JIANGBO
PHARMACEUTICALS, INC. AND SUBSIDIARIES
|
(FORMERLY
GENESIS PHARMACEUTICALS ENTERPRISES, INC.)
|
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
|
(UNAUDITED)
|
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
25,725,837 |
|
|
$ |
26,231,191 |
|
|
$ |
85,991,330 |
|
|
$ |
66,648,051 |
|
Sales-
related parties
|
|
|
- |
|
|
|
1,869,092 |
|
|
|
243,943 |
|
|
|
4,611,849 |
|
TOTAL
REVENUE
|
|
|
25,725,837 |
|
|
|
28,100,283 |
|
|
|
86,235,273 |
|
|
|
71,259,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
6,853,810 |
|
|
|
5,896,113 |
|
|
|
19,705,020 |
|
|
|
16,626,461 |
|
Cost
of sales -related parties
|
|
|
- |
|
|
|
441,709 |
|
|
|
54,500 |
|
|
|
1,117,918 |
|
COST
OF SALES
|
|
|
6,853,810 |
|
|
|
6,337,822 |
|
|
|
19,759,520 |
|
|
|
17,744,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
18,872,027 |
|
|
|
21,762,461 |
|
|
|
66,475,753 |
|
|
|
53,515,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESEARCH
AND DEVELOPMENT EXPENSE
|
|
|
1,098,675 |
|
|
|
967,930 |
|
|
|
3,295,125 |
|
|
|
2,170,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
4,477,356 |
|
|
|
12,136,164 |
|
|
|
31,111,752 |
|
|
|
29,269,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
13,295,996 |
|
|
|
8,658,367 |
|
|
|
32,068,876 |
|
|
|
22,075,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(INCOME) EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expense, net
|
|
|
(281,570 |
) |
|
|
1,244,892 |
|
|
|
1,062,959 |
|
|
|
1,217,385 |
|
Other
(income)-related parties
|
|
|
(76,552 |
) |
|
|
(27,415 |
) |
|
|
(313,276 |
) |
|
|
(80,851 |
) |
Non-operating
(income) expense
|
|
|
150,466 |
|
|
|
(529 |
) |
|
|
(471 |
) |
|
|
(232 |
) |
Interest
expense, net
|
|
|
1,241,843 |
|
|
|
526,509 |
|
|
|
4,143,968 |
|
|
|
925,993 |
|
Loss
from discontinued operations
|
|
|
103,008 |
|
|
|
228,812 |
|
|
|
1,693,830 |
|
|
|
341,743 |
|
OTHER
EXPENSE , NET
|
|
|
1,137,195 |
|
|
|
1,972,269 |
|
|
|
6,587,010 |
|
|
|
2,404,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
12,158,801 |
|
|
|
6,686,098 |
|
|
|
25,481,866 |
|
|
|
19,671,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
3,302,953 |
|
|
|
2,211,265 |
|
|
|
8,093,320 |
|
|
|
6,808,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
8,855,848 |
|
|
$ |
4,474,833 |
|
|
$ |
17,388,546 |
|
|
$ |
12,863,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding (loss) gain
|
|
$ |
(200,025 |
) |
|
$ |
(270,351 |
) |
|
$ |
(2,147,642 |
) |
|
$ |
1,347,852 |
|
Foreign
currency translation adjustment
|
|
|
(201,173 |
) |
|
|
1,960,948 |
|
|
|
378,284 |
|
|
|
3,428,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$ |
8,454,650 |
|
|
$ |
6,165,430 |
|
|
$ |
15,619,188 |
|
|
$ |
17,639,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
WEIGHTED AVERAGE NUMBER OF SHARES
|
|
|
10,277,762 |
|
|
|
9,740,129 |
|
|
|
9,937,189 |
|
|
|
6,507,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS PER SHARE
|
|
$ |
0.86 |
|
|
$ |
0.46 |
|
|
$ |
1.75 |
|
|
$ |
1.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
WEIGHTED AVERAGE NUMBER OF SHARES
|
|
|
10,907,243 |
|
|
|
9,740,129 |
|
|
|
10,599,618 |
|
|
|
7,081,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS PER SHARE
|
|
$ |
0.44 |
|
|
$ |
0.46 |
|
|
$ |
1.27 |
|
|
$ |
1.14 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
JIANGBO
PHARMACEUTICALS, INC. AND SUBSIDIARIES
|
(FORMERLY
KNOWN AS GENESIS PHARMACEUTICALS ENTERPRISES, INC.)
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
|
|
For
the Nine Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
Net
income
|
|
$ |
17,388,546 |
|
|
$ |
12,863,288 |
|
Loss
from discontinued operations
|
|
|
1,693,830 |
|
|
|
341,743 |
|
Income
from continuing operations
|
|
|
19,082,376 |
|
|
|
13,205,031 |
|
Adjustments
to reconcile net income to cash, net of acquisition,
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
464,094 |
|
|
|
375,456 |
|
Amortization
of intangible assets
|
|
|
371,925 |
|
|
|
113,578 |
|
Amortization
of deferred debt issuance costs
|
|
|
510,227 |
|
|
|
47,583 |
|
Amortization
of debt discount
|
|
|
2,679,526 |
|
|
|
671,296 |
|
Bad
debt expense
|
|
|
368,840 |
|
|
|
(112,459 |
) |
Realized
(gain) loss on marketable securities
|
|
|
(106,865 |
) |
|
|
19,819 |
|
Unrealized
loss on marketable securities
|
|
|
1,255,522 |
|
|
|
1,150,516 |
|
Other
non-cash settlement
|
|
|
(20,000 |
) |
|
|
- |
|
Stock-based
compensation
|
|
|
43,340 |
|
|
|
28,750 |
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
2,353,566 |
|
|
|
(7,246,740 |
) |
Accounts
receivable - related parties
|
|
|
488,646 |
|
|
|
(1,403,383 |
) |
Notes
receivables
|
|
|
- |
|
|
|
59,790 |
|
Inventories
|
|
|
205,471 |
|
|
|
27,542 |
|
Other
receivables
|
|
|
63,170 |
|
|
|
(254,886 |
) |
Other
receivables - related parties
|
|
|
(317,303 |
) |
|
|
(81,384 |
) |
Advances
to suppliers and other assets
|
|
|
1,602,693 |
|
|
|
(391,526 |
) |
Accounts
payable
|
|
|
3,171,180 |
|
|
|
1,159,105 |
|
Accrued
liabilities
|
|
|
682,145 |
|
|
|
301,290 |
|
Other
payables
|
|
|
194,283 |
|
|
|
2,146,659 |
|
Other
payables - related parties
|
|
|
(58,580 |
) |
|
|
(962,509 |
) |
Customer
deposit
|
|
|
4,100,600 |
|
|
|
- |
|
Liabilities
assumed from reorganization
|
|
|
(1,164,323 |
) |
|
|
(1,162,133 |
) |
Taxes
payable
|
|
|
5,107,831 |
|
|
|
10,006,057 |
|
Net
cash provided by operating activities
|
|
|
41,078,364 |
|
|
|
17,697,452 |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Cash
used in acquisition
|
|
|
(8,581,970 |
) |
|
|
- |
|
Proceeds
from sale of marketable securities
|
|
|
167,623 |
|
|
|
605,882 |
|
Prepayment
for land use rights
|
|
|
- |
|
|
|
(8,246,830 |
) |
Cash
receipt from reverse acquisition
|
|
|
- |
|
|
|
534,950 |
|
Purchase
of equipment
|
|
|
(130,814 |
) |
|
|
(401,302 |
) |
Net
cash used in investing activities
|
|
|
(8,545,161 |
) |
|
|
(7,507,300 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Change
in restricted cash
|
|
|
4,149,305 |
|
|
|
(5,361,849 |
) |
Proceeds
from sale of common stock and options exercised
|
|
|
- |
|
|
|
337,500 |
|
Proceeds
from sale of treasury stock
|
|
|
- |
|
|
|
1,977 |
|
Proceeds
from convertible debt
|
|
|
- |
|
|
|
5,000,000 |
|
Payments
on debt issuance costs
|
|
|
- |
|
|
|
(354,408 |
) |
Dividends
paid
|
|
|
- |
|
|
|
(10,520,000 |
) |
Proceeds
from bank loans
|
|
|
2,196,750 |
|
|
|
3,255,360 |
|
Payments
for bank loans
|
|
|
(2,782,550 |
) |
|
|
(5,425,600 |
) |
Proceeds
from officers
|
|
|
- |
|
|
|
27,128 |
|
Proceeds
from notes payable
|
|
|
7,009,097 |
|
|
|
10,729,040 |
|
Principal
payments on notes payable
|
|
|
(9,161,912 |
) |
|
|
(5,367,191 |
) |
Net
cash provided by (used in) financing activities
|
|
|
1,410,690 |
|
|
|
(7,678,043 |
) |
|
|
|
|
|
|
|
|
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
|
|
198,836 |
|
|
|
1,324,727 |
|
|
|
|
|
|
|
|
|
|
INCREASE
IN CASH
|
|
|
34,142,729 |
|
|
|
3,836,836 |
|
|
|
|
|
|
|
|
|
|
CASH,
beginning
|
|
|
48,195,798 |
|
|
|
17,737,208 |
|
|
|
|
|
|
|
|
|
|
CASH,
ending
|
|
$ |
82,338,527 |
|
|
$ |
21,574,044 |
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
Interest
paid
|
|
$ |
1,130,837 |
|
|
$ |
331,431 |
|
Income
taxes paid
|
|
$ |
4,883,039 |
|
|
$ |
3,615,867 |
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Common
stock issued to acquire Hongrui
|
|
$ |
2,597,132 |
|
|
$ |
- |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
JIANGBO
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(UNAUDITED)
Note
1 - Organization and business
Jiangbo
Pharmaceuticals, Inc. (the “Company” or “Jiangbo”) was originally incorporated
in the state of Florida on August 15, 2001, under the name Genesis Technology
Group, Inc. 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, the stock symbol changed to "JGBO" with the
opening of trading on May 12, 2009 on the OTCBB.
On
October 1, 2007, the Company completed a share exchange transaction by and among
the Company, Karmoya International Ltd. (“Karmoya”), a British Virgin Islands
company, and Karmoya’s shareholders. As a result of the share exchange
transaction, Karmoya, a company which was established as a “special purpose
vehicle” for the foreign capital raising activities of its Chinese subsidiaries,
became our wholly-owned subsidiary and our new operating business. Karmoya was
incorporated under the laws of the British Virgin Islands on July 17, 2007, and
owns 100% of the capital stock of Union Well International Limited (“Union
Well”), a Cayman Islands company. Karmoya conducts its business operations
through Union Well’s wholly-owned subsidiary, Genesis Jiangbo (Laiyang) Biotech
Technology Co., Ltd. (“GJBT”). GJBT was incorporated under the laws of the
People’s Republic of China ("PRC") on September 16, 2007, and registered as a
wholly foreign owned enterprise (“WOFE”) on September 19, 2007. GJBT has entered
into consulting service agreements and equity-related agreements with Laiyang
Jiangbo Pharmaceutical Co., Ltd. (“Laiyang Jiangbo”), a PRC limited liability
company incorporated on August 18, 2003.
As a
result of the share exchange transaction, our primary operations consist of the
business and operations of Karmoya and its subsidiaries, which are conducted by
Laiyang Jiangbo in the PRC. Laiyang Jiangbo produces and sells western
pharmaceutical products in China and focuses on developing innovative medicines
to address various medical needs for patients worldwide.
Note
2 - Summary of significant accounting policies
Basis of
presentation
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America ("US
GAAP") for interim financial information and pursuant to the requirements for
reporting on Form 10-Q. Accordingly, they do not include all the information and
footnotes required by US GAAP for complete financial statements. In the opinion
of management, the accompanying consolidated balance sheets, and related interim
consolidated statements of income, 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, 2008 included in the Company’s Annual Report on Form
10-K.
Principles of
consolidation
The
accompanying consolidated financial statements include the accounts of the
following entities, and all significant intercompany transactions and balances
have been eliminated in consolidation:
Consolidated
entity name:
|
|
Percentage of ownership
|
|
Karmoya
International Ltd.
|
|
|
100
|
%
|
Union
Well International Limited
|
|
|
100
|
%
|
Genesis
Jiangbo (Laiyang) Biotech Technology Co., Ltd.
|
|
|
100
|
%
|
Laiyang
Jiangbo Pharmaceuticals 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 (“VIEs”), should be consolidated in a company’s consolidated
financial statements. In accordance with the provisions of FIN 46R, the Company
has determined that Laiyang Jiangbo is a VIE, and the Company is the primary
beneficiary, and accordingly, the financial statements of Laiyang Jiangbo are
consolidated into the financial statements of the Company.
Reverse stock
split
In July
2008, the Company approved a 40-to-1 reverse stock split, effective September 4,
2008, and a new trading symbol “GNPH” also became effective on that day. The
accompanying consolidated financial statements have been retroactively adjusted
to reflect the reverse stock split. All share representations are on a
post-split basis.
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 Statement of Financial Accounting Standards (“SFAS”) 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 currency other than the functional currency are included in the results of
operations as incurred.
Asset and
liability accounts at March 31, 2009 were translated at 6.83 RMB to $1.00 as
compared to 6.85 RMB at June 30, 2008. Equity accounts were stated at their
historical rates. The average translation rates applied to statements of income
for the three months ended March 31, 2009 and 2008 were 6.83 RMB and 7.18 RMB to
$1.00, respectively. The average translation rates applied to statements of
income for the nine months ended March 31, 2009 and 2008 were 6.83 RMB and 7.40
RMB to $1.00.
In
accordance with SFAS 95, "Statement of Cash Flows,"
cash flows from the Company's operations is calculated based upon the local
currencies using the average translation rate. 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.
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, fair
value of warrants and beneficial conversion features related to the convertible
notes, and fair value of stock based compensation. Actual results could be
materially different from these estimates upon which the carrying values were
based.
Revenue
recognition
Product
sales are generally recognized when title to the product has transferred to
customers in accordance with the terms of the sale. The Company recognizes
revenue in accordance with the Securities and Exchange Commission’s (“SEC”)
Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial
Statements,” as amended by SAB No. 104 (together,
“SAB 104”), and SFAS 48 “Revenue Recognition When Right of
Return Exists.” SAB 104 states that revenue should not be
recognized until it is realized or realizable and earned. In general, the
Company records revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price to
the customer is fixed or determinable, and collectability is reasonably
assured.
The
Company is generally not contractually obligated to accept returns. However, on
a case by case negotiated basis, the Company permits customers to return their
products. In accordance with SFAS 48, 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
SFAS 107,
“Disclosures about Fair Value
of Financial Instruments,” defines financial instrument and requires fair
value disclosures about those instruments. SFAS 157, “Fair Value Measurements,”
adopted July 1, 2008, defines fair value, establishes a three-level valuation
hierarchy for disclosures of fair value measurement and enhances disclosures
requirements for fair value measures. Investments,
receivables, payables, short term loans and convertible debt all qualify as
financial instruments. Management concluded the receivables, payables
and short term loans approximate their fair values because of the short period
of time between the origination of such instruments and their expected
realization and, if applicable, their stated rates of interest are equivalent to
rates currently available.
The three
levels of valuation hierarchy are defined as follows:
·
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted)
for identical assets or liabilities in active
markets.
|
·
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
·
|
Level
3 inputs to the valuation methodology are unobservable and
significant to the fair value
measurement.
|
The
Company analyzes all financial instruments with features of both liabilities and
equity under SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity,” SFAS
133, “Accounting for
Derivative Instruments and Hedging Activities,” and EITF 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.” Further, as required by SFAS 157, 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, which does not
entail material subjectivity because the methodology employed does not
necessitate significant judgment, and the pricing inputs are observed from
actively quoted markets.
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, 2009
|
|
|
Fair Value Measurements at
March
31, 2009,
Using
Fair Value Hierarchy
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Investments
|
|
$ |
672,682 |
|
|
$ |
672,682 |
|
|
$ |
- |
|
|
$ |
- |
|
Investments,
restricted
|
|
|
400,050 |
|
|
|
400,050 |
|
|
|
- |
|
|
|
- |
|
$5M
Convertible Debt (November 2007)
|
|
|
1,084,638 |
|
|
|
- |
|
|
|
- |
|
|
|
5,288,577 |
|
$29.8M
Convertible Debt (May 2008)
|
|
|
3,934,931 |
|
|
|
- |
|
|
|
- |
|
|
|
32,608,278 |
|
Total
|
|
$ |
6,092,301 |
|
|
$ |
1,072,732 |
|
|
$ |
- |
|
|
$ |
37,896,855 |
|
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 SFAS 157.
