The accompanying notes are integral part of
these consolidated financial statements.
The accompanying notes are integral part of
these consolidated financial statements.
The accompanying notes are integral part of
these consolidated financial statements.
JIANGBO
PHARMACEUTICALS, INC. AND SUBSIDIARIES
|
(FORMERLY
KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
FOR
NINE MONTHS ENDED MARCH 31, 2010 AND 2009
|
(Unaudited)
|
|
|
2010
|
|
|
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
22,664,082 |
|
|
$ |
17,388,546 |
|
Loss
from discontinued operations
|
|
|
200,769 |
|
|
|
1,693,830 |
|
Income
from continuing operations
|
|
|
22,864,851 |
|
|
|
19,082,376 |
|
Adjustments
to reconcile net income to net cash, net of acquisition,
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
615,565 |
|
|
|
464,094 |
|
Amortization
of intangible assets
|
|
|
1,194,331 |
|
|
|
371,925 |
|
Amortization
of deferred debt issuance costs
|
|
|
670,984 |
|
|
|
510,227 |
|
Amortization
of debt discount
|
|
|
11,409,936 |
|
|
|
2,679,526 |
|
Loss
from issuance of shares in lieu of cash interest payment
|
|
|
318,936 |
|
|
|
- |
|
Interest
expense payment of shares in lieu of cash
|
|
|
4,457 |
|
|
|
- |
|
Bad
debt expense
|
|
|
446,257 |
|
|
|
368,840 |
|
Realized
(gain) loss on marketable securities
|
|
|
406,346 |
|
|
|
(106,865 |
) |
Unrealized
(gain) loss on marketable securities
|
|
|
(270,339 |
) |
|
|
1,255,522 |
|
Other
non-cash settlement
|
|
|
- |
|
|
|
(20,000 |
) |
Change
in fair value of derivative liabilities
|
|
|
(13,490,071 |
) |
|
|
- |
|
Stock-based
compensation
|
|
|
155,104 |
|
|
|
43,340 |
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(8,813,521 |
) |
|
|
2,353,566 |
|
Accounts
receivable - related parties
|
|
|
- |
|
|
|
488,646 |
|
Inventories
|
|
|
(86,604 |
) |
|
|
205,471 |
|
Other
receivables
|
|
|
154,654 |
|
|
|
63,170 |
|
Other
receivables - related parties
|
|
|
(241,956 |
) |
|
|
(317,303 |
) |
Advances
to suppliers and other assets
|
|
|
(273,373 |
) |
|
|
1,602,693 |
|
Accounts
payable
|
|
|
(3,926,015 |
) |
|
|
3,171,180 |
|
Customer
deposit
|
|
|
(1,026,480 |
) |
|
|
4,100,600 |
|
Other
payables
|
|
|
725,041 |
|
|
|
194,283 |
|
Other
payables - related parties
|
|
|
712,114 |
|
|
|
(58,580 |
) |
Accrued
liabilities
|
|
|
3,338,193 |
|
|
|
682,145 |
|
Liabilities
assumed from reorganization
|
|
|
(95,384 |
) |
|
|
(1,164,323 |
) |
Taxes
payable
|
|
|
(6,308,625 |
) |
|
|
5,107,831 |
|
Net
cash provided by operating activities
|
|
|
8,484,399 |
|
|
|
41,078,364 |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash
used in acquisition
|
|
|
- |
|
|
|
(8,581,970 |
) |
Proceeds
from sale of marketable securities
|
|
|
531,750 |
|
|
|
167,623 |
|
Purchase
of equipment
|
|
|
(76,977 |
) |
|
|
(130,814 |
) |
Purchase
of land use right
|
|
|
(16,975,633 |
) |
|
|
- |
|
Net
cash used in investing activities
|
|
|
(16,520,860 |
) |
|
|
(8,545,161 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Change
in restricted cash
|
|
|
(4,186,572 |
) |
|
|
4,149,305 |
|
Proceeds
from bank loans
|
|
|
2,199,600 |
|
|
|
2,196,750 |
|
Payments
for bank loans
|
|
|
(2,199,600 |
) |
|
|
(2,782,550 |
) |
Proceeds
from notes payable
|
|
|
19,173,180 |
|
|
|
7,009,097 |
|
Principal
payments on notes payable
|
|
|
(14,986,608 |
) |
|
|
(9,161,912 |
) |
Net
cash provided by financing activities
|
|
|
- |
|
|
|
1,410,690 |
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
|
|
134,826 |
|
|
|
198,836 |
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH
|
|
|
(7,901,635 |
) |
|
|
34,142,729 |
|
|
|
|
|
|
|
|
|
|
CASH,
beginning
|
|
|
104,366,117 |
|
|
|
48,195,798 |
|
|
|
|
|
|
|
|
|
|
CASH,
ending
|
|
$ |
96,464,482 |
|
|
$ |
82,338,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid for Interest
|
|
$ |
393,111 |
|
|
$ |
1,130,837 |
|
Cash
paid for Income taxes
|
|
$ |
2,631,495 |
|
|
$ |
4,883,039 |
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Common
stock issued to acquire Hongrui
|
|
$ |
- |
|
|
$ |
2,597,132 |
|
Common
stock issued for stock based compensation
|
|
$ |
20,000 |
|
|
|
- |
|
Common
stock issued to offset related party payable
|
|
$ |
20,000 |
|
|
|
- |
|
Common
stock issued for interest payment
|
|
$ |
673,929 |
|
|
$ |
- |
|
Common
stock issued for convertible notes conversion
|
|
$ |
7,610,000 |
|
|
$ |
- |
|
Marketable
securities used to settle for
|
|
|
|
|
|
|
|
|
liabilities
assumed from reorganization
|
|
$ |
1,133,807 |
|
|
$ |
- |
|
Derivative
liability reclassified to equity upon conversion
|
|
$ |
6,287,408 |
|
|
$ |
- |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
(FORMERLY
KNOWN AS GENESIS PHARMACEUTICALS ENTERPRISES, INC.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
Note
1 – Organization and business
Jiangbo
Pharmaceuticals, Inc. (the “Company” or “Jiangbo”) was originally incorporated
in the state of Florida on August 15, 2001.
Pursuant
to a Certificate of Amendment to the Amended and Restated Articles of
Incorporation filed with the state of Florida which took effect as of April 16,
2009, the Company's name was changed from "Genesis Pharmaceuticals Enterprises,
Inc." to "Jiangbo Pharmaceuticals, Inc." (the "Corporate Name Change").
The Corporate Name Change was approved and authorized by the Board of
Directors of the Company as well as the holders of a majority of the outstanding
shares of the Company’s voting stock by written consent. As a result of the
Corporate Name Change, the stock symbol changed to "JGBO" with the opening of
trading on May 12, 2009, on the OTCBB.
Our
primary operations consist of the business and operations of our direct and
indirect subsidiaries and Variable Interest Entity (“VIE”), which
produce and sell western pharmaceutical products in China and focuses on
developing innovative medicines to address various medical needs for patients
worldwide.
Note
2 - Summary of significant accounting policies
Restatement
The
Company previously excluded the dilutive effect of its May 2008 convertible
debentures from the diluted earnings (loss) per share calculation for the
periods ended March 31, 2009 in its Form 10-Q filed on May 15, 2009. The Company
has revised its accounting to include the dilutive effect of the November 2007
and May 2008 convertible debentures in its diluted earnings per share
calculation in its Amendment No. 1 to Form 10-Q/A filed on May 14, 2010. The
interest expense and amortization expenses on the financing costs and note
discounts were added back and all the unamortized financing costs and debt
discounts at beginning of the periods were subtracted from the March 31, 2009
diluted earnings per share calculation.
