three months ended March 31, 2010 and 2009:

Basic earnings per share

   
2010
    
2009
  
   
 
    
 
  
Net income for basic and diluted earnings per share
   $ 15,184,266     $ 8,855,848  
                 
Weighted average shares used in basic computation
     11,419,991       10,277,762  
Earnings per share:
                
Basic
   $ 1.33     $ 0.86  


Diluted earnings (loss) per share
 
   
2010
    
2009
  
Net income for basic earnings per share
   $ 15,184,266     $ 8,855,848  
Add: interest expense
     2,753,645       522,600  
Add: financing cost amortization
     198,230       170,076  
Add: note discount amortization
     3,862,102       1,033,291  
Subtract: unamortized financing cost at beginning of the period
     (763,915 )     (1,576,793 )
Subtract: unamortized debt discount at beginning of the period
     (20,945,255 )     (30,853,722 )
Net income (loss) for diluted earnings per share
   $ 289,073     $ (21,848,700 )
Weighted average shares used in basic computation
     11,419,991       10,277,762  
Diluted effect of stock options and warrants
     391,931       -  
Diluted effect of convertible note
     3,423,889       4,355,000  
Weighted average shares used in diluted computation
     15,235,811       14,632,762  
                 
Earnings (loss) per share:
                
 Diluted
   $ 0.02     $ (1.49 )

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The following is a reconciliation of the basic and diluted earnings per share computations for the nine months ended March 31, 2010 and 2009:


Basic earnings per share

   
2010
    
2009
  
             
Net income for basic earnings per share
  
$
22,664,082
    
$
17,388,546
  
                 
Weighted average shares used in basic computation
    
10,965,346
      
9,937,189
  
                 
Earnings per share – Basic
  
$
2.07
    
$
1.75
  


Diluted earnings (loss) per share
             
   
2010
    
2009
  
Net income for basic earnings per share
   $ 22,664,082     $ 17,388,546  
Add: interest expense
     3,744,360       1,595,935  
Add: financing cost amortization
     670,985       510,227  
Add: note discount amortization
     11,409,937       2,679,526  
Subtract: unamortized financing cost at beginning of the period
     (1,236,669 )     (1,916,943 )
Subtract: unamortized debt discount at beginning of the period
     (28,493,090 )     (32,499,957 )
Net income (loss) for diluted earnings per share
   $ 8,759,605     $ (12,242,666 )
Weighted average shares used in basic computation
     10,965,346       9,937,189  
Diluted effect of stock options and warrants
     383,837       -  
Diluted effect of  convertible note
     3,884,974       4,368,400  
Weighted average shares used in diluted computation
     15,234,156       14,305,589  
                 
Earnings (loss) per share:
                
Diluted
   $ 0.57     $ (0.86 )

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For the three and nine months ended March 31, 2010, 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 nine months ended March 31, 2009, 140,900 stock options and 2,275,000 warrants with average exercise prices of $4.93 and $9.65, 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: 

   
March 31, 2010
    
June 30, 2009
  
   
(Unaudited)
        
Raw materials
   $ 1,468,420     $ 1,539,602  
Work-in-process
     -       55,992  
Packing materials
     573,401       483,297  
Finished goods
     1,326,487       1,198,303  
Total
   $ 3,368,308     $ 3,277,194  


Note 5 - Plant and equipment

Plant and equipment consisted of the following:
 
   
March 31, 2010
    
June 30, 2009
  
   
(Unaudited)
        
Buildings and building improvements
   $ 12,838,821     $ 12,798,375  
Manufacturing equipment
     2,771,754       2,603,114  
Office equipment and furniture
     180,407       291,061  
Vehicles
     478,044