SFAS 159,
“The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115,” became effective for the Company on July 1,
2008. SFAS 159 provides the Company with the irrevocable option to elect fair
value for the initial and subsequent measurement for certain financial assets
and liabilities on a contract-by-contract basis with the difference between the
carrying value before election of the fair value option and the fair value
recorded upon election as an adjustment to beginning retained earnings. The
Company chose not to elect the fair value option.
Stock-based
compensation
The
Company accounts for stock-based compensation pursuant to SFAS 123R, "Share Based Payment.” SFAS
123R 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. Under SFAS 123R, 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. SFAS 123R requires forfeitures to be estimated at the time of grant and
revised in subsequent periods, if necessary, if actual forfeitures differ from
those estimates.
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 SFAS 123R 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
SFAS 130,
“Reporting 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 financial statements that are displayed with
the same prominence as other financial statements. The accompanying consolidated
financial statements include the provisions of SFAS 130.
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, 2009 and June 30, 2008, the Company’s bank
balances, including restricted cash balances, exceeded government-insured limits
by approximately $85,990,000 and $55,576,000, respectively.
Restricted
cash
Restricted
cash represent 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.
As of
March 31, 2009 and June 30, 2008, the Company had restricted cash of
approximately $3,714,000 and $7,840,000, respectively, of which approximately
$3,714,000 and $5,843,000, respectively, were maintained as security deposits
for bank acceptance related to the Company’s notes payable.
Investments 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
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 investments as the Company intends to hold them beyond one year.
Restricted investments are carried at fair value based on the trade price of
these securities.
The
following is a summary of the components of the gain/loss on investments and
restricted investments for the three months and nine months ended March 31, 2009
and 2008:
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Investments
- trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
loss (gain)
|
|
$ |
8,263 |
|
|
$ |
84,561 |
|
|
$ |
(106,865 |
) |
|
$ |
19,819 |
|
Unrealized
loss (gain)
|
|
|
(204,134 |
) |
|
|
1,159,409 |
|
|
|
1,255,522 |
|
|
|
1,150,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
investments - available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss (gain)
|
|
|
200,025 |
|
|
|
270,351 |
|
|
|
2,147,642 |
|
|
|
(1,347,852 |
) |
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
In the
normal course of business, the Company extends credit to its customers without
requiring collateral or other security interests. Management reviews its
accounts receivables at each reporting period to provide for an allowance
against accounts receivable for an amount that could become uncollectible. This
review process may involve the identification of payment problems with specific
customers. The Company estimates this allowance based on the aging of the
accounts receivable, historical collection experience, and other relevant
factors, such as changes in the economy and the imposition of regulatory
requirements that can have an impact on the industry. These factors continuously
change, and can have a material impact on collections and the Company’s
estimation process. 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.
Inventories
Inventories,
consisting of raw 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,
2009 and June 30, 2008, the Company has determined that no reserves were
necessary.
Advances 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 monies to be
deposited with them as a guarantee that the Company will receive their purchases
on a timely basis. As of March 31, 2009 and June 30, 2008, advances to suppliers
amounted to approximately $130,000 and $1,719,000, respectively.
Plant and
equipment
Plant and
equipment are stated at cost less accumulated depreciation. Major
renewals are charged directly to the plant and equipment accounts, while
replacements, maintenance, and repairs which do not improve or extend the
respective lives of the assets are expensed currently. 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. 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
|
|
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 and October 2007 in the amounts of
approximately $879,000 and $8,871,000, 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 five years, which reflects the period over
which those formulas, manufacturing processes, technical and procedural manuals
are kept secret to the Company as agreed between the Company and the selling
parties.
The
estimated useful lives of intangible assets are as follows:
|
Useful
Life
|
Land
use rights
|
50 Years
|
Patents
|
5
Years
|
Licenses
|
5
Years
|
Customer
list and customer relationships
|
3
Years
|
Trade
secrets - formulas and know how technology
|
5
Years
|
Impairment of long-lived
assets
Long-lived
assets of the Company are reviewed at least annually, 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 and amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
As of March 31, 2009, the Company expects these assets to be fully
recoverable.
Beneficial conversion
feature of convertible notes
The
Company accounts for the $5,000,000 and $30,000,000 secured convertible notes
issued pursuant to the subscription agreements discussed in Note 14 under EITF
00-27, ‘‘Application of Issue
98-5 to Certain Convertible Instruments.” In accordance with EITF 00-27,
the Company has determined that the convertible notes contained beneficial
conversion feature because on November 6, 2007, the effective conversion price
of the $5,000,000 convertible note was $5.48 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 $4.69 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 conversion feature is amortized using the effective interest method
over the term of the note. As of March 31, 2009 and June 30, 2008, $18,776,786
and $20,453,441, respectively, remained unamortized relating to the beneficial
conversion features.
Income
taxes
The
Company accounts for income taxes in accordance with SFAS 109, “Accounting for Income Taxes”
and FIN 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109."
Under the asset and liability method as required by SFAS 109, 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 SFAS 109, 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.
Since the Company’s operations are domiciled in the PRC, and the taxable income
mirrors that of GAAP income, there are no temporary differences that would
result in deferred tax assets or liabilities. As such, no valuation allowances
were necessary at March 31, 2009 and June 30, 2008.
FIN 48
clarifies the accounting and disclosure for uncertain tax positions and
prescribes a recognition threshold and measurement attribute for recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition.
Under FIN
48, evaluation of a tax position is a two-step process. The first step is to
determine whether it is more likely than not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met.
The
Company’s operations are subject to income and transaction taxes in the United
States and in the PRC jurisdictions. Significant estimates and judgments are
required in determining the Company’s worldwide provision for income taxes. Some
of these estimates are based on interpretations of existing tax laws or
regulations, and as a result the ultimate amount of tax liability may be
uncertain. However, the Company does not anticipate any events that would lead
to changes to these uncertainties.
Value added
tax
The
Company is subject to value added tax (“VAT”) for manufacturing products and
business tax for services provided. The applicable VAT rate is 17% for products
sold in the PRC. The amount of VAT liability is determined by applying the
applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT
paid on purchases made with the relevant supporting invoices (input VAT). Under
the commercial practice of the PRC, the Company paid 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 been made by the taxing authorities that a
penalty is due.
VAT on
sales and VAT on purchases amounted to approximately $4,372,000 and $712,000,
respectively, for the three months ended March 31, 2009, and approximately
$4,807,000 and $259,000, respectively, for the three months ended March 31,
2008. VAT on sales and VAT on purchases amounted to approximately $14,659,000
and $1,867,000, respectively, for the nine months ended March 31, 2009, and
approximately $12,114,000 and $443,000, respectively, for the nine months ended
March 31, 2008. Sales and purchases are recorded net of VAT collected and paid
as the Company acts as an agent for the government. VAT is 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 $153,000 and $107,000 for the three months ended March 31, 2009
and 2008, respectively. Shipping and handling costs amounted to approximately
$405,000 and $253,000 for the nine months ended March 31, 2009 and 2008,
respectively.
Advertising
Expenses
incurred in the advertisement of the Company and the Company’s products are
charged to operations as incurred. Advertising expenses amounted to
approximately $1,192,000 and $2,019,000 for the three months ended March 31,
2009 and 2008, respectively, and approximately $2,120,000 and $6,148,000 for the
nine months ended March 31, 2009 and 2008, respectively.
Research and
development
Research
and development costs are expensed as incurred. These costs primarily consist of
cost of materials used and salaries paid for the development of the Company’s
products and fees paid to third parties to assist in such efforts. Research and
development costs amounted to approximately $1,099,000 and $968,000 for the
three months ended March 31, 2009 and 2008, respectively, and approximately
$3,295,000 and $2,170,000 for the nine months ended March 31, 2009 and 2008,
respectively.
Recent accounting
pronouncements
In
December 2007, the FASB issued SFAS 141(R), “Business Combinations,”
which replaced SFAS 141. SFAS 141R retains the purchase method of accounting for
acquisitions, but requires a number of changes, including changes in the way
assets and liabilities are recognized in the purchase accounting as well as
requiring the expensing of acquisition-related costs as incurred. Furthermore,
SFAS 141R provides guidance for recognizing and measuring the goodwill acquired
in the business combination and determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141R is effective for fiscal years
beginning on or after December 15, 2008. Earlier adoption is prohibited. The
Company is evaluating the impact, if any, that the adoption of this statement
will have on its consolidated results of operations or consolidated financial
position.
In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements — An Amendment of ARB No. 51.” SFAS 160
amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It is intended to eliminate the diversity in practice regarding the
accounting for transactions between equity and noncontrolling interests by
requiring that they be treated as equity transactions. Further, it requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. SFAS 160 also
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation, requires that a
parent recognize a gain or loss in net income when a subsidiary is
deconsolidated, requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the
parent’s owners and the interests of the noncontrolling owners of a subsidiary,
among others. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008, with early adoption permitted, and it is to be applied
prospectively. SFAS 160 is to be applied prospectively as of the beginning of
the fiscal year in which it is initially applied, except for the presentation
and disclosure requirements, which must be applied retrospectively for all
periods presented. The Company is currently evaluating the impact that SFAS 160
will have on its consolidated financial position or consolidated results of
operations.
In
February 2008, the FASB issued FSP No. 157-1 , "Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13." FSP 157-1 indicates that it does not apply under
SFAS 13, "Accounting for
Leases," and other accounting pronouncements that address fair value
measurements for purposes of lease classification or measurement under SFAS 13.
This scope exception does not apply to assets acquired and liabilities assumed
in a business combination that are required to be measured at fair value under
SFAS 141 or SFAS 141R, regardless of whether those assets and liabilities are
related to leases.
Also in
February 2008, the FASB issued FSP 157-2, "Effective Date of FASB Statement
No. 157." With the issuance of FSP 157-2, the FASB agreed to: (a) defer
the effective date in SFAS No. 157 for one year for certain nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually),
and (b) remove certain leasing transactions from the scope of SFAS 157. The
deferral is intended to provide the FASB time to consider the effect of certain
implementation issues that have arisen from the application of SFAS 157 to these
assets and liabilities.
In March
2008, the FASB issued SFAS 161, "Disclosures about Derivative
Instruments and Hedging Activities." SFAS 161 is intended to improve
financial reporting of derivative instruments and hedging activities by
requiring enhanced disclosures to enable financial statement users to better
understand the effects of derivatives and hedging on an entity's financial
position, financial performance and cash flows. The provisions of SFAS 161 are
effective for interim periods and fiscal years beginning after November 15,
2008, with early adoption encouraged. The Company does not anticipate that the
adoption of SFAS 161 will have a material impact on its consolidated results of
operations or consolidated financial position.
In May
2008, the FASB issued SFAS 162, "The Hierarchy of Generally
Accepted Accounting Principles." SFAS 162 is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with GAAP for nongovernmental entities. SFAS
162 is effective 60 days following the SEC's approval of the Public Company
Accounting Oversight Board (“PCAOB”) amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles." The Company
does not expect the adoption of SFAS 162 will have a material impact on its
consolidated results of operations or consolidated financial
position.
On May 9,
2008, the FASB issued FASB FSP APB 14-1, "Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)." FSP APB 14-1 clarifies that convertible debt instruments
that may be settled in cash upon conversion (including partial cash settlement)
are not addressed by paragraph 12 of APB Opinion No. 14, "Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants." Additionally, FSP APB 14-1
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity's
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB14-1 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. The Company is currently evaluating the impact that FSP APB 14-1
will have on its consolidated results of operations or consolidated financial
position.
On June
16, 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities,” to address the question of whether instruments granted in
share-based payment transactions are participating securities prior to vesting.
FSP EITF 03-6-1 indicates that unvested share-based payment awards that contain
rights to dividend payments should be included in earnings per share
calculations. The guidance will be effective for fiscal years beginning after
December 15, 2008. The Company is currently evaluating the requirements of FSP
EITF 03-6-1 and the impact that its adoption will have on the consolidated
results of operations or consolidated financial position.
In June
2008, the FASB issued EITF 07-5, “Determining whether an Instrument
(or Embedded Feature) is indexed to an Entity’s Own Stock.” EITF 07-5 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
application is not permitted. Paragraph 11(a) of SFAS No. 133 “Accounting for Derivatives and
Hedging Activities,” specifies that a contract that would otherwise meet
the definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of financial
position would not be considered a derivative financial instrument. EITF 07-5
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer’s own stock and thus
able to qualify for the SFAS 133 paragraph 11(a) scope exception. This standard
triggers liability accounting on all options and warrants exercisable at strike
prices denominated in any currency other than the functional currency of the
operating entity in the PRC (Renminbi). The Company is currently evaluating the
impact of the adoption of EITF 07-5 on the accounting for related warrants
transactions.
In June
2008, FASB issued EITF 08-4, “Transition Guidance for Conforming
Changes to Issue No. 98-5.” The objective of EITF 08-4 is to
provide transition guidance for conforming changes made to EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,” that result from EITF 00-27 “ Application of Issue No. 98-5 to
Certain Convertible Instruments,” and SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.” EITF
08-4 is effective for financial statements issued for fiscal years ending after
December 15, 2008. Early application is permitted. The adoption of EITF08-4 is
not expected to have a material impact on the Company’s consolidated results of
operations or consolidated financial position.
On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which
clarifies the application of SFAS 157 when the market for a financial asset is
inactive. Specifically, FSP 157-3 clarifies how (1) management’s internal
assumptions should be considered in measuring fair value when observable data
are not present, (2) observable market information from an inactive market
should be taken into account, and (3) the use of broker quotes or pricing
services should be considered in assessing the relevance of observable and
unobservable data to measure fair value. The Company is currently evaluating the
impact of adoption of FSP 157-3 on the Company’s consolidated financial
statements.
In April
2009, the FASB issued FSP 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly.” FSP 157-4 amends SFAS
157 and provides additional guidance for estimating fair value in accordance
with SFAS 157 when the volume and level of activity for the asset or liability
have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value
measurements. FSP 157-4 shall be applied prospectively with retrospective
application not permitted. FSP 157-4 shall be effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. An entity early adopting FSP 157-4
must also early adopt FSP 115-2 and 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments.” Additionally, if an entity elects to early
adopt either FSP 107-1 and 28-1, “Interim Disclosures about Fair Value of
Financial Instruments” or FSP 115-2 and 124-2, it must also elect to early adopt
this FSP. The Company is currently evaluating this new FSP but does not believe
that it will have a material impact on the consolidated financial
statements.
In April
2009, the FASB issued FSP 115-2 and 124-2. FSP 115-2 amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF 99-20, “Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to Be Held by a
Transferor in Securitized Financial Assets,” to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This FSP will
replace the existing requirement that the entity’s management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This FSP provides increased disclosure about
the credit and noncredit components of impaired debt securities that are not
expected to be sold and also requires increased and more frequent disclosures
regarding expected cash flows, credit losses, and an aging of securities with
unrealized losses. Although this FSP does not result in a change in the carrying
amount of debt securities, it does require that the portion of an
other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity may early
adopt this FSP only if it also elects to early adopt FSP 157-4. Also, if an
entity elects to early adopt either FSP 157-4 or FSP 107-1 and 28-1, the entity
also is required to early adopt this FSP. The Company is currently evaluating
this new FSP but does not believe that it will have a material impact on the
consolidated financial statements.
In April
2009, the FASB issued FSP 107-1 and 28-1. This FSP amends SFAS 107, to require
disclosures about fair value of financial instruments not measured on the
balance sheet at fair value in interim financial statements as well as in annual
financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments. This FSP shall be effective for interim periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP 157-4 and 115-2 and 124-2. This FSP does not require
disclosures for earlier periods presented for comparative purposes at initial
adoption. In periods after initial adoption, this FSP requires comparative
disclosures only for periods ending after initial adoption. The Company is
currently evaluating the disclosure requirements of this new FSP.
Reclassifications
Certain
amounts in the prior period’s consolidated financial statements have been
reclassified to conform to the current period presentation with no impact on the
previously reported net income or cash flows.
Note
3 - Acquisition
On
January 23, 2009, Laiyang Jiangbo entered into an asset acquisition agreement
(the “Agreement”) with Shandong Traditional Chinese Medicine College (the
“Medicine College”) and Shandong Hongrui Pharmaceutical Factory (“Shandong
Hongrui” or “Hongrui”), a wholly-owned subsidiary of Medicine
College, pursuant to which Laiyang Jiangbo purchased the
majority of the assets owned by Hongrui, including all tangible assets, all
manufacturing and office buildings, land, equipment and inventories and all
rights to manufacture and distribute Hongrui’s 22 Traditional Chinese Medicines
(“TCMs”), for an original contract purchase price of approximately $12 million
consisted of approximately $9.6 million in cash and 643,651 shares of Jiangbo’s
common stock. The $4.035 fair value of each common share was based on the
weighted average trading price of the common stock of 5 days prior to the
execution of the Agreement and amounted to $2,597,132. On February 10, 2009, the
Agreement was amended to revise the total purchase price to approximately $11
million consisting of approximately $8.6 million in cash. However, the Company
is still obligated to issue 643,651 shares of Jiangbo’s common stock to
Medicine College within one year of the date of the execution of the
Agreement. As of March 31, 2009, Laiyang Jiangbo paid approximately $8.6 million
in cash in full. The 643,651 shares of Jiangbo’s common stock issuable to
Medicine College in connection with the acquisition of Hongrui have
been included in the accompanying consolidated balance sheet as outstanding
shares.