The
restatement had no effect on the Company’s consolidated balance sheets,
consolidated statements of cash flow, and consolidated statements of
shareholders’ equity as of and for the periods March 31, 2009. The Company’s
diluted earnings (loss) per share in its consolidated statement of income and
other comprehensive income for the periods ended March 31, 2009 have been
restated as follows:
Diluted
earnings (loss) per share
|
|
Original
|
|
|
Increase
(Decrease)
|
|
|
Restated
|
|
For
the three months ended March 31,2009:
|
|
|
|
|
|
|
|
|
|
Net
income for basic earnings per share
|
|
$
|
8,855,848
|
|
|
$
|
-
|
|
|
$
|
8,855,848
|
|
Add:
interest expense
|
|
|
75,000
|
|
|
447,600
|
522,600
|
|
Add:
financing cost amortization
|
|
|
29,534
|
|
|
|
140,542
|
|
|
|
170,076
|
|
Add: note
discount amortization
|
|
|
219,362
|
|
|
|
813,929
|
|
|
|
1,033,291
|
|
Subtract:
unamortized financing cost at beginning of the period
|
|
|
(218,223
|
)
|
|
|
(1,358,570
|
)
|
|
|
(1,576,793
|
)
|
Subtract:
unamortized debt discount at beginning of the period
|
|
|
(4,134,724
|
)
|
|
|
(26,718,998
|
)
|
|
|
(30,853,722
|
)
|
Net
income (loss) for diluted earnings per share
|
|
$
|
4,826,797
|
|
|
$
|
(26,675,497
|
)
|
|
$
|
(21,848,700
|
)
|
Weighted
average shares used in basic computation
|
|
|
10,277,762
|
|
|
|
--
|
|
|
|
10,277,762
|
|
Diluted
effect of stock options and warrants
|
|
|
4,481
|
|
|
|
(4,481
|
)
|
|
|
-
|
|
Diluted
effect of convertible notes
|
|
|
625,000
|
|
|
|
3,730,000
|
|
|
|
4,355,000
|
|
Weighted
average shares used in diluted computation
|
|
|
10,907,243
|
|
|
|
3,725,519
|
|
|
|
14,632,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(Loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.86
|
|
|
$
|
-
|
|
|
$
|
0.86
|
|
Diluted
|
|
$
|
0.44
|
|
|
$
|
(1.93
|
)
|
|
$
|
(1.49
|
)
|
|
|
Original
|
|
|
Increase
(Decrease)
|
|
|
Restated
|
|
For
the nine months ended March 31,2009:
|
|
|
|
|
|
|
|
|
|
Net
income for basic earnings per share
|
|
$
|
17,388,546
|
|
|
$
|
-
|
|
|
$
|
17,388,546
|
|
Add:
interest expense
|
|
|
225,000
|
|
|
1,370,932
|
|
1,595,932
|
|
Add:
financing cost amortization
|
|
|
88,602
|
|
|
|
421,625
|
|
|
|
510,227
|
|
Add: note
discount amortization
|
|
|
539,279
|
|
|
|
2,140,247
|
|
|
|
2,679,526
|
|
Subtract:
unamortized financing cost at beginning of the period
|
|
|
(277,291
|
)
|
|
|
(1,639,652
|
)
|
|
|
(1,916,943
|
)
|
Subtract:
unamortized debt discount at beginning of the period
|
|
|
(4,454,641
|
)
|
|
|
(28,045,316
|
)
|
|
|
(32,499,957
|
)
|
Net
income (loss) for diluted earnings per share
|
|
$
|
13,509,495
|
|
|
$
|
(25,752,164
|
)
|
|
$
|
(12,242,669
|
)
|
Weighted
average shares used in basic computation
|
|
|
9,937,189
|
|
|
|
--
|
|
|
|
9,937,189
|
|
Diluted
effect of stock options and warrants
|
|
|
37,429
|
|
|
|
(37,429
|
)
|
|
|
-
|
|
Diluted
effect of convertible notes
|
|
|
625,000
|
|
|
|
3,743,000
|
|
|
|
4,368,400
|
|
Weighted
average shares used in diluted computation
|
|
|
10,599,618
|
|
|
|
3,705,971
|
|
|
|
14,305,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.75
|
|
|
$
|
-
|
|
|
$
|
1.75
|
|
Diluted
|
|
$
|
1.27
|
|
|
$
|
(2.13
|
)
|
|
$
|
(0.86
|
)
|
Basis of
presentation
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America ("US
GAAP") for interim financial information and pursuant to the requirements for
reporting on Form 10-Q. Accordingly, they do not include all the
information and footnotes required by US Generally Accepted Accounting
Principles (“GAAP”) for complete financial statements. In the opinion of
management, the accompanying consolidated balance sheets, and related interim
consolidated statements of income and other comprehensive income, stockholders’
equity, and cash flows, include all adjustments, consisting only of normal
recurring items. However, these consolidated financial statements are not
indicative of a full year of operations. The information included in this
Quarterly Report on Form 10-Q should be read in conjunction with the audited
consolidated financial statements and footnotes for the year ended June 30, 2009
included in the Company’s Annual Report on Form 10-K.
Principles of
consolidation
The
accompanying consolidated financial statements include the accounts of the
following entities, and all significant intercompany transactions and balances
have been eliminated in consolidation:
Consolidated
entity name:
|
|
Percentage of ownership
|
|
Karmoya
International Ltd.
|
|
|
100
|
% |
Union
Well International Ltd.
|
|
|
100
|
% |
Genesis
Jiangbo (Laiyang) Biotech Technology Co., Ltd.
|
|
|
100
|
% |
Laiyang
Jiangbo Pharmaceuticals Co., Ltd.
|
|
Variable Interest Entity
|
|
The
Financial Accounting Standards Board’s (“FASB”) accounting standards address
whether certain types of entities, referred to as VIEs, should be consolidated
in a company’s consolidated financial statements. In accordance with the
provisions of the accounting standard, the Company has determined that Laiyang
Jiangbo Pharmaceuticals Co., Ltd. (“Laiyang Jiangbo”) is a VIE and that the
Company is the primary beneficiary, and accordingly, the financial statements of
Laiyang Jiangbo are consolidated into the financial statements of the
Company.
Foreign currency
translation
The
reporting currency of the Company is the U.S. dollar. The functional currency of
the Company is the local currency, the Chinese Renminbi (“RMB”). In accordance
with the FASB’s accounting standard governing foreign currency translation,
results of operations and cash flows are translated at average exchange rates
during the period, assets and liabilities are translated at the unified exchange
rates as quoted by the People’s Bank of China at the end of the period, and
equity is translated at historical exchange rates. As a result, amounts related
to assets and liabilities reported on the consolidated statements of cash flows
will not necessarily agree with changes in the corresponding balances on the
consolidated balance sheets. Transaction gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other than
the functional currency are included in the results of operations as
incurred.
Asset and
liability accounts at March 31, 2010, were translated at 6.82 RMB to $1.00 as
compared to 6.83 RMB to $1.00 at June 30, 2009. The average translation rates
applied to statements of income for the nine months ended March 31, 2010 and
2009 were 6.82 RMB and 6.83 RMB to $1.00, respectively.
Use of
estimates
The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. The significant estimates made in the
preparation of the Company’s consolidated financial statements relate to the
assessment of the carrying values of accounts receivable and related allowance
for doubtful accounts, allowance for obsolete inventory, sales returns, accrual
for estimated advertising costs, fair value of warrants and beneficial
conversion features related to the convertible notes, fair value of
derivative liability and fair value of options granted to employees. Actual
results could be materially different from these estimates upon which the
carrying values were based.
Revenue
recognition
Revenue
from product sales are generally recognized when title to the product has
transferred to customers in accordance with the terms of the sale. In general,
the Company records revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price to
the customer is fixed or determinable, and collectability is reasonably
assured.
The
Company is generally not contractually obligated to accept returns. However, on
a case by case negotiated basis, the Company permits customers to return their
products. Therefore, revenue is recorded net of an allowance for estimated
returns. Such reserves are based upon management's evaluation of historical
experience and estimated costs. The amount of the reserves ultimately required
could differ materially in the near term from amounts included in the
accompanying consolidated statements of income.
Financial
instruments
The
accounting standard governing financial instruments adopted on July 1, 2008,
defines financial instruments and requires fair value disclosures about those
instruments. It defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances
disclosure requirements for fair value measures. Cash, investments,
receivables, payables, short term loans and convertible debt all qualify as
financial instruments. Management concluded cash, receivables,
payables and short term loans approximate their fair values because of the short
period of time between the origination of such instruments and their expected
realization and, if applicable, their stated rates of interest are equivalent to
rates currently available.
The three
levels of valuation hierarchy are defined as follows:
·
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted)
for identical assets or liabilities in active markets.
|
·
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
·
|
Level
3 inputs to the valuation methodology are unobservable and
significant to the fair value
measurement.
|
The
Company analyzes all financial instruments with features of both liabilities and
equity under the FASB’s accounting standard for such instruments. Under this
standard, financial assets and liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value
measurement. Depending on the product and the terms of the transaction, the fair
value of notes payable and derivative liabilities were modeled using a series of
techniques, including closed-form analytic formula, such as the Black-Scholes
option-pricing model.
Effective
July 1, 2009, as a new accounting standard took effect, the Company’s two
convertible notes with principal amounts totaling $34,840,000 and 2,275,000
warrants previously treated as equity pursuant to the derivative treatment
exemption are no longer afforded equity treatment because the strike price of
the warrants is denominated in US dollar, a currency other than the Company’s
functional currency, the Chinese Renminbi. As a result, those
financial instruments are not considered indexed to the Company’s own stock, and
as such, all future changes in the fair value of these convertible notes and
warrants are recognized currently in earnings until such time as the
convertible notes and warrants are converted, exercised or expired.
As such,
effective July 1, 2009, the Company reclassified the fair value of the
conversion features on the convertible notes and warrants from equity to
liability, as if these conversion features on the convertible notes and warrants
were treated as a derivative liability since their initial issuance dates. On
July 1, 2009, the Company reclassified approximately $35 million from
additional paid-in capital and approximately $4.9 million from beginning
retained earnings to warrant liabilities, as a cumulative effect adjustment, to
recognize the fair value of the conversion features on the convertible notes and
warrants. For the nine months ended March 31, 2010, $7,610,000 million of
convertible notes were converted. As of March 31, 2010, the Company has
$27,230,000 convertible notes and 2,275,000 warrants related to the convertible
debentures outstanding. The fair value of the conversion features on the
convertible notes was approximately $10 million and the fair value of the
warrants was approximately $10.1 million. The Company recognized
$13.5 million and $11.7 million gains from the change in fair value of the
conversion features on the convertible notes and warrants for the nine months
and three months ended March 31, 2010, respectively.
These
common stock purchase warrants do not trade in an active securities market, and
as such, the Company estimates the fair value of the conversion features on the
convertible notes and warrants using the Black-Scholes option pricing model
using the following assumptions:
|
|
March
31, 2010
|
|
|
July
1, 2009
|
|
|
|
Annual
dividend yield
|
|
|
Expected
term (years)
|
|
|
Risk-free
interest rate
|
|
|
Expected
volatility
|
|
|
Annual
dividend yield
|
|
|
Expected
term (years)
|
|
|
Risk-free
interest rate
|
|
|
Expected
volatility
|
|
Conversion
feature on the $5 million convertible notes
|
|
|
- |
|
|
|
0.60 |
|
|
|
0.24 |
% |
|
|
65.17 |
% |
|
|
- |
|
|
|
1.35 |
|
|
|
1.11 |
% |
|
|
95.80 |
% |
Conversion
feature on the $30 million convertible notes
|
|
|
- |
|
|
|
1.17 |
|
|
|
0.41 |
% |
|
|
69.99 |
% |
|
|
- |
|
|
|
1.92 |
|
|
|
1.11 |
% |
|
|
102.00 |
% |
400,000
warrants issued in November 2007
|
|
|
- |
|
|
|
0.60 |
|
|
|
0.24 |
% |
|
|
65.17 |
% |
|
|
- |
|
|
|
1.35 |
|
|
|
1.11 |
% |
|
|
95.80 |
% |
1,875,000
warrants issued in May 2008
|
|
|
- |
|
|
|
3.17 |
|
|
|
1.60 |
% |
|
|
86.28 |
% |
|
|
- |
|
|
|
3.92 |
|
|
|
2.54 |
% |
|
|
97.51 |
% |
Expected
volatility is based primarily on historical volatility. Historical volatility
was computed using weekly pricing observations for recent periods that
correspond to the term of the warrants. The Company’s management believes this
method produces an estimate that is representative of the expectations of future
volatility over the expected term of these warrants. The Company has no reason
to believe future volatility over the expected remaining life of these
warrants will likely differ materially from historical volatility. The
expected life is based on the remaining term of the warrants. The risk-free
interest rate is based on U.S. Treasury securities according to the remaining
term of the financial instruments.
The
following table sets forth by level within the fair value hierarchy the
financial assets and liabilities that were accounted for at fair value on a
recurring basis.
|
|
Carrying
Value at March 31, 2010
|
|
|
Fair
Value Measurements at March 31, 2010, Using Fair Value
Hierarchy
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Investments
|
|
$ |
26,362 |
|
|
$ |
26,362 |
|
|
$ |
- |
|
|
$ |
- |
|
Investments,
restricted
|
|
|
161,471 |
|
|
|
161,471 |
|
|
|
- |
|
|
|
- |
|
Conversion
options - $4M Convertible Debt (November 2007)
|
|
|
1,118,920 |
|
|
|
- |
|
|
|
- |
|
|
|
1,118,920 |
|
Conversion
options - $23.23M Convertible Debt (May 2008)
|
|
|
8,861,691 |
|
|
|
- |
|
|
|
- |
|
|
|
8,861,691 |
|
400,000
warrants issued in November 2007
|
|
|
895,136 |
|
|
|
- |
|
|
|
- |
|
|
|
895,136 |
|
1,875,000
warrants issued in May 2008
|
|
|
9,199,126 |
|
|
|
- |
|
|
|
- |
|
|
|
9,199,126 |
|
Total
|
|
$ |
20,262,706 |
|
|
$ |
187,833 |
|
|
$ |
- |
|
|
$ |
20,074,873 |
|
The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented on the consolidated balance sheets at fair value in
accordance with the relevant accounting standards.
An
accounting standard provides the Company with the irrevocable option to elect
fair value for the initial and subsequent measurement for certain financial
assets and liabilities on a contract-by-contract basis with the difference
between the carrying value before election of the fair value option and the fair
value recorded upon election as an adjustment to beginning retained earnings.
The Company chose not to elect the fair value option.
Stock-based
compensation
The
Company records stock-based compensation expense pursuant to the governing
accounting standard which requires companies to measure compensation cost for
stock-based employee compensation plans at fair value at the grant date and
recognize the expense over the employee's requisite service period. The Company
estimates the fair value of the awards using the Black-Scholes option pricing
model. Under this accounting standard, the Company’s expected volatility
assumption is based on the historical volatility of Company’s stock or the
expected volatility of similar entities. The expected life assumption is
primarily based on historical exercise patterns and employee post-vesting
termination behavior. The risk-free interest rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of
grant.
Stock-based
compensation expense is recognized based on awards expected to vest, and there
were no estimated forfeitures as the Company has a short history of issuing
options.
The
Company uses the Black-Scholes option-pricing model which was developed for use
in estimating the fair value of options. Option-pricing models require the input
of highly complex and subjective variables including the expected life of
options granted and the Company’s expected stock price volatility over a period
equal to or greater than the expected life of the options. Because changes in
the subjective assumptions can materially affect the estimated value of the
Company’s employee stock options, it is management’s opinion that the
Black-Scholes option-pricing model may not provide an accurate measure of the
fair value of the Company’s employee stock options. Although the fair value of
employee stock options is determined in accordance with the accounting standards
using an option-pricing model, that value may not be indicative of the fair
value observed in a willing buyer/willing seller market
transaction.