The Company accounted for this
acquisition using the purchase method of accounting in accordance with
SFAS 141, “Business
Combinations.” The purchase price was determined based on an arm's length
negotiation and no finder's fees or commissions were paid in connection with
this acquisition.
The
following represents the allocation of the purchase price to the net assets
acquired based on their respective fair values. The accompanying
consolidated financial statements include the acquisition of Hongrui, effective
February 5, 2009, under the purchase method of accounting in accordance with
SFAS 141. The following represents the allocation of the purchase
price to the net assets acquired based on their respective fair
values.
Inventory
|
|
$ |
147,250 |
|
Plant
and equipments
|
|
|
3,223,808 |
|
Intangible
assets
|
|
|
7,810,974 |
|
Total
assets acquired
|
|
|
11,182,032 |
|
Net
assets acquired
|
|
|
11,182,032 |
|
Total
consideration paid
|
|
$ |
11,182,032 |
|
The
following unaudited pro forma consolidated results of operations for the nine months ended March 31,
2009 and 2008, as if the acquisition of Hongrui had been completed as of the
beginning of each period presented. The pro forma information gives
effect to actual operating results prior to the acquisition. The pro
forma amounts does not purport to be indicative of the results that would have
actually been obtained if the acquisition had occurred as of the beginning of the periods presented
and is not intended to be a projection of future results:
|
|
Nine
Months Ended March 31, 2009
|
|
|
Nine
Months Ended March 31, 2008
|
|
Net
Revenues
|
|
$ |
93,574,164 |
|
|
$ |
83,101,150 |
|
Income
from Operations
|
|
|
32,412,705 |
|
|
|
23,578,314 |
|
Net
Income
|
|
|
17,742,804 |
|
|
|
13,895,939 |
|
Net
Income Per Shares
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.70 |
|
|
$ |
1.94 |
|
Diluted
|
|
$ |
1.29 |
|
|
$ |
1.17 |
|
Weighted
Average number of shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,421,103 |
|
|
|
7,151,086 |
|
Diluted
|
|
|
10,756,955 |
|
|
|
7,725,442 |
|
Note
4 - Earnings per share
The
Company reports earnings per share in accordance with the provisions of SFAS
128, “Earnings Per
Share.” SFAS 128 requires presentation of basic and diluted earnings per
share in conjunction with the disclosure of the methodology used in computing
such earnings per share. Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average common shares outstanding during the period. Diluted earnings per share
takes into account the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted into common
stock.
All share
and per share amounts used in the Company’s consolidated financial statements
and notes thereto have been retroactively restated to reflect the 40-to-1
reverse stock split, which occurred on September 4, 2008.
The
following is a reconciliation of the basic and diluted earnings per share
computations for the three months ended March 31, 2009 and 2008:
Basic
earning per share
|
|
2009
|
|
|
2008
|
|
For
the three months ended March 31, 2009 and 2008
|
|
|
|
|
|
|
Net
income for basic earnings per share
|
|
$
|
8,855,848
|
|
|
$
|
4,474,833
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
10,277,762
|
|
|
|
9,740,129
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share-Basic
|
|
$
|
0.86
|
|
|
$
|
0.46
|
|
Diluted
earning per share
|
|
2009
|
|
|
2008
|
|
For
the three months ended March 31, 2009 and 2008
|
|
|
|
|
|
|
Net
income for basic earnings per share
|
|
$ |
8,855,848 |
|
|
$ |
4,474,833 |
|
Add:
Interest expense
|
|
|
75,000 |
|
|
|
75,000 |
|
Add:
Note discount amortization
|
|
|
219,362 |
|
|
|
88,165 |
|
Subtract:
Loan issuance cost
|
|
|
(188,689 |
) |
|
|
(306,825 |
) |
Subtract:
Debt discount if converted
|
|
|
(4,134,724 |
) |
|
|
(4,654,608 |
) |
Net
income (loss) for diluted EPS
|
|
|
4,826,797 |
|
|
|
(323,435 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
10,277,762 |
|
|
|
9,740,128 |
|
Diluted
effect of $5 million convertible debt, stock options and
warrants
|
|
|
629,481 |
|
|
|
- |
|
Weighted
average shares used in diluted computation
|
|
|
10,907,243 |
|
|
|
9,740,128 |
|
|
|
|
|
|
|
|
|
|
Earnings
per share-Diluted
|
|
$ |
0.44 |
|
|
|
0.46 |
|
The
following is a reconciliation of the basic and diluted earnings per share
computations for the nine months ended March 31, 2009 and 2008:
Basic
earning per share
|
|
2009
|
|
|
2008
|
|
For
the nine months ended March 31, 2009 and 2008
|
|
|
|
|
|
|
Net
income for basic earnings per share
|
|
$
|
17,388,546
|
|
|
$
|
12,863,288
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
9,937,189
|
|
|
|
6,507,434
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share – Basic
|
|
$
|
1.75
|
|
|
$
|
1.98
|
|
Diluted
earnings per share
|
|
2009
|
|
|
2008
|
|
For
the nine months ended March 31, 2009 and 2008
|
|
|
|
|
|
|
Net
income for basic earnings per share
|
|
$
|
17,388,546
|
|
|
$
|
12,863,288
|
|
Add:
Interest expense
|
|
|
225,000
|
|
|
|
100,000
|
|
Add: Note
discount amortization
|
|
|
539,279
|
|
|
|
434,006
|
|
Subtract:
Loan issuance cost
|
|
|
(188,689)
|
|
|
|
(306,825)
|
|
Subtract:
Debt discount if converted
|
|
|
(4,454,641)
|
|
|
|
(5,000,000)
|
|
|
|
|
|
|
|
|
|
|
Net
income for diluted EPS
|
|
|
13,509,495
|
|
|
|
8,090,469
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
9,937,189
|
|
|
|
6,507,434
|
|
Diluted
effect of $5 million convertible debt, stock options and
warrants
|
|
|
662,429
|
|
|
|
574,357
|
|
Weighted
average shares used in diluted computation
|
|
|
10,599,618
|
|
|
|
7,081,791
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share-Diluted
|
|
$
|
1.27
|
|
|
$
|
1.14
|
|
For the
three months and nine months ended March 31, 2009, 3,750 stock options and
2,275,000 warrants with an average exercise price of $13.87 and $9.65,
respectively, and 3,750,000 convertible shares with a conversion price of $8.00
per share were not included in the diluted earnings per share calculation
because of the anti-dilutive effect. For the
three months ended March 31, 2008, 500,000 convertible shares with a conversion
price of $10.00 per share and 74,084 and 250,000 stock options and warrants with
an average exercise price of $10.00 and $12.80, respectively, were not included
in the diluted per share calculation because of the anti-dilutive effect.
For the
nine months ended March 31, 2008, 74,084 and 250,000 stock options and warrants
at an exercise price of $10.00 and $12.80, respectively, were not included in
the diluted earnings per share calculation because of the anti-dilutive
effect.
Note
5 - Discontinued operations
In
connection with the reverse merger with Karmoya on October 1, 2007, the Company
determined to discontinue its operations of business development and marketing,
as it no longer supported its core business strategy. The discontinuance of
these operations did not involve any sale of assets or assumption of liabilities
by another party. In conjunction with the discontinuance of operations, the
Company determined that the assets related to the Company’s business development
and marketing operations were subject to the recognition of impairment. However,
since the related assets are continuing to be used by the company and its
subsidiaries, the Company determined that there had been no impairment. The
remaining liabilities of the discontinued operations are reflected in the
consolidated balance sheets under the caption "liabilities assumed from
reorganization" which amounted to approximately $1,614,000 and $1,084,000 as of
March 31, 2009 and June 30, 2008, respectively.
In
accordance with SFAS 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” the results of operations of a component
of entity that has been disposed of or is classified as held for sale shall be
reported in discontinued operations. Accordingly, the results of operations of
the business development and marketing operation segment are reported as
discontinued operations in the accompanying consolidated statements of income
for the nine months ended March 31, 2009. As the accompanying consolidated
statements of income for the nine months ended March 31, 2009 reflect the
results of operations for Karmoya and its subsidiaries, the discontinued
operations of the Company did not have any impact on the consolidated statements
of income for the period presented.
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
$ |
- |
|
|
$ |
- |
|
Cost
of sales
|
|
|
- |
|
|
|
- |
|
Gross
profit
|
|
|
- |
|
|
|
- |
|
Operating
and other non-operating expenses
|
|
|
103,008 |
|
|
|
228,812 |
|
Loss
from discontinued operations before other expenses and income
taxes
|
|
|
103,008 |
|
|
|
228,812 |
|
Income
tax benefit
|
|
|
|
|
|
|
- |
|
Loss
from discontinued operations
|
|
$ |
103,008 |
|
|
$ |
228,812 |
|
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
$ |
- |
|
|
$ |
- |
|
Cost
of sales
|
|
|
- |
|
|
|
- |
|
Gross
profit
|
|
|
- |
|
|
|
- |
|
Operating
and other non-operating expenses
|
|
|
1,693,830 |
|
|
|
341,743 |
|
Loss
from discontinued operations before other expenses and income
taxes
|
|
|
1,693,830 |
|
|
|
341,743 |
|
Income
tax benefit
|
|
|
- |
|
|
|
- |
|
Loss
from discontinued operations
|
|
$ |
1,693,830 |
|
|
$ |
341,743 |
|
Inventories
consisted of the following:
|
|
March
31, 2009
|
|
|
June 30, 2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Raw
materials
|
|
$
|
1,071,627
|
|
|
$
|
2,164,138
|
|
Work-in-process
|
|
|
-
|
|
|
|
531,076
|
|
Packing
materials
|
|
|
618,708
|
|
|
|
204,763
|
|
Finished
goods
|
|
|
2,173,612
|
|
|
|
1,006,197
|
|
Total
|
|
$
|
3,863,947
|
|
|
$
|
3,906,174
|
|
Note
7 - Plant and equipment
Plant and
equipment consisted of the following:
|
|
|
March
31, 2009
|
|
|
|
June 30, 2008
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Buildings
and building improvements
|
|
$ |
12,798,376 |
|
|
$ |
10,926,369 |
|
Manufacturing
equipment
|
|
|
2,579,070 |
|
|
|
1,188,643 |
|
Office
equipment and furniture
|
|
|
301,126 |
|
|
|
298,137 |
|
Vehicles
|
|
|
481,143 |
|
|
|
380,485 |
|
Total
|
|
|
16,159,715 |
|
|
|
12,793,634 |
|
Less:
accumulated depreciation
|
|
|
(1,997,294 |
) |
|
|
(1,567,790 |
) |
Total
|
|
$ |
14,162,421 |
|
|
$ |
11,225,844 |
|
For the
three months ended March 31, 2009 and 2008, depreciation expense amounted to
approximately $174,000 and $134,000, respectively. For the nine months ended
March 31, 2009 and 2008, depreciation expense amounted to approximately
$464,000 and $375,000, respectively.
Note
8 - Intangible assets
Intangible
assets consisted of the following:
|
|
March
31, 2009
|
|
|
June 30, 2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Land
use rights
|
|
$
|
11,245,939
|
|
|
$
|
9,930,157
|
|
Patents
|
|
|
4,937,050
|
|
|
|
539,830
|
|
Customer
lists and customer relationships
|
|
|
1,123,580
|
|
|
|
-
|
|
Trade
secrets- formulas and manufacture process know-how
|
|
|
1,025,500
|
|
|
|
-
|
|
Licenses
|
|
|
23,367
|
|
|
|
23,271
|
|
Total
|
|
|
18,355,436
|
|
|
|
10,493,258
|
|
Less:
accumulated amortization
|
|
|
(950,879
|
)
|
|
|
(576,457
|
)
|
Total
|
|
$
|
17,404,557
|
|
|
$
|
9,916,801
|
|
The
estimated amortization expense attributed to future periods is as
follows:
Twelve
month periods ending March 31:
|
|
|
|
2010
|
|
$ |
1,770,693 |
|
2011
|
|
|
1,710,193 |
|
2012
|
|
|
1,691,583 |
|
2013
|
|
|
1,317,056 |
|
2014
and thereafter
|
|
|
10,915,032 |
|
|
|
|
|
|
Total
|
|
$ |
17,404,557 |
|
Total
amortization expense for the three months ended March 31, 2009 and 2008 amounted
to approximately $225,000 and $56,000, respectively. Total amortization expense
for the nine months ended March 31, 2009 and 2008 amounted to approximately
$372,000 and $114,000, respectively.
Note
9 - Debt
Short term bank
loan
Short
term bank loan represents an amount due to a bank that is due within one year.
This loan can be renewed with the bank upon maturity. The Company’s short term
bank loan consisted of the following:
|
|
March
31, 2009
|
|
|
June 30,2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Loan
from Bank of Communication; due December 2009 and September 2008; interest
rates of 6.37 and 8.64% per annum; monthly interest payment; guaranteed by
related party, Jiangbo Chinese-Western Pharmacy.
|
|
$
|
2,197,500
|
|
|
$
|
2,772,100
|
|
Total
|
|
$
|
2,197,500
|
|
|
$
|
2,772,100
|
|
Interest expense amounted to
approximately $22,000 and $126,000 for the three months ended March 31, 2009 and
2008, respectively. Interest expense related to the short
term bank loans amounted to approximately $81,000 and $371,000 for nine months
ended March 31, 2009 and 2008, respectively.
Notes
Payable
Notes
payable represent amounts due to a bank which are normally secured and are
typically renewed. All notes payable are secured by the Company’s restricted
cash. The Company’s notes payables consist of the following:
|
|
March
31, 2009
|
|
|
June 30, 2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Commercial
Bank, various amounts, due from April 2009 to September
2009
|
|
$
|
3,713,775
|
|
|
$
|
5,843,295
|
|
Total
|
|
$
|
3,713,775
|
|
|
$
|
5,843,295
|
|
Note
10 - Related party transactions
Accounts receivable -
related parties
The
Company is engaged in business activities with three related parties, Jiangbo
Chinese-Western Pharmacy, Laiyang Jiangbo Medicals, Co., Ltd, and Yantai Jiangbo
Pharmaceuticals Co., Ltd. The Company’s Chief Executive Officer and other
majority shareholders have 100% ownership of these entities. At March 31, 2009
and June 30, 2008, accounts receivable from sales of the Company’s products to
these related entities were $187,766 and $673,808, respectively. Accounts
receivable due from related parties are receivable in cash and due within three
to six months. For the three months ended March 31 2008, the Company recorded
net revenues of approximately $1,869,000, from sales to these related parties.
For the three months ended March 31, 2009, the Company did not make any sales to
these related parties. For the nine months ended March 31, 2009 and
2008, the Company recorded net revenues of $243,943 and $4,611,849,
respectively, from sales to related parties.
The
Company leases two of its buildings to Jiangbo Chinese-Western
Pharmacy. For the three months ended March 31, 2009 and 2008, the
Company recorded other income of approximately $77,000 and $27,000 from leasing
the two aforementioned buildings. For the nine months ended March 31,
2009 and 2008, the Company recorded other income of $313,000 and $81,000 from
leasing the two buildings to this related party. As of March 31,
2009, amounts due from this related party was $317,412. As of June
30, 2008, there were no amounts due from this related party.
Other payable - related
parties
Other
payable-related parties primarily consist of accrued salary payable to the
Company’s officers and directors, and advances from the Company’s Chief
Executive Officer. These advances are short-term in nature and bear no interest.
The amounts are expected to be repaid in the form of cash. Other
payable - related parties consisted of the following:
|
|
March
31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Payable
to Wubo Cao, Chief Executive Officer and Chairman of the Board
|
|
$
|
145,436
|
|
|
$
|
281,137
|
|
|
|
|
|
|
|
|
|
|
Payable
to Haibo Xu, Chief Operating Officer and Director
|
|
|
16,888
|
|
|
|
43,835
|
|
|
|
|
|
|
|
|
|
|
Payable
to Elsa Sung, Chief Financial Officer
|
|
|
11,842
|
|
|
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Payable
to John Wang, Director
|
|
|
2,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
other payable - related parties
|
|
$
|
176,666
|
|
|
$
|
324,972
|
|
Note
11 - Concentration of major customers, suppliers, and products
For the
three months ended March 31, 2009 and 2008, three products accounted for 89% and
95% of the Company’s total sales. For the nine months ended March 31, 2009 and
2008, three products accounted for 93% and 95%, respectively, of the Company’s
total sales.