Comprehensive
income
FASB’s
accounting standard regarding comprehensive income establishes standards for
reporting and display of comprehensive income and its components in financial
statements. It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The accompanying consolidated financial statements include
the provisions of this accounting standard.
Cash and cash
equivalents
Cash and
cash equivalents include cash on hand and demand deposits in accounts maintained
with state-owned banks within the PRC. The Company considers all highly liquid
instruments with original maturities of three months or less, and money market
accounts to be cash and cash equivalents.
The
Company maintains cash deposits in financial institutions that exceed the
amounts insured by the U.S. government. Balances at financial institutions or
state-owned banks within the PRC are not covered by insurance. Non-performance
by these institutions could expose the Company to losses for amounts in excess
of insured balances. As of March 31, 2010 and June 30, 2009, the Company’s bank
balances, including restricted cash balances, exceeded government-insured limits
by approximately $107,698,000 and $111,684,000, respectively.
Restricted
cash
Restricted
cash represents amounts set aside by the Company in accordance with the
Company’s debt agreements with certain financial institutions. These cash
amounts are designated for the purpose of paying down the principal amounts owed
to the financial institutions, and these amounts are held at the same financial
institutions with which the Company has debt agreements. Due to the short-term
nature of the Company’s debt obligations to these banks, the corresponding
restricted cash balances have been classified as current in the consolidated
balance sheets.
Investment and restricted
investments
Investments
are comprised of marketable equity securities of publicly traded companies and
are stated at fair value based on the quoted price of these securities. These
investments are classified as trading securities based on the Company’s intent
and ability to sell them within the year. Restricted investments are marketable
equity securities of publicly traded companies that were acquired through the
reverse merger and contained certain SEC Rule 144 restrictions on the
securities. These securities are classified as available-for-sale and are
reflected as restricted and noncurrent, as the Company intends to hold them
beyond one year. Restricted investments are carried at fair value based on the
trading price of these securities.
The
following is a summary of the components of the gain/loss on investments and
restricted investments for the three and nine months ended March 31, 2010 and
2009:
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Realized
(gain) loss on trading securities
|
|
$ |
(205 |
) |
|
$ |
8,263 |
|
|
$ |
406,345 |
|
|
$ |
(106,865 |
) |
Unrealized
(gain) loss on trading securities
|
|
|
(4,592 |
) |
|
|
(204,134 |
) |
|
|
(270,339 |
) |
|
|
1,255,522 |
|
Unrealized
(gain) loss on restricted investments – available-for-sale
securities
|
|
|
(32,164 |
) |
|
|
200,025 |
|
|
|
(88,535 |
) |
|
|
2,147,642 |
|
All
unrealized gains and losses related to available-for-sale securities have been
properly reflected as a component of accumulated other comprehensive
income.
Accounts
receivable
During
the normal course of business, the Company extends credit to its customers
without requiring collateral or other security interests. Management reviews its
accounts receivable at each reporting period to provide for an allowance against
accounts receivable for an amount that could become uncollectible. This review
process may involve the identification of payment problems with specific
customers. The Company estimates this allowance based on the aging of the
accounts receivable, historical collection experience, and other relevant
factors, such as changes in the economy and the imposition of regulatory
requirements that can have an impact on the industry. These factors continuously
change, and can have an impact on collections and the Company’s estimation
process. These impacts may be material.
Certain
accounts receivable amounts are charged off against allowances after
unsuccessful collection efforts. Subsequent cash recoveries are recognized as
income in the period when they occur.
The
activities in the allowance for doubtful accounts are as follows for the periods
ended March 31, 2010 and June 30, 2009:
|
|
March
31, 2010
|
|
|
June 30, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Beginning
allowance for doubtful accounts
|
|
$ |
694,370 |
|
|
$ |
155,662 |
|
Bad
debt additions
|
|
|
446,255 |
|
|
|
538,068 |
|
Foreign
currency translation adjustments
|
|
|
1,131 |
|
|
|
640 |
|
Ending
allowance for doubtful accounts
|
|
$ |
1,141,756 |
|
|
$ |
694,370 |
|
Inventories
Inventories,
consisting of raw materials, work-in-process, packing materials and finished
goods related to the Company’s products, are stated at the lower of cost or
market utilizing the weighted average method. The Company reviews its inventory
periodically for possible obsolete goods or to determine if any reserves are
necessary. As of March 31, 2010 and June 30, 2009, the Company determined that
no reserves were necessary.
Advance to
suppliers
Advances
to suppliers represent partial payments or deposits for future inventory and
equipment purchases. These advances to suppliers are non-interest bearing and
unsecured. From time to time, vendors require a certain amount of money to be
deposited with them as a guarantee that the Company will receive their purchase
on a timely basis.
Plant and
equipment
Plant and
equipment are stated at cost less accumulated depreciation. Additions and
improvements to plant and equipment accounts are recorded at cost. When assets
are retired or disposed of, the cost and accumulated depreciation are removed
from the accounts, and any resulting gains or losses are included in the results
of operations in the period of disposition. Maintenance, repairs, and minor
renewals are charged directly to expense as incurred. Major additions and
betterments to plant and equipment accounts are capitalized. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets. The estimated useful lives of the assets are as follows:
|
Useful
Life
|
Building
and building improvements
|
5 – 40 Years
|
Manufacturing
equipment
|
5 –
20 Years
|
Office
equipment and furniture
|
5 –
10 Years
|
Vehicles
|
5
Years
|
Intangible assets
All land
in the PRC is owned by the PRC government and cannot be sold to any individual
or company. The Company has recorded the amounts paid to the PRC government to
acquire long-term interests to utilize land underlying the Company’s facilities
as land use rights. This type of arrangement is common for the use of land in
the PRC. Land use rights are amortized on the straight-line method over the
terms of the land use rights, which range from 20 to 50 years. The Company
acquired land use rights in August 2004, October 2007 and November 2009 in the
amounts of approximately $879,000, $8,871,000 and $17,000,000, respectively,
which are included in intangible assets.
Patents
and licenses include purchased technological know-how, secret formulas,
manufacturing processes, technical and procedural manuals, and the certificate
of drugs production and is amortized using the straight-line method over the
expected useful economic life of 5 years, which reflects the period over which
those formulas, manufacturing processes, technical and procedural manuals are
kept secret to the Company as agreed between the Company and the selling
parties.
The
estimated useful lives of intangible assets are as follows:
|
Useful
Life
|
Land
use rights
|
50 Years
|
Patents
|
5
Years
|
Licenses
|
5
Years
|
Customer
list and customer relationships
|
3
Years
|
Trade
secrets - formulas and know how technology
|
5
Years
|
Impairment of long-lived
assets
Long-lived
assets of the Company are reviewed periodically or more often if circumstances
dictate, to determine whether their carrying values have become impaired. The
Company considers assets to be impaired if the carrying values exceed the future
projected cash flows from related operations. The Company also re-evaluates the
periods of depreciation to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of March 31, 2010, the Company
expects these assets to be fully recoverable.
Beneficial conversion
feature of
convertible notes
In
accordance with accounting standards governing the beneficial conversion feature
of convertible notes, the Company has determined that the convertible notes
contained a beneficial conversion feature because on November 6, 2007, the
effective conversion price of the $5,000,000 convertible note was $5.81 when the
market value per share was $16.00, and on May 30, 2008, the effective conversion
price of the $30,000,000 convertible note was $5.10 when the market value per
share was $12.00. Total value of beneficial conversion
feature of $2,904,092 for the November 6, 2007 convertible note and
$19,111,323 for the May 30, 2008 convertible debt was discounted from the
carrying value of the convertible notes. The beneficial conversation feature is
amortized using the effective interest method over the term of the note. As of
March 31, 2010 and June 30, 2009, a total of $10,781,153 and $17,955,637,
respectively, remained unamortized for the beneficial conversion
feature.
Income
taxes
The
Company accounts for income taxes in accordance with the accounting standard for
income taxes. Deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under this accounting
standard, the effect on deferred income taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is recognized if it is more likely than not that some portion, or all
of, a deferred tax asset will not be realized.
The
accounting standards clarify the accounting and disclosure for uncertain tax
positions and prescribe a recognition threshold and measurement attribute for
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The accounting standards also provide guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.
Under
this accounting standard, evaluation of a tax position is a two-step process.
The first step is to determine whether it is more-likely-than-not that a tax
position will be sustained upon examination, including the resolution of any
related appeals or litigation based on the technical merits of that position.
The second step is to measure a tax position that meets the more-likely-than-not
threshold to determine the amount of benefit to be recognized in the financial
statements. A tax position is measured at the largest amount of benefit that is
greater than 50 percent likely of being realized upon ultimate settlement. Tax
positions that previously failed to meet the more-likely-than-not recognition
threshold should be recognized in the first subsequent period in which the
threshold is met. Previously recognized tax positions that no longer meet the
more-likely-than-not criteria should be de-recognized in the first subsequent
financial reporting period in which the threshold is no longer met.
Penalties and interest incurred related to underpayment of income tax are
classified as income tax expense in the year incurred. No significant
penalties or interest relating to income taxes have been incurred during the
nine months ended March 31, 2010 and 2009. GAAP also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosures and transition.
The
Company’s operations are subject to income and transaction taxes in the United
States and in the PRC jurisdictions. Significant estimates and judgments are
required in determining the Company’s worldwide provision for income taxes. Some
of these estimates are based on interpretations of existing tax laws or
regulations, and as a result the ultimate amount of tax liability may be
uncertain. However, the Company does not anticipate any events that would lead
to changes to these uncertainties.
Value added
tax
The
Company is subject to value added tax (“VAT”) for manufacturing products and
business tax for services provided. The applicable VAT rate is 17% for products
sold in the PRC. The amount of VAT liability is determined by applying the
applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT
paid on purchases made with the relevant supporting invoices (input VAT). Under
the commercial practice of the PRC, the Company pays VAT based on tax
invoices issued. The tax invoices may be issued subsequent to the date on which
revenue is recognized, and there may be a considerable delay between the date on
which the revenue is recognized and the date on which the tax invoice is issued.
In the event that the PRC tax authorities dispute the date on which revenue is
recognized for tax purposes, the PRC tax office has the right to assess a
penalty, which can range from zero to five times the amount of the taxes which
are determined to be late or deficient, and will be charged to operations in the
period if and when a determination is made by the taxing authorities that a
penalty is due.
VAT on
sales and VAT on purchases amounted to approximately $4,347,000 and $924,000 for
the three months ended March 31, 2010, respectively, and approximately
$4,372,000 and $712,000 for the three months ended March 31, 2009, respectively.
VAT on sales and VAT on purchases amounted to approximately $11,583,000 and
$2,662,000, respectively, for the nine months ended March 31, 2010,
respectively, and approximately $14,659,000 and $1,867,000, respectively, for
the nine months ended March 31, 2009. Sales and purchases are recorded net of
VAT collected and paid as the Company acts as an agent for the government. VAT
taxes are not impacted by the income tax holiday.
Shipping and
handling
Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative expenses. Shipping and handling costs amounted to
approximately $146,000 and $153,000, respectively, for the three months ended
March 31, 2010 and 2009, respectively. Shipping and handling costs amounted to
approximately $411,000 and $405,000 for the nine months ended March 31,
2010 and 2009, respectively.
Advertising
Expenses
incurred in the advertising of the Company and the Company’s products are
charged to operations. Advertising expenses amounted to approximately $1,077,000
and $1,192,000 for the three months ended March 31, 2010 and 2009, respectively.
Advertising expenses amounted to approximately $4,346,000 and $2,120,000 for the
nine months ended March 31, 2010 and 2009, respectively.
Research and
development
Research
and development costs are expensed as incurred. These costs primarily consist of
cost of materials used and salaries paid for the development of the Company’s
products, and fees paid to third parties to assist in such efforts.
Recent accounting
pronouncements
In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140.The amendments in
this ASU improve financial reporting by eliminating the exceptions for
qualifying special-purpose entities from the consolidation guidance and the
exception that permitted sale accounting for certain mortgage securitizations
when a transferor has not surrendered control over the transferred financial
assets. In addition, the amendments require enhanced disclosures about the risks
that a transferor continues to be exposed to because of its continuing
involvement in transferred financial assets. Comparability and consistency in
accounting for transferred financial assets will also be improved through
clarifications of the requirements for isolation and limitations on portions of
financial assets that are eligible for sale accounting. This ASU did not have a
material impact on the accompanying consolidated financial
statements.
In
December 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This ASU amends the
FASB Accounting Standards Codification for the issuance of FASB Statement No.
167, Amendments to FASB
Interpretation No. 46(R). The amendments in this ASU replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this ASU also require
additional disclosures about a reporting entity’s involvement in variable
interest entities, which will enhance the information provided to users of
financial statements. This ASU is effective for the Company for the fiscal year
ending June 30, 2011, however, the Company does not expect the adoption of this
ASU to have a material impact on its consolidated financial
statements.
In
January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for
decreases in ownership of a subsidiary. Under this guidance, an entity is
required to deconsolidate a subsidiary when the entity ceases to have a
controlling financial interest in the subsidiary. Upon deconsolidation of
a subsidiary, and entity recognizes a gain or loss on the transaction and
measures any retained investment in the subsidiary at fair value. In
contrast, an entity is required to account for a decrease in its ownership
interest of a subsidiary that does not result in a change of control of the
subsidiary as an equity transaction. This ASU clarifies the scope of the
decrease in ownership provisions, and expands the disclosures about the
deconsolidation of a subsidiary or de-recognition of a group of assets.
This ASU is effective for beginning in the first interim or annual
reporting period ending on or after December 31, 2009. This ASU did not
have a material impact on the accompanying consolidated financial
statements.
In
January 2010, FASB issued ASU No. 2010-01 Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this ASU
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. This ASU did not have a material impact on the accompanying
consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-02 Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this ASU affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are
effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date
the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15, 2009. The
amendments in this update should be applied retrospectively to the first period
that an entity adopted SFAS No. 160. The adoption of this ASU did not have a
material impact on the Company’s consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-06 Improving Disclosures about Fair Value
Measurements. This ASU provides amendments to Subtopic 820-10 that requires new
disclosure as follows: 1) Transfers in and out of Levels 1 and
2. A reporting entity should disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers. 2) Activity in
Level 3 fair value measurements. In the reconciliation for fair value
measurements using significant unobservable inputs (Level 3), a reporting entity
should present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number). This
update provides amendments to Subtopic 820-10 that clarify existing disclosures
as follows: 1) Level of disaggregation. A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities. A
class is often a subset of assets or liabilities within a line item in the
statement of financial position. A reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities.
2) Disclosures about inputs and valuation techniques. A reporting entity
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Thos disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
Company is currently evaluating the impact of this ASU, however, the Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.
In
February 2010, the FASB issued Accounting Standards Update 2010-09, Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements, or ASU 2010-09. This ASU 2010-09 primarily rescinds the
requirement that, for listed companies, financial statements clearly disclose
the date through which subsequent events have been evaluated. Subsequent events
must still be evaluated through the date of financial statement issuance;
however, the disclosure requirement has been removed to avoid conflicts with
other SEC guidelines. This ASU was effective immediately upon issuance and was
adopted in February 2010. The adoption of this ASU did not have a material
impact on the accompaying consolidated financial statements.
Note
3 - Earnings per share
The
FASB’s accounting standard for earnings per share requires presentation of basic
and diluted earnings per share in conjunction with the disclosure of the
methodology used in computing such earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock.