Five
largest customers accounted for approximately 37% and 19% of the Company’s sales
for the three months ended March 31, 2009 and 2008, respectively, and 22% and
21% of the Company's sales for the nine months ended March 31, 2009 and 2008,
respectively. These five customers represent 16% and 11.8% of the Company's
total accounts receivable as of March 31, 2009 and June 30, 2008,
respectively.
Five
suppliers accounted for approximately 33% and 71% of the Company’s purchases for
the three months ended March 31, 2009 and 2008, respectively, and 56% and 61%,
of the Company's purchases for the nine months ended March 31, 2009 and 2008,
respectively, and. These five suppliers represent 62% and 63.8% of the Company's
total accounts payable as of March 31, 2009 and June 30, 2008,
respectively.
Note
12 - Taxes payable
The
Company is subject to U.S. federal income taxes at a tax rate of 34%. No
provision for U.S. income taxes has been made as the Company had no U.S. taxable
income during the three months and nine months ended March 31, 2009 and
2008.
The
Company’s wholly-owned subsidiaries Karmoya and Union Well were incorporated in
the British Virgin Islands and the Cayman Islands, respectively, and under the
current laws of the BVI and the Cayman Islands, the two entities are not subject
to income taxes.
Prior to
January 1, 2008, companies established in the PRC were generally subject to an
enterprise income tax ("EIT") rate of 33%, which included a 30% state income tax
and a 3% local income tax. The PRC local government has provided various
incentives to companies in order to encourage economic development. Such
incentives include reduced tax rates and other measures. On March 16, 2007, the
National People's Congress of China passed the new Enterprise Income Tax Law
("EIT Law"), and on November 28, 2007, the State Council of China passed the
Implementing Rules for the EIT Law ("Implementing Rules") which took effect on
January 1, 2008. The EIT Law and Implementing Rules impose a unified EIT rate of
25.0% on all domestic-invested enterprises and Foreign Investment Enterprises
(“FIEs”), unless they qualify under certain limited exceptions. Therefore,
nearly all FIEs are subject to the new tax rate alongside other domestic
businesses rather than benefiting from the FEIT, and its associated preferential
tax treatments, beginning on January 1, 2008.
In addition to the changes to the current tax structure, under
the EIT Law, an enterprise established outside of China with "de facto
management bodies" within China is considered a resident enterprise and will
normally be subject to an EIT of 25% on its global income. The Implementing
Rules define the term "de facto management bodies" as "an establishment that
exercises, in substance, overall management and control over the production,
business, personnel, accounting, etc., of a Chinese enterprise." If the PRC tax
authorities subsequently determine that the Company should be classified as a
resident enterprise, then the organization's global income will be subject to
PRC income tax of 25%. Laiyang Jiangbo and GJBT were subject to 25% income tax
rate since January 1, 2008, and 33% income tax rate prior to January 1,
2008.
The table
below summarizes the differences between the U.S. statutory federal rate and the
Company’s effective tax rate for the nine months ended March 31, 2009 and
2008:
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
U.S.
Statutory rates
|
|
|
34.0
|
% |
|
|
34.0 |
% |
Foreign
income not recognized in the U.S
|
|
|
(34.0
|
)% |
|
|
(34.0 |
)% |
China
income taxes
|
|
|
25.0
|
% |
|
|
30.2 |
% |
Total
provision for income taxes
|
|
|
25.0
|
% |
|
|
30.2 |
% |
Taxes
payable are as follows:
|
March
31,
|
|
June 30,
|
|
|
2009
|
|
2008
|
|
|
(Unaudited)
|
|
|
|
Value
added taxes
|
|
$
|
1,861,558
|
|
|
$
|
83,775
|
|
Income
taxes
|
|
|
3,274,367
|
|
|
|
62,733
|
|
Other
taxes
|
|
|
140,765
|
|
|
|
19,925
|
|
Total
|
|
$
|
5,276,690
|
|
|
$
|
166,433
|
|
Note
13- Convertible Debt
November 2007 Convertible
Debentures
On
November 7, 2007, the Company entered into a Securities Purchase Agreement (the
“November 2007 Purchase Agreement”) with Pope Investments, LLC (“Pope”) (the
“November 2007 Investor”). Pursuant to the November 2007 Purchase Agreement, the
Company issued and sold to the November 2007 Investor, $5,000,000 principal
amount of the 6% convertible subordinated debentures due November 30, 2010 (the
“November 2007 Debenture”) and a three-year warrant to purchase 250,000 shares
of the Company’s common stock, par value $0.001 per share, exercisable at $12.80
per share, subject to adjustment as provided therein. The November 2007
Debenture bears interest at the rate of 6% per annum and the initial conversion
price of the debentures is $10 per share. In connection with the offering, the
Company placed in escrow 500,000 shares of its common stock. In connection with
the May 2008 financing, the November 2007 Debenture conversion price was
subsequently adjusted to $8 per share (post 40-to-1 reverse split).
The
Company evaluated the application of EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,” and EITF 00-27, “Application of Issue No. 98-5 to
Certain Convertible Instruments,” and concluded that the convertible
debenture has a beneficial conversion feature. The Company estimated
the intrinsic value of the beneficial conversion feature of the November 2007
Debenture at $2,904,093. The fair value of the warrants was estimated at
$2,095,907. The two amounts are recorded together as debt discount and amortized
using the effective interest method over the three-year term of
debentures.
In
connection with the private placement, the Company paid the placement agents a
fee of $250,000 and incurred other expenses of $104,408, which were capitalized
as deferred debt issuance costs and are being amortized to interest expense over
the life of the debentures. For the three months ended March 31, 2009 and 2008,
amortization of debt issuance costs related to the November 2007 Purchase
Agreement was $29,533 and $29,534, respectively. For the nine
months ended March 31, 2009 and 2008, amortization of debt issuance costs
related to the November 2007 Purchase Agreement was $88,602 and $47,583,
respectively. The remaining balance of unamortized debt issuance costs of the
November 2007 Purchase Agreement at March 31, 2009 and June 30, 2008 was
$188,689 and $277,291, respectively. The amortization of debt
discounts was $219,362 and $88,615 for the three months ended March 31, 2009 and
2008, respectively. The amortization of debt discounts was $539,278 and $434,006
for the nine months ended March 31, 2009 and 2008, respectively. These amounts
have been included in interest expense on the accompanying consolidated
statements of income. The balance of the unamortized debt discount was
$3,915,362 and $4,454,641 at March 31, 2009 and June 30, 2008,
respectively.
The
Company evaluated whether or not the secured convertible debentures contain
embedded conversion options, which meet the definition of derivatives under SFAS
133 and related interpretations. The Company concluded that since the secured
convertible debentures had a fixed conversion rate of $10, the secured
convertible debt was not a derivative instrument.
The
November 2007 Debenture bears interest at the rate of 6% per annum, payable in
semi-annual installments on May 31 and November 30 of each year, with the first
interest payment due on May 31, 2008. The initial conversion price (“November
2007 Conversion Price”) of the November 2007 Debentures is $10 per share. If the
Company issues common stock at a price that is less than the effective November
2007 Conversion Price, or common stock equivalents with an exercise or
conversion price less than the then effective November 2007 Conversion Price,
the November 2007 Conversion Price of the November 2007 Debenture and the
exercise price of the warrants will be reduced to such price. In connection with
the May 2008 financing, the November 2007 Debenture conversion price was
subsequently adjusted to $8.00 per share (Post 40-to-1 reverse split). The
November 2007 Debenture may not be prepaid without the prior written consent of
the Holder, as defined. In connection with the Offering, the Company placed in
escrow 500,000 shares of common stock issued by the Company in the name of the
escrow agent. In the event the Company’s consolidated Net Income Per Share (as
defined in the November 2007 Purchase Agreement), for the year ended June 30,
2008, is less than $1.52, the escrow agent shall deliver the 500,000 shares to
the November 2007 Investor. The Company determined that its fiscal year 2008 Net
Income Per Share met the required amount and no shares were delivered to the
November 2007 Investor.
Pursuant
to the November 2007 Purchase Agreement, the Company entered into a Registration
Rights Agreement. In accordance with the Registration Rights Agreement, the
Company must file on each Filing Date (as defined in the Registration Rights
Agreement) a registration statement to register the portion of the Registrable
Securities (as defined therein) as permitted by the Securities and Exchange
Commission’s (“SEC”) guidance. The initial registration statement must be filed
within 90 days of the closing date and declared effective within 180 days
following such closing date. Any subsequent registration statements that are
required to be filed on the earliest practical date on which the Company is
permitted by the SEC’s guidance to file such additional registration statements,
these statements must be effective 90 days following the date on which it is
required to be filed. In the event that the registration statement is not timely
filed or declared effective, the Company will be required to pay liquidated
damages. Such liquidated damages shall be, at the investor’s option, either
$1,643.83 or 164 shares of common stock per day that the registration statement
is not timely filed or declared effective as required pursuant to the
Registration Rights Agreement, subject to an amount of liquidated damages not
exceeding either $600,000, and 60,000 shares of common stock, or a combination
thereof based upon 12% liquidated damages in the aggregate. In December 2006,
the FASB issued FSP EITF 00-19-2, "Accounting for Registration
Payments," which was effective immediately. FSP EITF 00-19-2 amended EITF
00-19 to require potential registration payment arrangements be treated as a
contingency pursuant to SFAS 5, “Accounting for
Contingencies,” rather than at fair value. The November 2007 Investor has
subsequently agreed to allow the Company to file the November 2007 registration
statement in conjunction with the Company’s financing in May 2008 and, as such,
no liquidated damages were incurred for the year ended June 30,
2008.
May 2008 Convertible
Debentures
On May
30, 2008, the “Company entered into a Securities Purchase Agreement (the “May
2008 Securities Purchase Agreement”) with certain investors (the “May 2008
Investors”), pursuant to which, on May 30, 2008, the Company sold to the May
2008 Investors 6% convertible debentures (the “May 2008 Notes”) and warrants to
purchase 1,875,000 shares of the Company’s common stock (“May 2008 Warrants”),
for an aggregate amount of $30,000,000 (the “May 2008 Purchase Price”), in
transactions exempt from registration under the Securities Act (the “May 2008
Financing”). Pursuant to the terms of the May 2008 Securities Purchase
Agreement, the Company will use the net proceeds from this financing for working
capital purposes. Also pursuant to the terms of the May 2008 Securities Purchase
Agreement, the Company, among other things, was required to increase the number
of its authorized shares of common stock to 22,500,000 by August 31, 2008, and
is prohibited from issuing any “Future Priced Securities” as such term is
described by NASD IM-4350-1 for one year following the closing of the May 2008
Financing. The Company has satisfied the increase in the number of its
authorized shares of common stock in August 2008 (post 40-to-1 reverse
split).
The May
2008 Notes are due May 30, 2011, and are convertible into shares of the
Company’s common stock at a conversion price equal to $8 per share, subject to
adjustment pursuant to customary anti-dilution provisions and automatic downward
adjustments in the event of certain sales or issuances by the Company of common
stock at a price per share less than $8. Interest on the outstanding principal
balance of the May 2008 Notes is 6% per annum, payable in semi-annual
installments on November 30 and May 30 of each year, with the first interest
payment due on November 30, 2008. At any time after the issuance of the May 2008
Note, any May 2008 Investor may convert its May 2008 Note, in whole or in part,
into shares of the Company’s common stock, provided that such May 2008 Investor
shall not effect any conversion if immediately after such conversion, such May
2008 Investor and its affiliates would, in the aggregate, beneficially own more
than 9.99% of the Company’s outstanding common stock. The May 2008 Notes are
convertible at the option of the Company if the following four conditions are
met: (i) effectiveness of a registration statement with respect to the shares of
the Company’s common stock underlying the May 2008 Notes and the May 2008
Warrants; (ii) the Volume Weighted Average Price (“VWAP” of the common stock has
been equal to or greater than 250% of the conversion price, as adjusted, for 20
consecutive trading days on its principal trading market; (iii) the average
dollar trading volume of the common stock exceeds $500,000 on its principal
trading market for the same 20 days; and (iv) the Company achieves 2008
Guaranteed EBT (as hereinafter defined) and 2009 Guaranteed EBT (as hereinafter
defined). A holder of a May 2008 Note may require the Company to redeem all or a
portion of such May 2008 Note for cash at a redemption price as set forth in the
May 2008 Notes, in the event of a change in control of the Company, an event of
default or if any governmental agency in the PRC challenges or takes action that
would adversely affect the transactions contemplated by the Securities Purchase
Agreement. The May 2008 Warrants are exercisable for a five-year period
beginning on May 30, 2008, at an initial exercise price of $10 per
share.
The
Company evaluated the application of EITF 98-5, and EITF 00-27and concluded that
the convertible debenture has a beneficial conversion feature. The
Company estimated the intrinsic value of the beneficial conversion feature of
the May 2008 Note at $19,111,323. The fair value of the warrants was estimated
at $10,888,677. The two amounts are recorded together as debt discount and
amortized using the effective interest method over the three-year term of the
debentures.
The fair
value of the warrants granted with this private placement was computed using the
Black-Scholes option-pricing model. Variables used in the option-pricing model
include (1) risk-free interest rate at the date of grant (4.2%),
(2) expected warrant life of five years, (3) expected volatility
of 95%, and (4) zero expected dividends. The total estimated fair value of
the warrants granted and beneficial conversion feature of the May 2008 Note
should not exceed the $30,000,000 debenture, and the calculated warrant value
was used to determine the allocation between the fair value of the beneficial
conversion feature of the May 2008 debenture and the fair value of the
warrants.
In
connection with the private placement, the Company paid the placement agents a
fee of $1,500,000 and incurred other expenses of $186,500, which were
capitalized as deferred debt issuance costs and are being amortized to interest
expense over the life of the debenture. During the three months and nine months
ended March 31, 2009, amortization of debt issuance costs related to the May
2008 Purchase Agreement was $140,541 and $421,625, respectively. The remaining
balance of unamortized debt issuance costs of the May 2008 Purchase Agreement at
March 31, 2009 was $1,218,028. The amortization of debt discounts was $813,929
and $2,140,247 for the three months and nine months ended March 31, 2009,
respectively, which have been included in interest expense on the accompanying
consolidated statements of income. The balance of the unamortized debt discount
was $25,905,069 and $28,045,316 at March 31, 2009 and June 30, 2008,
respectively.
The
Company evaluated whether or not the secured convertible debentures contain
embedded conversion options, which meets the definition of derivatives under
SFAS 133 and related interpretations. The Company concluded that since the
secured convertible debentures had a fixed conversion rate of $8 per share, the
secured convertible debt was not a derivative instrument.
In
connection with the May 2008 Financing, the Company entered into a holdback
escrow agreement (the “Holdback Escrow Agreement”) dated May 30, 2008, with the
May 2008 Investors and Loeb & Loeb LLP, as Escrow Agent, pursuant to which
$4,000,000 of the May 2008 Purchase Price was deposited into an escrow account
with the Escrow Agent at the closing of the financing. Pursuant to the terms of
the Holdback Escrow Agreement, (i) $2,000,000 of the escrowed funds will be
released to the Company upon the Company’s satisfaction no later than 120 days
following the closing of the financing of an obligation that the board of
directors be comprised of at least five members (at least two of whom are to be
fluent English speakers who possess necessary experience to serve as a director
of a public company), a majority of whom will be independent directors
acceptable to Pope and (ii) $2,000,000 of the escrowed funds will be released to
the Company upon the Company’s satisfaction no later than six months following
the closing of the financing of an obligation to hire a qualified full-time
chief financial officer (as defined in the May 2008 Securities Purchase
Agreement). In the event that either or both of these obligations were not so
satisfied, the applicable portion of the escrowed funds will be released pro
rata to the May 2008 Investors. The Company has satisfied both of these
requirements and all of the holdback money has been released to the
Company.