The
following is a reconciliation of the basic and diluted earnings per share
computations for the three months ended March 31, 2010 and 2009:
Basic
earnings per share
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Net
income for basic and diluted earnings per share
|
|
$ |
15,184,266 |
|
|
$ |
8,855,848 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
11,419,991 |
|
|
|
10,277,762 |
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.33 |
|
|
$ |
0.86 |
|
Diluted
earnings (loss) per share
|
|
2010
|
|
|
2009
|
|
Net
income for basic earnings per share
|
|
$ |
15,184,266 |
|
|
$ |
8,855,848 |
|
Add:
interest expense
|
|
|
2,753,645 |
|
|
|
522,600 |
|
Add:
financing cost amortization
|
|
|
198,230 |
|
|
|
170,076 |
|
Add:
note discount amortization
|
|
|
3,862,102 |
|
|
|
1,033,291 |
|
Subtract:
unamortized financing cost at beginning of the period
|
|
|
(763,915 |
) |
|
|
(1,576,793 |
) |
Subtract:
unamortized debt discount at beginning of the period
|
|
|
(20,945,255 |
) |
|
|
(30,853,722 |
) |
Net
income (loss) for diluted earnings per share
|
|
$ |
289,073 |
|
|
$ |
(21,848,700 |
) |
Weighted
average shares used in basic computation
|
|
|
11,419,991 |
|
|
|
10,277,762 |
|
Diluted
effect of stock options and warrants
|
|
|
391,931 |
|
|
|
- |
|
Diluted
effect of convertible note
|
|
|
3,423,889 |
|
|
|
4,355,000 |
|
Weighted
average shares used in diluted computation
|
|
|
15,235,811 |
|
|
|
14,632,762 |
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.02 |
|
|
$ |
(1.49 |
) |
The
following is a reconciliation of the basic and diluted earnings per share
computations for the nine months ended March 31, 2010 and 2009:
Basic
earnings per share
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Net
income for basic earnings per share
|
|
$
|
22,664,082
|
|
|
$
|
17,388,546
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
10,965,346
|
|
|
|
9,937,189
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share – Basic
|
|
$
|
2.07
|
|
|
$
|
1.75
|
|
Diluted
earnings (loss) per share
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Net
income for basic earnings per share
|
|
$ |
22,664,082 |
|
|
$ |
17,388,546 |
|
Add:
interest expense
|
|
|
3,744,360 |
|
|
|
1,595,935 |
|
Add:
financing cost amortization
|
|
|
670,985 |
|
|
|
510,227 |
|
Add:
note discount amortization
|
|
|
11,409,937 |
|
|
|
2,679,526 |
|
Subtract:
unamortized financing cost at beginning of the period
|
|
|
(1,236,669 |
) |
|
|
(1,916,943 |
) |
Subtract:
unamortized debt discount at beginning of the period
|
|
|
(28,493,090 |
) |
|
|
(32,499,957 |
) |
Net
income (loss) for diluted earnings per share
|
|
$ |
8,759,605 |
|
|
$ |
(12,242,666 |
) |
Weighted
average shares used in basic computation
|
|
|
10,965,346 |
|
|
|
9,937,189 |
|
Diluted
effect of stock options and warrants
|
|
|
383,837 |
|
|
|
- |
|
Diluted
effect of convertible note
|
|
|
3,884,974 |
|
|
|
4,368,400 |
|
Weighted
average shares used in diluted computation
|
|
|
15,234,156 |
|
|
|
14,305,589 |
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.57 |
|
|
$ |
(0.86 |
) |
For the
three and nine months ended March 31, 2010, 7,500 vested stock options with an
average exercise price of $17.93 were not included in the diluted earnings per
share calculation because of the anti-dilutive effect. For the three months and
nine months ended March 31, 2009, 140,900 stock options and 2,275,000 warrants
with average exercise prices of $4.93 and $9.65, respectively, were not
included in the diluted earnings per share calculation because of the
anti-dilutive effect.
Note
4 - Inventories
Inventories
consisted of the following:
|
|
March
31, 2010
|
|
|
June 30, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Raw
materials
|
|
$ |
1,468,420 |
|
|
$ |
1,539,602 |
|
Work-in-process
|
|
|
- |
|
|
|
55,992 |
|
Packing
materials
|
|
|
573,401 |
|
|
|
483,297 |
|
Finished
goods
|
|
|
1,326,487 |
|
|
|
1,198,303 |
|
Total
|
|
$ |
3,368,308 |
|
|
$ |
3,277,194 |
|
Note
5 - Plant and equipment
Plant and
equipment consisted of the following:
|
|
March
31, 2010
|
|
|
June 30, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Buildings
and building improvements
|
|
$ |
12,838,821 |
|
|
$ |
12,798,375 |
|
Manufacturing
equipment
|
|
|
2,771,754 |
|
|
|
2,603,114 |
|
Office
equipment and furniture
|
|
|
180,407 |
|
|
|
291,061 |
|
Vehicles
|
|
|
478,044 |
|
|
|
477,396 |
|
Total
|
|
|
16,269,026 |
|
|
|
16,169,946 |
|
Less:
Accumulated depreciation
|
|
|
(2,831,386
|
) |
|
|
(2,212,549
|
) |
Total
|
|
$ |
13,437,640 |
|
|
$ |
13,957,397 |
|
For the
three months ended March 31, 2010 and 2009, depreciation expense amounted to
approximately $225,000 and $174,000, respectively. For the nine months ended
March 31, 2010 and 2009, depreciation expense amounted to approximately $616,000
and $464,000, respectively.
Note
6 - Intangible assets
Intangible
assets consisted of the following:
|
|
March
31, 2010
|
|
|
June 30, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Land
use rights
|
|
$ |
28,243,871 |
|
|
$ |
11,245,938 |
|
Patents
|
|
|
4,943,790 |
|
|
|
4,937,050 |
|
Customer
lists and customer relationships
|
|
|
1,125,114 |
|
|
|
1,123,580 |
|
Trade
secrets, formulas and manufacture process know-how
|
|
|
1,026,900 |
|
|
|
1,025,500 |
|
Licenses
|
|
|
23,399 |
|
|
|
23,368 |
|
Total
|
|
|
35,363,074 |
|
|
|
18,355,436 |
|
Less:
Accumulated amortization
|
|
|
(2,510,869
|
) |
|
|
(1,314,255
|
) |
Total
|
|
$ |
32,852,205 |
|
|
$ |
17,041,181 |
|
Amortization
expense for the three months ended March 31, 2010 and 2009 amounted to
approximately $391,000, and $225,000, respectively. Amortization expense for the
nine months ended March 31, 2010 and 2009 amounted to approximately $1,194,000
and $372,000, respectively.
The
following table summarizes the amortization expense for the next five years and
thereafter:
Years
ending June 30
|
|
Amount
|
|
2010
|
|
$ |
391,254 |
|
2011
|
|
|
1,524,689 |
|
2012
|
|
|
1,517,354 |
|
2013
|
|
|
1,517,354 |
|
2014
and thereafter
|
|
|
27,901,554 |
|
Total
|
|
$ |
32,852,205 |
|
Note
7 - Debt
Short term bank
loan
Short
term bank loan represents an amount due to a bank that is due within one year.
This loan can be renewed with the bank upon maturity. The Company’s short term
bank loan consisted of the following:
|
|
March
31, 2010
|
|
|
June 30,
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Loan
from Communication Bank; due December 2010 and 2009; interest rate of
6.16% and 6.37% per annum; monthly interest payment; guaranteed by
related party, Jiangbo Chinese-Western Pharmacy.
|
|
$ |
2,200,500 |
|
|
$ |
2,197,500 |
|
Total
|
|
$ |
2,200,500 |
|
|
$ |
2,197,500 |
|
Interest
expense related to the short term bank loan amounted to approximately
$37,000 and $22,000 for three months ended March 31, 2010 and 2009,
respectively. Interest expense related to the short term bank loan amounted to
approximately $73,000 and $81,000 for the nine months ended March 31, 2010 and
2009, respectively.
Notes
Payable
Notes
payable represents amounts due to a bank which are secured and typically
renewed. All notes payable are secured by the Company’s restricted cash. The
Company’s notes payables consist of the following:
|
|
March
31, 2010
|
|
|
June 30, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Commercial
Bank, various amounts, non-interest bearing, due from January 2010 to June
2010; 100% of restricted cash deposited
|
|
$ |
11,523,285 |
|
|
$ |
7,325,000 |
|
Total
|
|
$ |
11,523,285 |
|
|
$ |
7,325,000 |
|
Note
8 - Related party transactions
Other receivable - related
parties
The
Company leases two of its buildings to Jiangbo Chinese-Western Pharmacy, a
company owned by the Company’s Chief Executive Officer and other majority
shareholders. For the three months ended March 31, 2010 and 2009, the Company
recorded other income of approximately $81,000 and $77,000 from leasing the two
buildings to this related party. For the nine months ended March 31, 2010 and
2009, the Company recorded other income of approximately $242,000 and $313,000
from leasing the two buildings to this related party. As of March 31,
2010 and June 30, 2009, amount due from this related party was approximately
$242,000 and $0, respectively.
Other payables - related
parties
Other
payables-related parties primarily consist of accrued salary payable to the
Company’s officers and directors, and advances from the Company’s Chief
Executive Officer. These advances are short-term in nature and bear no interest.
The amounts are expected to be repaid in the form of cash.
Other
payables - related parties consisted of the following:
|
|
March
31,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Payable
to Cao Wubo, Chief Executive Officer and Chairman of the Board
|
|
$ |
901,029 |
|
|
$ |
184,435 |
|
|
|
|
|
|
|
|
|
|
Payable
to Haibo Xu, Director
|
|
|
33,688 |
|
|
|
33,688 |
|
|
|
|
|
|
|
|
|
|
Payable
to Elsa Sung, Chief Financial Officer
|
|
|
11,744 |
|
|
|
18,333 |
|
|
|
|
|
|
|
|
|
|
Payable
to John Wang, Director
|
|
|
5,000 |
|
|
|
2,500 |
|
|
|
|
|
|
|
|
|
|
Total
other payable - related parties
|
|
$ |
951,461 |
|
|
$ |
238,956 |
|
Note
9 – Concentration of major customers, suppliers, and products
For the
three months ended March 31, 2010 and 2009, sales from four products accounted
for 99.8% and 98.8%, respectively, of the Company’s total sales. For
the nine months ended March 31, 2010 and 2009, the four products accounted for
99.4% and 98.7%, respectively, of the Company’s total sales.
For the
three months ended March 31, 2010 and 2009, one customer accounted for
approximately 10.7% and 7.9%, respectively, of the Company's total revenue. For
the nine months ended March 31, 2010 and 2009, the customer accounted for
approximately 10.2% and 6.1%, respectively, of the Company's total revenue. The
customer represented 11.1% and 4.3% of the Company's total accounts receivable
as of March 31, 2010 and June 30, 2009, respectively.
For the
three months ended March 31, 2010 and 2009, three suppliers accounted for
approximately 65.7% and 47.8%, respectively, of the Company's purchases. For the
nine months ended March 31, 2010 and 2009, three suppliers accounted for
approximately 61.7% and 65.7%, respectively, of the Company's purchases. These
three suppliers represented 10.0% and 57.63% of the Company's total accounts
payable as of March 31, 2010 and June 30, 2009, respectively.
Note 10 - Taxes
payable
The
Company is subject to the United States federal income tax at a tax rate of 34%.
No provision for U.S. income taxes has been made as the Company had no U.S.
taxable income during the nine months ended March 31, 2010 and
2009.
The
Company’s wholly owned subsidiaries Karmoya International Ltd. (“Karmoya”) and
Union Well International Ltd. (“Union Well”) were incorporated in the British
Virgin Island (“BVI”) and the Cayman Islands, respectively. Under the current
laws of the BVI and Cayman Islands, the two entities are not subject to income
taxes.
On March
16, 2007, the National People's Congress of China passed the new Enterprise
Income Tax Law ("EIT Law"), and on November 28, 2007, the State Council of China
passed the Implementing Rules for the EIT Law ("Implementing Rules") which
became effective on January 1, 2008. The EIT Law and Implementing Rules impose a
unified EIT rate of 25.0% on all domestic-invested enterprises and FIEs, unless
they qualify under certain limited exceptions. Therefore, nearly all FIEs are
subject to the new tax rate alongside other domestic businesses rather than
benefiting from the EIT Law and its associated preferential tax treatments,
beginning January 1, 2008.
In
addition to the changes to the current tax structure, under the EIT Law, an
enterprise established outside of China with "de facto management bodies" within
China is considered a resident enterprise and will normally be subject to an EIT
of 25.0% on its global income. The Implementing Rules define the term "de facto
management bodies" as "an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise." If the PRC tax authorities subsequently
determine that the Company should be classified as a resident enterprise, then
the organization's global income will be subject to PRC income tax of
25.0%. Laiyang Jiangbo and GJBT were subject to 25% income tax rate since
January 1, 2008.
The table
below summarizes the differences between the U.S. statutory federal rate and the
Company’s effective tax rate for the nine months ended March 31, 2010 and
2009:
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
U.S.
Statutory rates
|
|
|
34.0
|
% |
|
|
34.0
|
% |
Foreign
income not recognized in the U.S
|
|
|
(34.0
|
)% |
|
|
(34.0
|
)% |
China
income taxes
|
|
|
25.0
|
% |
|
|
25.0
|
% |
China
income tax exemptions
|
|
|
- |
|
|
|
- |
|
Other
items(a)
|
|
|
2.5
|
% |
|
|
0.0
|
% |
Total
provision for income taxes
|
|
|
27.5
|
% |
|
|
25.0
|
% |
(a) The
2.5% and 0.0% represent the expenses incurred by the Company that are not
deductible for PRC income tax purpose for the nine months ended March 31, 2010
and 2009 respectively.
Taxes
payable
The
following table reflects taxes payable as of:
|
March
31,
|
|
June 30,
|
|
|
2010
|
|
2009
|
|
|
(Unaudited)
|
|
|
|
Value
added taxes
|
|
$ |
1,211,408 |
|
|
$ |
4,090,492 |
|
Income
taxes
|
|
|
3,436,575 |
|
|
|
6,689,199 |
|
Other
taxes
|
|
|
304,373 |
|
|
|
468,535 |
|
Total
|
|
$ |
4,952,356 |
|
|
$ |
11,248,226 |
|
Note
11 - 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 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 adjustments 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. As of
March 31, 2010, the 500,000 shares are still in escrow. 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 FASB’s accounting standard regarding convertible
debentures 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 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 (4.5%),
(2) expected warrant life of 3 years, (3) expected volatility of
197%, and (4) zero expected dividends. The total estimated fair value of
the warrants granted and beneficial conversion feature of the November 2007
Debenture should not exceed the $5,000,000 November 2007 Debenture, and the
calculated warrant value was used to determine the allocation between the fair
value of the beneficial conversion feature of the November 2007 Debenture and
the fair value of the warrants.
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, 2010 and 2009,
amortization of debt issuance costs related to the November 2007 Purchase
Agreement was $24,876 and $29,533, respectively. For the nine months ended March
31, 2010 and 2009, amortization of debt issuance costs related to the November
2007 Purchase Agreement was $102,951 and $88,602, respectively. The amortization
of debt issuance costs has been included in interest expense. The remaining
balance of unamortized debt issuance costs of the November 2007 Purchase
Agreement at March 31, 2010 and June 30, 2009 was $56,204 and $159,155,
respectively. The amortization of debt discounts was $436,202 and $219,362,
respectively, for the three months ended March 31, 2010 and 2009. The
amortization of debt discounts was $1,830,624 and $539,278, respectively, for
the nine months ended March 31, 2010 and 2009, respectively. The amortization of
debt discount has been included in interest expense on the accompanying
consolidated statements of income. The balance of the debt discount was
$1,806,453 and $3,637,077 at March 31, 2010 and June 30, 2009,
respectively.
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 was $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. 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 2008 Net Income Per Share
met the required amount and no shares were delivered to the November 2007
Investor. As of March 31, 2010, the 500,000 shares are still in
escrow.