In
connection with the May 2008 Financing, Mr. Cao, the Company’s Chief Executive
Officer and Chairman of the Board, placed 3,750,000 shares of common stock of
the Company owned by him into an escrow account pursuant to a make good escrow
agreement, dated May 30, 2008 (the “Make Good Escrow Agreement”). In the event
that either (i) the Company’s adjusted 2008 earnings before taxes is less than
$26,700,000 (“2008 Guaranteed EBT”) or (ii) the Company’s 2008 adjusted fully
diluted earnings before taxes per share is less than $1.60 (“2008 Guaranteed
Diluted EBT”), 1,500,000 of such shares (the “2008 Make Good Shares”) are to be
released pro rata to the May 2008 Investors. In the event that either (i) the
Company’s adjusted 2009 earnings before taxes is less than $38,400,000 (“2009
Guaranteed EBT”) or (ii) the Company’s adjusted fully diluted earnings before
taxes per share is less than $2.32 (or $2.24 if the 500,000 shares of common
stock held in escrow in connection with the November 2007 private placement have
been released from escrow) (“2009 Guaranteed Diluted EBT”), 2,250,000 of such
shares (the “2009 Make Good Shares”) are to be released pro rata to the May 2008
Investors. Should the Company successfully satisfy these respective financial
milestones, the 2008 Make Good Shares and 2009 Make Good Shares will be returned
to Mr. Cao. In addition, Mr. Cao is required to deliver shares of common stock
owned by him to the Investors on a pro rata basis equal to the number of shares
(the “Settlement Shares”) required to satisfy all costs and expenses associated
with the settlement of all legal and other matters pertaining to the Company
prior to or in connection with the completion of the Company’s October 2007
share exchange in accordance with formulas set forth in the May 2008 Securities
Purchase Agreement (post 40-to-1 reverse split).
The
security purchase agreement set forth permitted indebtedness which the Company’s
lease obligations and purchase money indebtedness is limited up to $1,500,000
per year in connection with new acquisition of capital assets and lease
obligations. Permitted investment set forth with the security purchase agreement
limits capital expenditure of the Company not to exceed $5,000,000 in any
rolling 12 months.
Pursuant
to a Registration Rights Agreement, the Company agreed to file a registration
statement covering the resale of the shares of common stock underlying the May
2008 Notes and Warrants, (ii) the 2008 Make Good Shares, (iii) the 2009 Make
Good Shares, and (iv) the Settlement Shares. The Company was obligated to file
an initial registration statement covering the shares of common stock underlying
the Notes and Warrants no later than 45 days from the closing of the financing
and to have such registration statement declared effective no later than 180
days from the closing of the financing. If the Company did not timely file such
registration statement or cause it to be declared effective by the required
dates, then the Company would be required to pay liquidated damages to the
Investors equal to 1.0% of the aggregate May 2008 Purchase Price paid by such
Investors for each month that the Company does not file the registration
statement or cause it to be declared effective. Notwithstanding the foregoing,
in no event shall liquidated damages exceed 10% of the aggregate amount of the
May 2008 Purchase Price. The Company satisfied its obligations under the
Registration Rights Agreement by filing the required registration statement and
causing it to be declared effective within the time periods set forth in the
Registration Rights Agreement.
During
the nine months ended March 31, 2009, the Company issued 20,000 shares of its
common stock upon conversion of $160,000 convertible debt.
The
above two convertible debenture liabilities are as
follows:
|
|
|
|
|
|
|
|
|
March
31,
2009
(Unaudited)
|
|
|
June
30, 2008
|
|
|
|
|
|
|
|
|
November
2007 convertible debenture note payable
|
|
$ |
5,000,000 |
|
|
$ |
5,000,000 |
|
May
2008 convertible debenture note payable
|
|
|
29,840,000 |
|
|
|
30,000,000 |
|
Total
convertible debenture note payable
|
|
|
34,840,000 |
|
|
|
35,000,000 |
|
Less:
Unamortized discount on November 2007 convertible debenture note
payable
|
|
|
(3,915,362 |
) |
|
|
(4,454,641 |
) |
Less:
Unamortized discount on May 2008 convertible debenture note
payable
|
|
|
(25,905,069 |
) |
|
|
(28,045,316 |
) |
Convertible
debentures, net
|
|
$ |
5,019,569 |
|
|
$ |
2,500,043 |
|
Note
14 - Shareholders’ equity
Common
Stock
In July
2008, the Board of Directors approved a 40-to-1 reverse stock split that became
effective on September 4, 2008, and a new trading symbol “GNPH” also became
effective on that day. Those holding fractional shares were rounded up the next
whole share. Subsequent to the stock split, the Company had approximately
9,768,000 shares issued and outstanding. The total number of authorized shares
became 22,500,000. These consolidated financial statements have been
retroactively adjusted to reflect the reverse split. Additionally, all share
representations are on a post-split basis.
In July
2008, in connection with the settlement (see Note 20) with Mr. Fernando Praca
(Fernando Praca, Plaintiff vs. EXTREMA, LLC and Genesis Pharmaceuticals
Enterprises, Inc.- Case No. 50 2005 CA 005317, Circuit Court of the 15th
Judicial Circuit in and for Palm Beach County, Florida), the Company cancelled
2,500 shares of its common stock (post 40-to-1 reverse split) and the cancelled
shares were valued at fair market value on the date of cancellation at $8 per
share or $20,000 in total, based on the trading price of the common stock. For
the nine months ended March 31, 2009, the Company recorded settlement income of
$20,000 related to this settlement.
In July 2008, the Company issued 2,500 shares of common stock to
two of the Company’s current and former directors as part of their compensation
for services. The Company valued these shares at the fair market value on the
date of grant of $8 per share, or $20,000 in total, based on the trading price
of common stock (post 40-to-1 reverse split). In September 2008, the Company
issued 2,500 shares of common stock to two of the Company’s current and
ex-directors as part of compensation for services. The Company valued these
shares at the fair market value on the date of grant of $9 per share, or $22,500
in total, based on the trading price of common stock (post 40-to-1 reverse
split).
In
December 2008, the Company issued 20,000 shares of its common stock in
connection with the conversion of $160,000 of convertible debt. In connection
with the conversion, the Company recorded $145,524 interest expense to fully
amortize the unamortized discount related to the converted
dentures.
In
November 2008, the Board of the Directors of the Company authorized a share
buyback program to purchase the Company’s common stock in the open market with a
$2,000,000 limitation. As of March 31, 2009, the Company has not purchased any
shares in the open market.
In
January 2009, in connection with the Hongrui acquisition, the Company recorded
643,651 shares of Jiangbo’s common stock issuable to Shandong
Traditional Chinese Medicine College as part of the consideration for
acquisition. The fair value of the common stock of $4.035 per share
was based on the weighted average trading price of 5 days prior to the date of
the acquisition, and amounted to $2,597,132.
In May
2009, in connection with the Company’s name change to Jiangbo Pharmaceuticals,
Inc., the Company changed the trading symbol for its common stock to
“JGBO.” This change in trading symbol became effective on May 12,
2009.
Registered capital
contribution receivable
At
inception, Karmoya issued 1,000 shares of common stock to its founder. The
shares were valued at par value. On September 20, 2007, the Company issued 9,000
shares of common stock to nine individuals at par value. The balance of $10,000
is shown in capital contribution receivable on the accompanying consolidated
financial statements. As part of its agreements with shareholders, the Company
was to receive the entire $10,000 in October 2007. As of March 31, 2009, the
Company has not received the $10,000.
Union
Well was established with a registered capital of $1,000. In connection with
Karmoya’s acquisition of Union Well, the registered capital of $1,000 is
reflected as capital contribution receivable on the accompanying consolidated
financial statements. The $1,000 was due in October 2007, however, as of March
31, 2009, the Company has not received the $1,000.
PRC laws
require the owner of a WOFE to contribute at least 15% of the registered capital
within 90 days of its business license issuance date and the remaining balance
is required to be contributed within two years of the business license issuance
date. In June 2008, the PRC government approved GJBT to increase its registered
capital from $12,000,000 to $30,000,000. By June 30, 2008, the Company had
funded GJBT the entire registered capital required in accordance with PRC laws.
In August 2008, the PRC government approved GJBT to increase its registered
capital from $30,000,000 to $59,800,000. 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 is required to be contributed
within two years of the approval date. In August 2008, GJBT received additional
registered capital in the amount of approximately $1,966,000. As of March 31,
2009, the Company has not received the remaining contribution receivable in the
amount of $27,845,000. If the remaining contribution receivable cannot be
received by August 2010, the Company may be required to reduce its registered
capital or apply to extend the registered capital due date with the
government.
Note
15 - Warrants
In
connection with the May 2008 financing, the exercise price of outstanding
warrants issued in 2004 to purchase 74,085 shares of common stock was reduced to
$8 per share. The 2004 warrants contain full ratchet anti-dilution provisions to
the exercise price, in which due to the Company’s May 2008 Financing, resulted
in the 2004 warrants to be exercisable at $8 per share. The provisions of the
2004 warrants, which result in the reduction of the exercise price, remain in
place. The 74,085 shares of warrants were fully expired as of March 31,
2009.
In
connection with the $5,000,000 November 2007 Convertible Debentures, 6%
convertible subordinated debentures note, the Company issued a three-year
warrant to purchase 250,000 shares of common stock, at an exercise price of
$12.80 per share. The calculated fair value of the warrants granted with this
private placement was computed using the Black-Scholes option-pricing model.
Variables used in the option-pricing model include (1) risk-free interest
rate at the date of grant (4.5%), (2) expected warrant life of
three years, (3) expected volatility of 197%, and (4) zero
expected dividends. In connection with the May 2008 Financing, the exercise
price of outstanding warrants issued in November 2007 was reduced to $8 per
share and the total number of warrants to purchase common stock was increased to
400,000.
In
connection with the $30,000,000 May 2008 Convertible Debentures, the Company
issued a five-year warrant to purchase 1,875,000 shares of common stock, at an
exercise price of $10 per share. The calculated fair value of the warrants
granted with this private placement was computed using the Black-Scholes
option-pricing model. Variables used in the option-pricing model include
(1) risk-free interest rate at the date of grant (4.5%), (2) expected
warrant life of five years, (3) expected volatility of 95%, and
(4) zero expected dividends.
On
February 15, 2009, the Company granted 40,000 stock warrants to a consultant at
an exercise price of $6.00 per share exercisable for a period of three years.
The warrants fully vest on July 15, 2009. The fair value of this
warrant grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (1) risk-free interest rate
at the date of grant (1.83%), (2) expected warrant life of three years, (3)
expected volatility of 106%, and (4) zero expected dividends. In connection with
these warrants, the Company recorded stock-based deferred compensation of
$123,908 for the three months and nine months ended March 31, 2009.
A summary
of the warrants as of March 31, 2009, and changes during the period are
presented below:
|
|
Number of warrants
|
|
Outstanding
as of June 30, 2007
|
|
|
74,085
|
|
Granted
|
|
|
2,275,000
|
|
Forfeited
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
Outstanding
as of June 30, 2008
|
|
|
2,349,085
|
|
Granted
|
|
|
40,000
|
|
Forfeited
|
|
|
(74,085)
|
|
Exercised
|
|
|
-
|
|
Outstanding
as of March 31, 2009
|
|
|
2,315,000
|
|
The
following is a summary of the status of warrants outstanding at March 31,
2009:
Outstanding Warrants
|
Exercise Price
|
|
Number
|
|
Average
Remaining
Contractual Life
(Years)
|
$ |
6.00
|
|
|
40,000
|
|
2.88
|
$ |
8.00
|
|
|
400,000
|
|
3.61
|
$ |
10.00
|
|
|
1,875,000
|
|
4.17
|
|
Total
|
|
|
2,315,000
|
|
|
The
Company had 2,315,000 warrants outstanding and exercisable at an average
exercise price of $9.59 per share as of March
31, 2009.
Note
16 - Stock options
On July
1, 2007, 133,400 options were granted and the fair value of these options was
estimated on the date of the grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
|
Expected
|
|
Expected
|
|
Dividend
|
|
Risk Free
|
|
Grant Date
|
|
Life
|
|
Volatility
|
|
Yield
|
|
Interest Rate
|
|
Fair Value
|
Former
officers
|
3.50 years
|
|
|
195
|
%
|
0
|
%
|
4.50
|
%
|
$
|
5.20
|
On June
10, 2008, 7,500 options were granted and the fair value of these options was
estimated on the date of the grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Expected
|
|
Expected
|
|
Dividend
|
|
Risk Free
|
|
Average Fair
|
|
Life
|
|
Volatility
|
|
Yield
|
|
Interest Rate
|
|
Value
|
Current
officer
|
5
years
|
|
|
95
|
%
|
0
|
%
|
2.51
|
%
|
$
|
8.00
|
As of
March 31, 2009, of the 7,500 options held by the Company’s executives,
directors, and employees, 3,750 were vested.
The
following is a summary of the option activity:
|
|
Number of options
|
|
Outstanding
as of June 30, 2007
|
|
|
194,436
|
|
Granted
|
|
|
7,500
|
|
Forfeited
|
|
|
(23,536
|
)
|
Exercised
|
|
|
(37,500
|
)
|
Outstanding
as of June 30, 2008
|
|
|
140,900
|
|
Granted
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
Outstanding
as of March 31, 2009
|
|
|
140,900
|
|
Following
is a summary of the status of options outstanding at March 31,
2009:
Outstanding options
|
|
Exercisable options
|
|
Average
Exercise price
|
|
Number
|
|
Average
remaining
contractual life
(years)
|
|
Average
exercise price
|
|
Number
|
|
Weighted
average
exercise price
|
|
$
|
4.20
|
|
133,400
|
|
1.75
|
|
$
|
4.20
|
|
133,400
|
|
$
|
4.20
|
|
|
12.00
|
|
2,000
|
|
4.25
|
|
|
12.00
|
|
2,000
|
|
|
12.00
|
|
|
16.00
|
|
1,750
|
|
4.25
|
|
|
16.00
|
|
1,750
|
|
|
16.00
|
|
|
20.00
|
|
1,875
|
|
4.25
|
|
|
-
|
|
-
|
|
|
-
|
|
|
24.00
|
|
1,875
|
|
4.25
|
|
|
-
|
|
-
|
|
|
-
|
|
$
|
4.93
|
|
140,900
|
|
|
|
$
|
-
|
|
137,150
|
|
$
|
4.46
|
|
For the
three months and nine months ended March 31, 2009, the Company recorded
stock-based compensation expense of approximately $9,000 and
$43,000. As of March 31, 2009, there was approximately $149,000 of
total unrecognized compensation expense related to non vested share-based
compensation arrangements. That cost is expected to be recognized over a period
of eight months.
Note
17 - Employee pension
The
employee pension in the Company generally includes two parts: the first part to
be paid by the Company is 30.6% of $128 for each qualified employee each month.
The other part, paid by the employees, is 11% of $128 each month. For the three
months ended March 31, 2009 and 2008, the Company made pension contributions in
the amount of $37,003 and $9,337, respectively. For the nine months
ended March 31, 2009 and 2008, the Company made pension contributions in the
amount of $109,466 and $25,061, respectively.
Note
18 - Statutory reserves
The
Company is required to make appropriations to reserve funds, comprising the
statutory surplus reserve and discretionary surplus reserve, based on after-tax
net income determined in accordance with generally accepted accounting
principles of the PRC ("PRC GAAP"). Appropriations to the statutory surplus
reserve is required to be at least 10% of the after tax net income determined in
accordance with PRC GAAP until the reserve is equal to 50% of the entities'
registered capital. Appropriations to the discretionary surplus reserve are made
at the discretion of the Board of Directors.
The
statutory surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years' losses, if any, and may be
utilized for business expansion or converted into share capital by issuing new
shares to existing shareholders in proportion to their shareholding or by
increasing the par value of shares currently held by them, provided that the
remaining reserve balance after such issue is not less than 25% of the
registered capital.
The
discretionary surplus fund may be used to acquire fixed assets or to increase
the working capital to expend on production and operation of the business. The
Company's Board of Directors decided not to make an appropriation to this
reserve for fiscal year 2008.
Pursuant
to the Company's articles of incorporation, the Company is to appropriate 10% of
its net profits as statutory surplus reserve up to 50% of the Company’s
registered capital. For the nine month ended March 31, 2008, the Company
appropriated to the statutory surplus reserve in the amount $1,582,820. The
Company’s statutory surplus reserve has reached 50% of its registered capital as
of June 30, 2008, as such, no additional reserve was recorded during the nine
months period ended March 31, 2009.
Note
19 - Accumulated other comprehensive income
The
components of accumulated other comprehensive income is as follows:
Balance,
June 30, 2008
|
|
$
|
7,700,905
|
|
Foreign
currency translation gain
|
|
|
378,284
|
|
Unrealized
loss on marketable securities
|
|
|
(2,147,642
|
)
|
Balance,
March 31, 2009 (unaudited)
|
|
$
|
5,931,547
|
|
Note 20 - Commitments and
contingencies
Operations based in the
PRC
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, and by the general
state of PRC's economy.
The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic, and legal environments, and foreign currency exchange. The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among
others.
R&D
Agreement
In
September 2007, the Company entered into a three year Cooperative Research and
Development Agreement (“CRADA”) with a provincial university. Under the CRADA,
the university is responsible for designing, researching and developing
designated pharmaceutical projects for the Company. Additionally, the university
will also provide technical services and training to the Company. As part
of the CRADA, the Company will pay approximately $3,500,000 (RMB 24,000,000)
plus out-of-pocket expenses to the university annually and provide internship
opportunities for students of the university. The Company will have the
primary ownership of the designated research and development project
results.
In
November 2007, the Company entered into a five year CRADA with a research
institute. Under this CRADA, the institute is responsible for designing,
researching and developing designated pharmaceutical projects for the Company.
Additionally, the research institute will also provide technical services and
training to the Company. As part of the CRADA, the Company will pay
approximately $880,000 (RMB 6,000,000) to the institute annually. The
Company will have the primary ownership of the designated research and
development project results. As of March 31, 2009, the Company’s future
estimated payments to this CRADA amounted to approximately
$8,500,000.
For the
three months ended March 31, 2009 and 2008, approximately $1,099,000 and
$968,000, respectively, was incurred as research and development expenses. For
the nine months ended March 31, 2009 and 2008, approximately $3,295,000 and
$2,170,000, respectively, was incurred as research and development
expenses.
Legal
proceedings
The
Company is involved in various legal matters arising in the ordinary course of
business. The following summarizes the Company’s pending and settled legal
proceedings:
Fernando Praca, Plaintiff
vs. EXTREMA, LLC and Genesis Pharmaceuticals Enterprises, Inc.- Case No. 50 2005
CA 005317, Circuit Court of the 15 th
Judicial Circuit in
and for Palm Beach County, Florida
Fernando
Praca, former Director and former President of the Company’s discontinued
subsidiary, Extrema LLC, filed an action in Dade County, Florida against
Extrema, LLC and the Company in June 2005 relating to damages arising from the
sale of Extrema LLC to Genesis Technology Group, Inc. Fernando Praca had filed a
Motion of Temporary Injunction but had not proceeded to move this case forward.
The plaintiff has decided to reinitiate the legal action in March 2008. In July
2008, the Company and Fernando Praca entered into a Settlement Agreement whereby
Fernando Praca agreed to dismiss this action against the Company and to
surrender to the Company for cancellation, 100,000 shares of common stock in the
Company held by him. The Company agreed to provide Fernando Praca with a legal
opinion of its counsel removing the restrictive legend on the 1,269,607 shares
of common stock held by Fernando Praca. This matter was settled in
July 2008. (See Note 14.)
CRG Partners, Inc. and
Capital Research Group, Inc. and Genesis Technology Group, Inc., n/k/a Genesis
Pharmaceuticals Enterprises, Inc. (Arbitration) - Case No. 32 145 Y 00976 07,
American Arbitration Association, Southeast Case Management
Center
On
December 4, 2007, CRG Partners, Inc. (“CRGP”), a former consultant of the
Company, filed a demand for arbitration against the Company alleging breach of
contract and seeking damages of approximately $10 million as compensation for
consulting services rendered to the Company. The amount of damages sought by the
claimant was equal to the dollar value of 29,978,900 shares of the Company’s
common stock (Pre 40-to-1 reverse split) in November 2007, in which the claimant
alleged were due and owing to CRGP. On December 5, 2007, the Company gave
notice of termination of the relationship with CRG under the consulting
agreement. CRGP subsequently filed an amendment to the demand for arbitration to
include Capital Research Group, Inc. (“CRG”) as an added claimant and increased
the damage amount sought under this matter to approximately $13.8
million.
The
Company subsequently filed counter claims in reference to the aforementioned
allegations of breach of contract. In February 2009, the Company was notified by
the arbitration panel of American Arbitration Association (the “Panel”) that the
Panel awarded CRG and CRGP jointly, a net total of $ 980,070 (the “Award”) to be
paid by the Company on or before February 27, 2009. Once the Award is satisfied,
CRG and CRGP would have no further claims against the Company’s common stock or
other property that were the subject of the arbitration. The amount has been
charged to operations for the nine months ended March 31, 2009, and is included
in liabilities assumed from reorganization as of March 31, 2009. At March 31,
2009, the award has not been paid and the Company is in the process of appealing
the case.
China West II, LLC and
Genesis Technology Group, Inc., n/k/a Genesis Pharmaceuticals Enterprises, Inc.
(Arbitration)
In June
2008, China West II, LLC (“CW II”) filed a Demand For Arbitration with the
American Arbitration Association (“AAA”) the case of CW II and Genesis Technology Group,
Inc. n/k/a Genesis Pharmaceuticals Enterprises, Inc. and Joshua Tan. In
that matter, CW II sought breach of contract damages in connection with the
Company’s October 2007 reverse merger from the Company and Joshua Tan, former
director of the Company, jointly and severally for approximately $6,700,000
estimated by CW II.
In
January 2009, the Company received a written notice from the
Panel that CW II had withdrawn the Demand for Arbitration without
prejudice.
China West, LLC and Genesis
Technology Group, Inc., n/k/a Genesis Pharmaceuticals Enterprises, Inc.
(Arbitration)
In
November 2008, China West, LLC (“CW”) filed a Demand For Arbitration with the
American Arbitration Association the case of CW and Genesis Technology Group,
Inc. n/k/a Genesis Pharmaceuticals Enterprises, Inc. and Joshua Tan. In
that matter, CW sought from the Company in the amount of approximately
$7,500,000 for breach of contract and fiduciary duty damages in connection with
the Company’s October 2007 reverse merger.
In
February 2009, the Company received a written notice from the
Panel that CW II had withdrawn the arbitration without
prejudice.
CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING INFORMATION
All
statements contained in this Quarterly Report on Form 10-Q (“Form 10-Q”) for
Jiangbo Pharmaceuticals, Inc., other than statements of historical facts, that
address future activities, events or developments are forward-looking
statements, including, but not limited to, statements containing the words
“believe,” “anticipate,” “expect” and words of similar import. These statements
are based on certain assumptions and analyses made by us in light of our
experience and our assessment of historical trends, current conditions and
expected future developments as well as other factors we believe are appropriate
under the circumstances. However, whether actual results will conform to the
expectations and predictions of management is subject to a number of risks and
uncertainties that may cause actual results to differ materially.
Such
risks include, among others, the following: international, national and local
general economic and market conditions; our ability to sustain, manage or
forecast our growth; raw material costs and availability; new product
development and introduction; existing government regulations and changes in, or
the failure to comply with, government regulations; adverse publicity;
competition; the loss of significant customers or suppliers; fluctuations and
difficulty in forecasting operating results; changes in business strategy or
development plans; business disruptions; the ability to attract and retain
qualified personnel; the ability to protect technology; and other factors
referenced in this and previous filings.
Consequently,
all of the forward-looking statements made in this Form 10-Q are qualified by
these cautionary statements and there can be no assurance that the actual
results anticipated by management will be realized or, even if substantially
realized, that they will have the expected consequences to or effects on our
business operations. As used in this Form 10-Q, unless the context requires
otherwise, “we” or “us” or “Jiangbo” or the “Company” means Jiangbo
Pharmaceuticals, Inc. and its subsidiaries.
Item 2. Management’s Discussion and Analysis
or Plan of Operation
The
following discussion and analysis of the results of operations and financial
condition of Jiangbo Pharmaceuticals, Inc. for the three months and
nine months ended March 31, 2009 and 2008 should be read in
conjunction with Jiangbo’ financial statements and the notes to those financial
statements that are included elsewhere in this Quarterly Report on Form 10-Q.
Our discussion includes forward-looking statements based upon current
expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of events
could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set forth under
the Risk Factors, and Cautionary Notice Regarding Forward-Looking Statements in
this Form 10-Q. We use words such as “anticipate,” “estimate,” “plan,”
“project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,”
“will,” “should,” “could,” and similar expressions to identify forward-looking
statements.
OVERVIEW
We were
incorporated on August 15, 2001, in the State of Florida under the name Genesis
Technology Group, Inc. On October 12, 2001, we consummated a merger with
NewAgeCities.com, an Idaho public corporation formed in 1969. We were the
surviving entity after the merger. On October 12, 2007, the Company’s
corporate name was changed to Genesis Pharmaceuticals Enterprises,
Inc.
Pursuant
to a Certificate of Amendment to our Amended and Restated Articles of
Incorporation filed with the Department of State of the State of Florida which
took effect as of April 16, 2009, our 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 our Board of Directors as well as our holders of a majority of the
outstanding shares of 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, we completed a share exchange transaction by and among us,
Karmoya International Ltd. (“Karmoya”), a British Virgin Islands company, and
Karmoya’s shareholders. As a result of the share exchange transaction, Karmoya,
a company which was established as a “special purpose vehicle” for the foreign
capital raising activities of its Chinese subsidiaries, became our wholly-owned
subsidiary and our new operating business. Karmoya was incorporated under the
laws of the British Virgin Islands on July 17, 2007, and owns 100% of the
capital stock of Union Well International Limited (“Union Well”), a Cayman
Islands company. Karmoya conducts its business operations through Union Well’s
wholly-owned subsidiary, Genesis Jiangbo (Laiyang) Biotech Technology Co., Ltd.
(“GJBT”). GJBT was incorporated under the laws of the People’s Republic of China
("PRC") on September 16, 2007, and registered as a wholly foreign owned
enterprise (“WOFE”) on September 19, 2007. GJBT has entered into consulting
service agreements and equity-related agreements with Laiyang Jiangbo
Pharmaceutical Co., Ltd. (“Laiyang Jiangbo”), a PRC limited liability company
incorporated on August 18, 2003.
As a
result of the share exchange transaction, our primary operations consist of the
business and operations of Karmoya and its subsidiaries, which are conducted by
Laiyang Jiangbo in the PRC. Laiyang Jiangbo produces and sells western
pharmaceutical products in China and focuses on developing innovative medicines
to address various medical needs for patients worldwide.
RESULTS
OF OPERATIONS
Comparison of three months and nine
months ended March 31, 2009 and 2008
The
following table sets forth the results of our operations for the periods
indicated as a percentage of total sales (in thousands, except
percentage):
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
2009
|
|
%
of Revenue
|
|
2008
|
%
of Revenue
|
|
2009
|
|
%
of Revenue
|
|
2008
|
|
%
of Revenue
|
|
SALES
|
|
$
|
25,726
|
|
100.00
|
%
|
$
|
26,231
|
93.35
|
%
|
$
|
85,991
|
|
99.72%
|
|
$
|
66,648
|
|
93.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES-
RELATED PARTY
|
|
|
-
|
|
-
|
%
|
|
1,869
|
6.65
|
%
|
|
244
|
|
0.28%
|
|
|
4,612
|
|
6.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
6,854
|
|
26.64
|
%
|
|
5,896
|
20.98
|
%
|
|
19,705
|
|
22.85%
|
|
|
16,626
|
|
23.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES- RELATED PARTIES
|
|
|
|
-
|
-
|
%
|
|
442
|
1.57
|
%
|
|
55
|
|
0.06%
|
|
|
1,118
|
|
1.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
18,872
|
|
73.36
|
%
|
|
21,762
|
77.44
|
%
|
|
66,476
|
|
77.09%
|
|
|
53,516
|
|
75.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESEARCH
AND DEVELOPMENT
|
|
|
1,099
|
|
4.27
|
%
|
|
968
|
3.44
|
%
|
|
3,295
|
|
3.82%
|
|
|
2,170
|
|
3.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
4,477
|
|
17.40
|
%
|
|
12,136
|
43.19
|
%
|
|
31,112
|
|
36.07%
|
|
|
29,269
|
|
41.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
13,296
|
|
51.68
|
%
|
|
8,658
|
30.81
|
%
|
|
32,069
|
|
37.19%
|
|
|
22,076
|
|
30.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES
|
|
|
1,137
|
|
4.42
|
%
|
|
1,972
|
7.02
|
%
|
|
6,587
|
|
7.65%
|
|
|
2,404
|
|
3.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
12,159
|
|
47.26
|
%
|
|
6,686
|
23.79
|
%
|
|
25,482
|
|
29.55%
|
|
|
19,672
|
|
27.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
3,303
|
|
12.84
|
%
|
|
2,211
|
7.87
|
%
|
|
8,093
|
|
9.38%
|
|
|
6,809
|
|
9.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
8,856
|
|
34.42
|
%
|
|
4,475
|
15.93
|
%
|
|
17,389
|
|
20.16%
|
|
|
12,863
|
|
18.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME (LOSS)
|
|
|
(401)
|
|
(1.56)
|
%
|
|
1,690
|
6.02
|
%
|
|
(1,770
|
)
|
(2.05)%
|
|
|
4,777
|
|
6.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
8,455
|
|
32.87
|
%
|
|
6,165
|
21.94
|
%
|
|
15,619
|
|
18.11%
|
|
|
17,640
|
|
24.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES. During the nine
months ended March 31, 2009, we had revenues of $86.2 million as compared to
revenues of $71.3 million for the nine months ended March 31, 2008, an increase
of $15.0 million or approximately 21.0%. Our revenues include sales to related
parties of $0.2 million for the nine months ended March 31, 2009, as compared to
$4.6 million for the nine months ended March 31, 2008, a decrease of $4.4
million or approximately 94.7%. For the three months ended March 31, 2009, we
had revenues of $25.7 million as compared to revenues of $26.2 million for the
three months ended March 31, 2008, a decrease of $0.5 million or
1.9%. For the three months ended March 31, 2009, we did not have any
revenues from related party as compared to $1.9 million for the three months
ended March 31, 2008, a decrease of $1.9 million or 100%. While the quantities
sold for Clarithromycin Sustained-released Tablets and Baobaole chewable tables
increased in the three months ended March 31, 2009 as compared to the three
months ended March 31, 2008, the decrease in the total revenue was primarily
attributable to the decrease of the per unit price by average of 26%
for Clarithromycin Sustained-released tablets, Itopride Hydrochloride
granules and Baobaole chewable tables, beginning in January 2009. The
three products accounted for approximately 88.6 % of our total revenue for the
three months ended March 31, 2009. In January 2009 ,we restructured our
distribution and sales system to sell our products primarily through 28 large
independent regional distributors and lowered the per unit prices of
the three major products to the distributors; at the same time, we reduce
the commission paid to our sales representatives on those products to
approximately 5%. The decrease in the revenue generated from the three major
products were partially offset by the increase in revenue from Radix
Isatidis Dispersible tablets and other products we acquired in the Hongrui
acquisition in January 2009. The increase in revenue for the nine months ended
March 31, 2009 as compared to the nine months ended March 31, 2008 was primarily
due to the increase in sales volume of Baobaole chewable tables and the new
product, Radix Isatidis Dispersible Tablets released in the second quarter of
fiscal year 2009. We believe that our product sales quantity will continue to
grow in remainder of fiscal year 2009 as the market demand for our major
products continues to be strong and we have recently launched three products, Yi
Mu Cao Gao (a motherwort herb electuary sticky syrup), Gan Mao Zhi Ke Ke Li (an
antipyretic and antitussive granule), and Kang Gu Sui Yan Pian (an osteomyelitis
treatment tablet) that we acquired from Hongrui under our own brand
name.
COST OF SALES. Cost of sales
for the nine months ended March 31, 2009 increased $2.0 million or 11.4%, from $
17.7 million for the nine months ended March 31, 2008 to $19.8 million for the
nine months ended March 31, 2009. Cost of sales for the three months ended March
31, 2009 increased $0.5 million or 8.1% from $6.3 million for the three months
ended March 31, 2008 to $6.9 million for the three months ended March 31, 2009.
The increase in cost of sales as a percentage of net revenue for the three
months ended March 31, 2009, approximately 26.6%, as compared to the three
months ended March 31, 2008, approximately 22.6%, was primarily attributable to
the decrease in the per unit price mentioned above. The decrease in cost of
sales as a percentage of net revenues for the nine months ended March 31, 2009,
approximately 22.9% as compared to the nine months ended March 31, 2008,
approximately 24.9% was primarily attributable to more sales being generated
from products with higher- profit- margins, including highly profitable new
products Itopride Hydrochloride Granules, Baobaole chewable tablets and Radix
Isatidis Dispersible Tablets and our ability to properly manage raw material
purchase prices and partially offset by the lower unit price for the three
months ended March 31, 2009 for the three major products.
GROSS PROFIT. Gross profit
was $66.5 million for the nine months ended March 31, 2009 as compared to $53.5
million for the nine months ended March 31, 2008, representing gross margins of
approximately 77.1 % and 75.1%, respectively. Gross profit was $18.9 million for
the three months ended March 31, 2009 as compared to $21.8 million for the three
months ended March 31, 2008, representing gross margins of approximately 73.4%
and 77.5%, respectively. The increase in our gross profits for the nine months
ended March 31, 2009 was mainly due to the higher volume of sales with higher
margin products and partially offset by the lower unit price for the three
months ended March 31, 2009 for the three major products. The decrease in the
gross profit for the three month ended March 31, 2009 was primarily due to the
lower unit price charged as a result of sales net work restructure.
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES. Selling, general and administrative expenses totaled $31.1
million for the nine months ended March 31, 2009, as compared to $ 29.3 million
for the nine months ended March 31, 2008, an increase of $1.8 million or
approximately 6.3%. Selling, general and administrative expenses
totaled $4.5 million for the three months ended March 31, 2009, as compared to $
12.1 million for the three months ended March 31, 2008, a decrease of $7.7
million or approximately 63.1% as summarized below ($ in
thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
March
31, 2009
|
|
|
March
31, 2008
|
|
|
March
31, 2009
|
|
|
March
31, 2008
|
|
Advertisement,
marketing and promotion
|
|
$ |
1,400 |
|
|
$ |
3,303 |
|
|
$ |
7,235 |
|
|
$ |
9,043 |
|
Travel
and entertainment - sales related
|
|
|
129 |
|
|
|
440 |
|
|
|
1,441 |
|
|
|
1,057 |
|
Salaries,
wages, commissions and related benefits
|
|
|
2,022 |
|
|
|
7,522 |
|
|
|
19,860 |
|
|
|
17,043 |
|
Travel
and entertainment - non sales related
|
|
|
41 |
|
|
|
58 |
|
|
|
171 |
|
|
|
215 |
|
Depreciation
and amortization
|
|
|
185 |
|
|
|
126 |
|
|
|
614 |
|
|
|
311 |
|
Shipping
and handling
|
|
|
153 |
|
|
|
11 |
|
|
|
405 |
|
|
|
253 |
|
Other
|
|
|
547 |
|
|
|
676 |
|
|
|
1,386 |
|
|
|
1,347 |
|
Total
|
|
$ |
4,477 |
|
|
$ |
12,136 |
|
|
$ |
31,112 |
|
|
$ |
29,269 |
|
The
changes in these expenses during the third quarter and nine months ended March
31, 2009, as compared to the corresponding period in 2008 included the
following:
·
|
A
decrease of $1.9 million or approximately 57.6% in advertisement,
marketing and promotion spending for the third quarter of fiscal year 2009
and an decrease of $1.8 million or approximately 20% for the nine months
ended March 31, 2009 as compared to the corresponding period in fiscal
year 2008. The decrease in advertising, marketing and promotion costs for
the three and nine months period ended March 31 2009 was primarily due to
less marketing and promotion spending and better managed advertising and
promotional costs in fiscal year
2009.
|
·
|
Travel
and entertainment - sales related expenses decreased by $0.3 million or
70.7 % for the third quarter of fiscal year 2009 as compared to
the corresponding period in fiscal year 2008 and increased by $0.4 million
or 36.3% for the nine months ended March 31, 2009 as compared to the
corresponding period in fiscal year 2008. The decrease in the third
quarter of fiscal year 2009 was primarily due to better traveling and
entertainment cost controls as well as less travel and entertainment
activities incurred by our sales representatives. The increase for the
nine months ended March 31, 2009 was primarily due to the
increase in our sales and trade show activities related to promoting our
products and establishing the distribution network for them during the
first six months of fiscal year
2009.
|
·
|
Salaries,
wages, commissions and related benefits decreased by 5.5 million or 73.1%
during the third quarter of fiscal year 2009 as compared to the
corresponding period in fiscal 2008, and increased by $2.8 million or
16.5% during the nine months ended March 31, 2009 as compared to the
corresponding period of fiscal year 2008. The decrease in the third
quarter of fiscal year 2009 was primarily because the significant decrease
in commission paid to our sales representatives. Beginning in January
2009, we reduced the commissions paid to our sales representatives to
approximately 5% for the sale of our three major products which was
approximately 30% of the product sales price. The increase in the nine
months period in fiscal year 2009 was primarily due to increase in
commission payments as a percentage of sales to sales representatives and
increase in sales volume in the first six months in fiscal year and
partially offset by the decrease in the third
quarter.
|
·
|
Travel
and entertainment - non sales related expenses decreased slightly for the
third quarter of fiscal year 2009 and the nine months ended March 31, 2009
as compared to prior year corresponding periods. The decrease was
primarily due to better expense spending controls in fiscal year
2009.
|
·
|
Shipping
and handling expenses increased by 0.1 million or 1291.1% during the third
quarter of fiscal year 2009 and increased by $0.2 million or 60.1% during
the nine months ended March 31, 2009 as compared to the corresponding
periods of fiscal year 2008. The increase was primarily due to increase in
fuel costs and more customers requiring us to pay for product shipping
costs in fiscal 2009.
|
·
|
Depreciation
and amortization expense increased by $0.06 million or 46.8% during the
third quarter of fiscal year 2009 and increased by $0.3 million or 97.4%
during the nine months ended March 31, 2009 as compared to the
corresponding period of fiscal year 2008, primarily due to more fixed
assets,, such as vehicles, and intangible assets acquired in fiscal 2009
and being depreciated and
amortized.
|
·
|
Other
selling, general and administrative expenses, which include professional
fees, utilities, office supplies and expenses decreased by $0.1 million or
19.1% for the third quarter of fiscal year 2009 and remained materially
consistent for the nine months ended March 31, 2009 as compared to the
corresponding period in fiscal year 2008. The slight decrease in the third
quarter of fiscal year 2009 was the result of better administrative and
corporate spending controls.
|
RESEARCH AND DEVELOPMENT
COSTS. Research and development costs, which consist of cost of materials
used and salaries paid for the development of the Company’s products and fees
paid to third parties, totaled $3.3 million for the nine months ended March 31,
2009, as compared to $2.2 million for the nine months ended March 31, 2008, an
increase of $1.1 million or approximately 51.8 %. Research and
development costs totaled $1.1 million for the three months ended March 31,
2009, as compared to $1.0 million for the three months ended March 31, 2008, an
increase of $0.1 million or approximately 13.5%. The increase in research and
development expenses was mainly due to two new R&D cooperative agreements
being signed in the latter part of 2008. We began making monthly payments to the
designated university research and development products, plus expenses
incurred.
OTHER EXPENSES . Our other
expenses consisted of financial expenses and non-operating expenses. We had
other expenses of $6.6 million for the nine months ended March 31, 2009 as
compared to other expenses $2.4 million for the nine months ended March 31,
2008, an increase of $4.2 million or approximately 174%. For the three
months ended March 31, 2009, we had other expenses of $1.1 million as compared
to $2.0 million for the three months ended March 31, 2008, a decrease of $0.8
million or 42.3%. The increase for the nine months ended March 31, 2009 in net
other expenses was primarily due to the increase in interest expense and
amortization of debt discounts related to our financing in November 2007 and May
2008 of $4.1 million, and loss from discontinued operation of $1.7 million for
the nine months ended March 31, 2009 and partially offset by the increase in
other income – related parties of $0.3 million and interest income $0.4
million.
NET INCOME. Our net income
for the nine months ended March 31, 2009 was $17.4 million as compared to $12.9
million for the nine months ended March 31, 2008, an increase of $4.5 million or
35.2 %. The net income for the three months ended March 31, 2009 was $8.9
million as compared to $4.5 million for the three months ended March 31, 2008,
an increase of $4.4 million or 97.9%. The increase in our net income
for the nine months and three months ended March 31, 2009 was primarily due to
the increase in our income from operations. Management believes
that net income will continue to be strong in the remainder of fiscal year
2009 as we have completed the Hongrui acquisition and we have started generating
sales from the products acquired in the acquisition. We also intend to continue
to strengthen our sales efforts to gain market share for our products and
control our spending.
LIQUIDITY
AND CAPITAL RESOURCES
Net
cash provided by operating activities for the nine months ended March 31, 2009
was $41.1 million as compared to net cash provided by operating activities of
$17.7 million for the nine months ended March 31, 2008. For the nine months
ended March 31, 2009, the significant increase in cash provided by operating
activities included the following: 1) increase in income from continuing
operations of $5.9 million; 2) an add-back of bad debt expenses of
$0.4 million; 3) an increase in add-back of amortization on debt
discount and deferred debt costs of $2.5 million; 4) a decrease in changes in
accounts receivable and accounts receivable from related parties totaling $11.5
million; 5) decrease in changes in advances to suppliers and other assets of
$2.0 million; 6) increase in changes in accounts payable
of $2.0 million; 7) increase changes in other payables- related
parties of $0.9 million; and 7) increase in changes in customer
deposit of $4.1 million, partially offset by a) the decrease in changes in other
payable of $2.0 million b) an increase in changes in liabilities
assumed from reorganization of $1.2 million and c) decrease in changes in taxes
payable of $5.1 million.
Net cash
used in investing activities for the nine months ended March 31, 2009 of $8.5
million was mainly attributable to cash used in Hongrui acquisition of $8.6
million and cash used in purchase of equipments of $0.1 million and
offset by proceeds from sale of marketable securities of $0.2 million. Net cash
used by investing activities for the nine months ended March 31, 2008 was $7.5
million attributable to payments on land use rights of $8.2 million and
purchases of equipments of $0.4 million and offset by cash acquired in reverse
merger of $0.5 million and proceeds from the sale of marketable securities
totaling $0.6 million.
Net cash
provided by financing activities was $1.4 million for the nine months ended
March 31, 2009 and was primarily attributable to decrease in restricted cash of
$4.1 million, proceeds from bank loans of $2.2 million and offset by decrease on
notes payable of $2.2 million and the principal payments on short term bank
loans of $2.8 million. Net cash used in financing activities was $7.7 million
for the nine months ended March 31, 2008 and was attributable to payments on
debt issuance cost of $0.4 million, payments on dividend payable of $10.5
million, payments for bank loans of $5.4 million and a in increase in notes
payable of $5.4 million and offset by proceeds from bank loans of $3.3 million,
proceeds from sale of common stock of $0.3 million, proceeds from issuance of
convertible debt of $5 million, and increase in restricted cash of $5.4
million.
We
reported a net increase in cash for the nine months ended March 31, 2009 of
$34.1 million as compared to a net increase in cash of $3.8 million for the nine
months ended March 31, 2008.
We
have historically financed our operations and capital expenditures principally
through private placements of debt and equity offerings, bank loans, and cash
provided by operations. At March 31, 2009, the majority of our liquid assets
were held in the Chinese Renminbi (“RMB”) denominations deposited in banks
within the PRC. The PRC has strict rules for converting RMB to other currencies
and for movement of funds from the PRC to other countries. Consequently, in the
future, we may face difficulties in moving funds deposited within the PRC to
fund working capital requirements in the U.S. Management has been evaluating and
resolving the situation. Our working capital position improved by $13.1 million
to $85.6 million at March 31, 2009 from $72.5 million at June 30, 2008. This
increase in working capital is primarily attributable to an increase in cash of
$ 34.1 million, a decrease in notes payable of $2.1 million and a decrease in
short term bank loans of $0.6 million offset by a decrease in restricted cash of
$4.1 million, a decrease in investments of $1.4 million, a decrease in accounts
receivables and accounts receivable - related parties totaling of $3.1 million,
an increase in accounts payable of $3.2 million, an increase in customer deposit
of $4.1 million, an increase in accrued liabilities of $0.6 million and an
increase in liabilities assumed from reorganization of $0.5 million and an
increase in taxes payable of $5.1 million.
We
anticipate that our working capital requirements may increase as a result of our
anticipated business expansion plan, continued increase in sales, potential
increases in the price of our raw materials, competition and our relationship
with suppliers or customers. We believe that our existing cash, cash equivalents
and cash flows from operations will be sufficient to meet our present
anticipated future cash needs for at least the next 12 months. We may, however,
require additional cash resources due to changed business conditions or other
future developments, including any investments or acquisitions we may decide to
pursue.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amount of payments.
Off-Balance
Sheet Arrangements
We have
not entered into any financial guarantees or other commitments to guarantee the
payment obligations of any third parties. We have not entered into any
derivative contracts that are indexed to our shares and classified as
shareholders’ equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
Risk
Factors
Interest Rates. Our exposure
to market risk for changes in interest rates primarily relates to our short-term
investments and short-term obligations; thus, fluctuations in interest rates
would not have a material impact on the fair value of these securities. At March
31, 2009, we had approximately $82.3 million in cash and cash equivalents. A
hypothetical 2 % increase or decrease in interest rates would not have a
material impact on our earnings or loss, or the fair market value or cash flows
of these instruments.
Foreign Exchange Rates. All
of our sales are denominated in the Chinese RMB. As a result, changes in the
relative values of the U.S. dollars and the RMB affect our reported levels of
revenues and profitability as the results are translated into U.S. dollars for
financial reporting purposes. In particular, fluctuations in currency exchange
rates could have a significant impact on our financial stability due to a
mismatch among various foreign currency-denominated sales and costs.
Fluctuations in exchange rates between the U.S. dollar and RMB affect our
gross and net profit margins and could result in foreign exchange and operating
losses.
Our
exposure to foreign exchange risk primarily relates to currency gains or losses
resulting from timing differences between signing of sales contracts and
settling of these contracts. Furthermore, we translate monetary assets and
liabilities denominated in other currencies into RMB, the functional currency of
our operating business. Our results of operations and cash flows are translated
at average exchange rates during the period, and assets and liabilities are
translated at the unified exchange rate as quoted by the People’s Bank of China
at the end of the period. Translation adjustments resulting from this process
are included in accumulated other comprehensive income in our statements of
shareholders’ equity. We recorded net foreign currency gains of $ 0.4 million
and $3.4 million for the nine months ended March 31, 2009 and 2008,
respectively. For the three months ended March 31, 2009 and 2008, the net
foreign currency gains (loss) amounted to $(0.2) million and $2.0 million,
respectively. We have not used any forward contracts, currency options or
borrowings to hedge our exposure to foreign currency exchange risk. We cannot
predict the impact of future exchange rate fluctuations on our results of
operations and may incur net foreign currency losses in the future. As our
sales, denominated in RMB, continue to grow, we will consider using arrangements
to hedge our exposure to foreign currency exchange risk.
Our
financial statements are expressed in U.S. dollars but the functional
currency of our operating subsidiary is the RMB. The value of your investment in
our stock will be affected by the foreign exchange rates between the
U.S. dollar and the RMB. To the extent we hold assets denominated in
U.S. dollars, any appreciation of the RMB against the U.S. dollar
could result in a change to our statements of operations and a reduction in the
value of our U.S. dollar denominated assets. On the other hand, a decline
in the value of RMB against the U.S. dollar could reduce the
U.S. dollar equivalent amounts of our financial results, the value of your
investment in our company and the dividends we may pay in the future, if any,
all of which may have a material adverse effect on the price of our
stock.
Credit Risk. We have not
experienced significant credit risk, as most of our customers are long-term
customers with excellent payment records. We review our accounts receivable on a
regular basis to determine if the allowance for doubtful accounts is adequate at
each quarter-end. We typically extend 30 to 90 day trade credit to our largest
customers and we have not seen any of our major customers’ accounts receivable
go uncollected beyond the extended period of time or experienced any material
write-off of accounts receivable in the past.
Inflation Risk. In recent
years, China has not experienced significant inflation, and thus inflation has
not had a material impact on our results of operations. According to the
National Bureau of Statistics of China (“NBS”) (www.stats.gov.cn), the change in
Consumer Price Index (“CPI”) in China was 3.9%, 1.8% and 1.5% in 2004, 2005 and
2006, respectively. However, in 2007, according to NBS, CPI rose significantly
at a monthly average rate of 4.8%. Especially during the months of August,
September, October, November, and December, CPI was up 6.5%, 6.2%, 6.5%, 6.9%,
and 6.5%, respectively. Inflationary factors, such as increases in the cost of
our products and overhead costs, could impair our operating results. Although we
do not believe that inflation has had a material impact on our financial
position or results of operations to date, a high rate of inflation may have an
adverse effect on our ability to maintain current levels of gross margin and
selling, general and administrative expenses as a percentage of sales revenue if
the selling prices of our products do not increase with these increased
costs.
Related
Party Transactions
Accounts receivable -
related parties
The
Company is engaged in business activities with three related parties, Jiangbo
Chinese-Western Pharmacy, Laiyang Jiangbo Medicals, Co., Ltd, and Yantai Jiangbo
Pharmaceuticals Co., Ltd. The Company’s Chief Executive Officer and other
majority shareholders have 100% ownership of these entities. At March 31, 2009
and June 30, 2008, accounts receivable from sales of the Company’s products to
these related entities were $187,766 and $673,808, respectively. Accounts
receivable due from related parties are receivable in cash and due within three
to six months. For the three months ended March 31 2008, the Company recorded
net revenues of approximately $1,869,000, from sales to these related parties.
For the three months ended March 31, 2009, the Company did not make any sales to
these related parties. For the nine months ended March 31, 2009 and
2008, the Company recorded net revenues of $243,943 and $4,611,849,
respectively, from sales to related parties.
Other receivable - related
parties
The
Company leases two of its buildings to Jiangbo Chinese-Western
Pharmacy. For the nine months ended March 31, 2009 and 2008, the
Company recorded other income of $313,216 and $80,851 from leasing the two
buildings to this related party. For the three months ended March 31,
2009 and 2008, the Company recorded other income of $76,552 and $27,415 from
leasing the two aforementioned buildings. As of March 31, 2009 and
June 30, 2008, amounts due from this related party was $317,412 and $0,
respectively.
Other payable - related
parties
Other
payable-related parties primarily consist of accrued salary payable to the
Company’s officers and directors, and advances from the Company’s Chief
Executive Officer. These advances are short-term in nature and bear no interest.
The amounts are expected to be repaid in the form of cash. Other
payable - related parties consisted of the following:
|
|
March
31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Payable
to Wubo Cao, Chief Executive Officer and Chairman of the Board
|
|
$
|
145,436
|
|
|
$
|
281,137
|
|
|
|
|
|
|
|
|
|
|
Payable
to Haibo Xu, Chief Operating Officer and Director
|
|
|
16,888
|
|
|
|
43,835
|
|
|
|
|
|
|
|
|
|
|
Payable
to Elsa Sung, Chief Financial Officer
|
|
|
11,842
|
|
|
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Payable
to John Wang, Director
|
|
|
2,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
other payable - related parties
|
|
$
|
176,666
|
|
|
$
|
324,972
|
|
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
We
believe that the application of the following accounting policies, which are
important to our financial position and results of operations, require
significant judgments and estimates on the part of management. Our critical
accounting policies and estimates present an analysis of the uncertainties
involved in applying a principle, while the accounting policies note to the
financial statements (Note 2) describe the method us e d to apply the accounting
principle.
Recent
Accounting Pronouncements
In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“ EITF
07-5” ). This issue is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. Paragraph 11(a) of Statement of
Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
Activities” (“ SFAS 133” ) specifies that a contract that would otherwise meet
the definition of a derivative but is both (a) indexed to the Company ’s own
stock and (b) classified in stockholders ’ equity in the statement of
financial position would not be considered a derivative financial instrument.
EITF 07-5 provides a new two-step model to be applied in determining whether a
financial instrument or an embedded feature is indexed to an issuer ’ s own
stock and thus able t o qualify for the SFAS 133 paragraph 11(a) scope
exception. The Company believes adopting statement will have a material impact
on the financial statements because among other things, any option or warrant
previously issued and all new issuances denominate d is US dollars will be
required to be carried as a liability and marked to market each reporting
period.
On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which
clarifies the application of SFAS 157 when the market for a financial asset is
inactive. Specifically, FSP 157-3 clarifies how (1) management’s internal
assumptions should be considered in measuring fair value when observable data
are not present, (2) observable market information from an inactive market
should be taken into account, and (3) the use of broker quotes or pricing
services should be considered in assessing the relevance of observable and
unobservable data to measure fair value. The Company is currently evaluating the
impact of adoption of FSP 157-3 on the Company’s consolidated
financial.
In April
2009, the FASB issued FSP 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly.” FSP 157-4 amends SFAS
157 and provides additional guidance for estimating fair value in accordance
with SFAS 157 when the volume and level of activity for the asset or liability
have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value
measurements. FSP 157-4 shall be applied prospectively with retrospective
application not permitted. FSP 157-4 shall be effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. An entity early adopting FSP 157-4
must also early adopt FSP 115-2 and 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments”. Additionally, if an entity elects to early
adopt either FSP 107-1 and 28-1, “Interim Disclosures about Fair Value of
Financial Instruments” or FSP 115-2 and 124-2, it must also elect to early adopt
this FSP. The Company is currently evaluating this new FSP but does not believe
that it will have a material impact on the consolidated financial
statements.
In April
2009, the FASB issued FSP 115-2 and 124-2. FSP 115-2 amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF 99-20, “Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to Be Held by a
Transferor in Securitized Financial Assets,” to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This FSP will
replace the existing requirement that the entity’s management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This FSP provides increased disclosure about
the credit and noncredit components of impaired debt securities that are not
expected to be sold and also requires increased and more frequent disclosures
regarding expected cash flows, credit losses, and an aging of securities with
unrealized losses. Although this FSP does not result in a change in the carrying
amount of debt securities, it does require that the portion of an
other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity may early
adopt this FSP only if it also elects to early adopt FSP 157-4. Also, if an
entity elects to early adopt either FSP 157-4 or FSP 107-1 and 28-1, the entity
also is required to early adopt this FSP. The Company is currently evaluating
this new FSP but does not believe that it will have a material impact on the
consolidated financial statements.
In April
2009, the FASB issued FSP 107-1 and 28-1. This FSP amends SFAS 107, to require
disclosures about fair value of financial instruments not measured on the
balance sheet at fair value in interim financial statements as well as in annual
financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments. This FSP shall be effective for interim periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP 157-4 and 115-2 and 124-2. This FSP does not require
disclosures for earlier periods presented for comparative purposes at initial
adoption. In periods after initial adoption, this FSP requires comparative
disclosures only for periods ending after initial adoption. The Company is
currently evaluating the disclosure requirements of this new FSP.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk
Not
required for smaller reporting companies.
Item
4T: Controls and Procedures
(a) Evaluation of Disclosure Controls
and Procedures. We maintain "disclosure controls and procedures" as such
term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In
designing and evaluating our disclosure controls and procedures, our management
recognized that disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of disclosure controls and procedures are met. Additionally, in
designing disclosure controls and procedures, our management was required to
apply its judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure controls and
procedures also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Our
management, including our Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report. Based on such evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that, as of
the end of the period covered by this report, our disclosure controls and
procedures were not effective, for the following two reasons:
1. Accounting and Finance
Personnel Weaknesses - US GAAP expertise - The current staff in the
accounting department does not have extensive experience with US GAAP, and needs
substantial training so as to meet the higher demands of being a publicly-traded
company in the US. The accounting skills and understanding necessary to fulfill
the requirements of US GAAP-based reporting, including the skills of subsidiary
financial statement consolidation, were inadequate and the personnel were
inadequately supervised. The lack of sufficient and adequately trained
accounting and finance personnel resulted in an ineffective segregation of
duties relative to key financial reporting functions.
2.
Lack of internal audit
function -The Company lacks qualified resources to perform the internal
audit functions properly, which resulted in the inability to prevent and detect
control lapses and errors in the accounting of certain key areas such as revenue
recognition, inter-company transactions, cash receipt and cash disbursement
authorizations, inventory safeguard and proper accumulation for cost of
products, in accordance with the appropriate costing method used by the Company.
In addition, the scope and effectiveness of the internal audit function are yet
to be developed.
In order
to correct the foregoing deficiencies, we have taken the following remediation
actions:
1. We
have started training our internal accounting staff on US GAAP and financial
reporting requirements. Additionally, we are also taking steps to hire
additional accounting personnel to ensure we have adequate resources to meet the
requirements of segregation of duties.
2. We
plan on involving both internal accounting and operations personnel and outside
consultants with US GAAP technical accounting expertise, as needed, early in the
evaluation of a complex, non-routine transaction to obtain additional guidance
as to the application of generally accepted accounting principles to such a
proposed transaction. During the nine months ended March 31, 2009, our senior
management has started interviewing and selecting outside internal control
consultants. In December 2008, we engaged a reputable independent accounting
firm as internal control consultants to provide advice and assistance on
improving our internal controls. The internal control consultants have began
working with our internal audit department to implement new policies and
procedures within the financial reporting process with adequate review and
approval procedures.
3. We
have continued to evaluate the internal audit function in relation to the
Company’s financial resources and requirements. During the nine months ended
March 31, 2009, we have established an internal audit department and the
department has started evaluating the Company’s current internal control over
financial reporting process. To the extent possible, we will implement
procedures to assure that the initiation of transactions, the custody of assets
and the recording of transactions will be performed by separate
individuals.
We
believe that the foregoing steps will remediate the significant deficiencies
identified above, and we will continue to monitor the effectiveness of these
steps and make any changes that our management deems appropriate to insure that
the foregoing do not become material weaknesses. We plan to fully implement the
above remediation plan by December 31, 2009.
A
material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. A significant deficiency is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting that is less severe than a material weakness, yet important enough to
merit attention by those responsible for oversight of the company's financial
reporting.
Our
management is not aware of any material weaknesses in our internal control over
financial reporting, and nothing has come to the attention of management that
causes them to believe that any material inaccuracies or errors exist in our
financial statements as of March 31, 2009. The reportable conditions
and other areas of our internal control over financial reporting identified by
us as needing improvement have not resulted in a material restatement of our
financial statements. Nor are we aware of any instance where such
reportable conditions or other identified areas of weakness have resulted in a
material misstatement or omission in any report we have filed with or submitted
to the Commission.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
(b) Changes in internal controls over
financial reporting . During the nine months covered by this quarterly
report, there was no change in our internal control over financial reporting
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control systems are met.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. Such limitations include the fact that human
judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures, such as simple errors or mistakes
or intentional circumvention of the established process.
PART
II
Item 1. Legal Proceedings
The
Company is involved in various legal matters arising in the ordinary course of
business. After taking into consideration the Company’s legal counsel’s
evaluation of such matters, the Company’s management is of the opinion that the
outcome of these matters will not have a significant effect on the Company’s
consolidated financial position as of March 31, 2009.
The
following summarizes the Company’s pending and settled legal proceedings as of
March 31, 2009:
Fernando Praca, Plaintiff
vs. EXTREMA, LLC and Genesis Pharmaceuticals Enterprises, Inc.- Case No. 50 2005
CA 005317, Circuit Court of the 15 th
Judicial Circuit in
and for Palm Beach County, Florida
Fernando
Praca, former Director and former President of the Company’s discontinued
subsidiary, Extrema LLC, filed an action in Dade County, Florida against
Extrema, LLC and the Company in June 2005 relating to damages arising from the
sale of Extrema LLC to Genesis Technology Group, Inc. Fernando Praca had filed a
Motion of Temporary Injunction but had not proceeded to move this case forward.
The plaintiff decided to reinitiate the legal action in March 2008.
In July 2008, the Company and Fernando Praca entered into a Settlement Agreement
whereby Fernando Praca agreed to dismiss this action against the Company and to
surrender to the Company for cancellation, 100,000 shares of common stock in the
Company held by him. The Company agreed to provide Fernando Praca with a legal
opinion of its counsel removing the restrictive legend on the 1,269,607 shares
of common stock held by Fernando Praca. In July, 2008, this matter
was settled.
CRG Partners, Inc. and
Capital Research Group, Inc. and Genesis Technology Group, Inc., n/k/a Genesis
Pharmaceuticals Enterprises, Inc. (Arbitration) - Case No. 32 145 Y 00976 07,
American Arbitration Association, Southeast Case Management
Center
On
December 4, 2007, CRG Partners, Inc. (“CRGP”), a former consultant of the
Company, filed a demand for arbitration against the Company alleging breach of
contract and seeking damages of approximately $10 million as compensation for
consulting services rendered to the Company. The amount of damages sought by the
claimant was equal to the dollar value of 29,978,900 shares of the Company’s
common stock (Pre 40-to-1 reverse split) in November 2007, in which the claimant
alleged were due and owing to CRGP. On December 5, 2007, the Company gave
notice of termination of the relationship with CRG under the consulting
agreement. CRGP subsequently filed an amendment to the demand for arbitration to
include Capital Research Group, Inc. (“CRG”) as an added claimant and increased
the damage amount sought under this matter to approximately $13.8
million.
The
Company subsequently filed counter claims in reference to the aforementioned
allegations of breach of contract. In February 2009, the Company was notified by
the arbitration panel of American Arbitration Association (the “Panel”) that the
Panel awarded CRG and CRGP jointly, a net total of $ 980,070 (the “Award”) to be
paid by the Company on or before February 27, 2009. Once the Award is satisfied,
CRG and CRGP would have no further claims against the Company’s common stock or
other property that were the subject of the arbitration. The amount has been
charged to operations for the nine months ended March 31, 2009, and is included
in liabilities assumed from reorganization as of March 31, 2009. At March 31,
2009, the award has not been paid and the Company is in the process of appealing
the case.
China West II, LLC and
Genesis Technology Group, Inc., n/k/a Genesis Pharmaceuticals Enterprises, Inc.
(Arbitration)
In June
2008, China West II, LLC (“CW II”) filed a Demand For Arbitration with the
American Arbitration Association (“AAA”) the case of CW II and Genesis Technology Group,
Inc. n/k/a Genesis Pharmaceuticals Enterprises, Inc. and Joshua Tan. In
that matter, CW II sought breach of contract damages in connection with the
Company’s October 2007 reverse merger from the Company and Joshua Tan, former
director of the Company, jointly and severally for approximately $6.7 million
estimated by CW II.
In
January 2009, the Company received a written notice from AAA that CW II had
withdrawn the arbitration without prejudice.
China West, LLC and Genesis
Technology Group, Inc., n/k/a Genesis Pharmaceuticals Enterprises, Inc.
(Arbitration)
In
November 2008, China West, LLC (“CW”) filed a Demand For Arbitration with the
American Arbitration Association the case of CW and Genesis Technology Group,
Inc. n/k/a Genesis Pharmaceuticals Enterprises, Inc. and Joshua Tan. In
that matter, CW sought from the Company in the amount of approximately $7.5
million for breach of contract and fiduciary duty damages in connection with the
Company’s October 2007 reverse merger.
In
February 2009, the Company received a written notice from AAA that CW II had
withdrawn the arbitration without prejudice.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
In July
2008, we issued 2,500 shares of restricted common stock as compensation to two
of our former and current directors. We valued the shares at the fair market
value on the date of the grant at $8 per share or $20,000 in total. We recorded
related stock-based compensation expenses of $16,667 and deferred compensation
of $3,333 for the nine months ended March 31, 2009, accordingly. The shares were
issued to accredited investors, without any general solicitation and,
accordingly, were exempt from Securities Act registration pursuant to Section
4(2) thereof.
In
September 2008, we issued 2,500 shares of restricted common stock to two of our
former and current directors for director compensation. We valued these common
shares at the fair market value on the date of the grant at $9 per share or
$22,500 in total. We recorded related stock-based compensation expenses of
$17,813 and deferred compensation of $4,687 for the nine months ended March 31,
2009, accordingly. The shares were issued to accredited investors, without any
general solicitation and, accordingly, were exempt from Securities Act
registration pursuant to Section 4(2) thereof.
In
December 2008, the Company issued 20,000 shares of its common stock in
connection with the conversion of $160,000 of convertible debt relating to the
debt financing. As a result of the conversion, the Company recorded $145,524
interest expense to fully amortize the unamortized discount related to the
converted dentures.
In
November 2008, the Board of the Directors of the Company authorized a share
buyback program to purchase the Company’s common stock in the open market with a
$2,000,000 limitation. As of March 31, 2009, the Company has not purchased any
shares in the open market.
In
January 2009, in connection with the Hongrui acquisition, the Company recorded
643,651 shares of Jiangbo’s common stock issuable to Shandong
Traditional Chinese Medicine College as part of the consideration for
acquisition. The fair value of the common stock of $4.035 per share
was based on the weighted average trading price of 5 days prior to the date of
the acquisition, and amounted to $2,597,132.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submissions of Matters to a Vote of Security Holders
None.
Item 5. Other
Information.
None.
Item
6. Exhibits
No.
|
|
Description
|
10.1
|
|
Unofficial
Summary Translation of the Supplemental Assets Transfer Contract dated as
of February 10, 2009 by and among Laiyang Jiangbo Pharmaceutical Co.,
Ltd., Shandong Traditional Chinese Medicine College
and Shandong Hongrui Pharmaceutical Factory, a wholly owned subsidiary of
Medicine College
|
|
|
|
31.1
|
|
Rule
13a-14(a)/ 15d-14(a) Certification of Chief Executive
Officer
|
|
|
|
31.2
|
|
Rule
13a-14(a)/ 15d-14(a) Certification of Chief Financial
Officer
|
|
|
|
32.1
|
|
Section
1350 Certification of Chief Executive Officer and Chief Financial
Officer
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
JIANGBO
PHARMACEUTICALS, INC.
|
|
|
|
|
|
Date:
May 15, 2009
|
By:
|
/s/ Cao
Wubo
|
|
|
|
Cao
Wubo
|
|
|
|
Chief
Executive Officer and President
|
|
|
|
|
|