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 Registerable
Securities (as defined therein) as permitted by the Securities and Exchange
Commission’s 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
Securities and Exchange Commission’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. The accounting standards require potential registration payment
arrangements be treated as a contingency 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.
During
the nine months ended March 31, 2010, the Company issued 125,000 shares of its
common stock upon conversion of $1,000,000 November 2007 convertible debt. As of
March 31, 2010, a total of $1,000,000 November 2007 debenture has been converted
into common shares.
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 the financing for working
capital purposes. Also pursuant to the terms of the May 2008 Securities Purchase
Agreement, the Company must, among other things, 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
adjustments 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 payable at a rate of 6% per annum, in
semi-annual installments payable 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
Notes, in whole or in part, into shares of the Company’s common stock, provided
that such May 2008 Investor shall not affect 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 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 the May 2008 Notes may require the Company to
redeem all or a portion of such May 2008 Notes 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 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 5 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 Notes 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 notes. During the three months ended March 31, 2010
and 2009, amortization of debt issuance costs related to the May 2008 Purchase
Agreement was $173,355 and $140,541, respectively. During the nine months ended
March 31, 2010 and 2009, amortization of debt issuance costs related to the May
2008 Purchase Agreement was $557,532 and $421,625, respectively. The
remaining balance of unamortized debt issuance costs of the May 2008 Purchase
Agreement at March 31, 2010 and June 30, 2009 was $509,479 and $1,077,513,
respectively. The amortization of debt discounts was $3,425,900 and $813,929 for
the three months ended March 31, 2010 and 2009, and was $9,579,312 and
$2,140,247 for the nine months ended March 31, 2010 and 2009 respectively, which
has been included in interest expense on the accompanying consolidated
statements of income. The balance of the unamortized debt discount was
$15,276,700 and $24,856,012 at March 31, 2010 and June 30, 2009,
respectively.
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 are not so
satisfied, the applicable portion of the escrowed funds will be released pro
rata to the Investors. The Company has satisfied both requirements and the
holdback money was released to the Company in July 2008.
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 Company has
determined that both thresholds for the years ended June 30, 2009 and June 30,
2008 have been met. The Make Good Shares have yet to be returned to Mr. Cao as
of March 31, 2010.
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, (i) the 2008 Make Good Shares, (ii) the 2009 Make Good
Shares, and (iii) the Settlement Shares. The Company must 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 does not timely file such registration
statement or cause it to be declared effective by the required dates, then the
Company will 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, 2010, the Company issued 826,250 shares of its
common stock upon conversion of $6,610,000 convertible debt. As of March 31,
2010, a total of $6,770,000 May 2008 Notes has been converted into common
shares.
The
above two convertible debenture liabilities are as follows:
|
|
|
|
|
|
|
|
|
March
31,
2010
|
|
|
June
30, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
November
2007 convertible debenture note payable
|
|
$ |
4,000,000 |
|
|
$ |
5,000,000 |
|
May
2008 convertible debenture note payable
|
|
|
23,230,000 |
|
|
|
29,840,000 |
|
Total
convertible debenture note payable
|
|
|
27,230,000 |
|
|
|
34,840,000 |
|
Less:
Unamortized discount on November 2007 convertible debenture note
payable
|
|
|
(1,806,453 |
) |
|
|
(3,637,077 |
) |
Less:
Unamortized discount on May 2008 convertible debenture note
payable
|
|
|
(15,276,700 |
) |
|
|
(24,856,012 |
) |
Convertible
debentures, net
|
|
$ |
10,146,847 |
|
|
$ |
6,346,911 |
|
As a
result of the delay in its ability to transfer cash out of PRC (partially due to
the stricter foreign exchange restrictions and regulations imposed in the PRC
starting in December 2008), the Company became delinquent on the payment of
interests under the November 2007 Debentures and May 2008 Notes in December
2009. In February 2010, the Company and the majority November 2007 Debentures
and May 2008 Notes holders entered to a waiver agreement regarding to the
delinquent interest payment; the waiver agreement required the Company to make
the delinquent interest payments by February 25, 2010 and to have its common
stock listed on the Nasdaq Stock market on or prior to April 15, 2010. The
Company was not able to meet the waiver letter requirements and has continued
dialogue with the November 2007 Debentures and May 2008 Notes holders. As such,
the Company’s related debt and warrants have been classified as current on the
accompanying balance sheet as of March 31, 2010. As of March 31, 2010 and
through the date of this filling, no formal event of default notice has been
presented by the November 2007 Debentures and May 2008 Notes holders. Accrued
interest and related interest penalty as of March 31, 2010 amounted to
$3,958,836.
Note
12 - Shareholders’ equity
Common
Stock
In July
2009, the Company issued 1,009 shares of common stock to a Company’s current
director as part of his compensation for services. The Company valued these
shares at the fair market value on the date of grant of $9.91 per share, or
$10,000 in total, based on the trading price of common stock. For the nine
months ended March 31, 2010, the Company recorded stock based compensation
expense of $10,000 accordingly.
In August
2009, the Company issued 82,500 shares to Pope as interest payment for the
interest due on May 30, 2009 on the November 2007 Debentures and the May 2008
Notes. The Company valued these shares at the fair market value on the date of
grant of $11.81 per share based on the trading price of common stock, or
$974,325 in total, of which $660,000 was recorded as interest expense for the
year ended June 30, 2009 and $314,325 was recorded as additional interest
expense in the nine months ended March 31, 2010.
In August
2009, the Company issued 82,500 shares of its common stock to Pope, the majority
holder of the Company’s November 2007 Debentures and May 2008 Notes. As a result
of the delay in its ability to transfer cash out of the PRC (partially due to
the stricter foreign exchange restrictions and regulations imposed in the PRC
starting in December 2008), the Company was delinquent on the payment of
interests under the November 2007 Debentures and May 2008 Notes Due on May 30,
2009. On August 10, 2009, the Company and Pope entered into a Letter
Agreement (the “Letter Agreement”). Pursuant to the Letter Agreement, Pope (i)
agreed to waive the Events of Default (as defined in the November
2007 Debentures and May 2008 Notes) that have occurred as a result of the
Company’s failure to timely make interest payments on the November 2007
Debentures and May 2008 Notes that were due and payable on May 30, 2009, and
agreed not to provide written notice to the Company with respect to the
occurrence of either of such Events of Default provided that the Company has
made such interest payment to the holders of the November 2007 Debentures and
the holders of the May 2008 Notes (ii) agreed that in lieu of payment
of the $660,000 in cash interest with respect to the Pope Notes that was due and
payable to Pope on May 30, 2009, that the Company shall issue to Pope on or
prior to August 17, 2009, 82,500 shares (the “Shares”) of its Common Stock (such
payment shall be referred to herein as the “Special Interest Payment”), and
(iii) waived each and every applicable provision of the 2007 Purchase Agreement,
the 2008 Securities Purchase Agreement (including, without limitation Section
4.17 (Right of First Refusal) and 4.21(c) (Additional Negative Covenants of the
Company), the November 2007 Debentures and the May 2008 Notes, each to the
extent necessary in order to permit the Company to make the Special Interest
Payment. The Company valued the 82,500 shares at the fair market value on the
date of issuance of $11.81 and recorded additional $314,325 interest expense
accordingly.
In
September 2009, the Company issued 62,500 shares of its common stock in
connection with the conversion of $500,000 of convertible debt. In connection
with the conversion, the Company recorded $402,112 of interest expense to fully
amortize the unamortized discount and deferred financing costs related to the
converted dentures. In connection with the conversion, the Company issued 938
shares of its common stock for the final interest payment. The Company valued
the 938 shares at the fair market value on the date of issuance of $11 per share
and recorded $10,300 interest expense in total.
In
October 2009, the Company issued 462,500 shares of its common stock in
connection with the conversion of $3,700,000 of convertible debt. In connection
with the conversion, the Company recorded $3,032,668 of interest expense to
fully amortize the unamortized discount and deferred financing costs related to
the converted dentures.
In
November 2009, the Company issued 62,500 shares of its common stock in
connection with the conversion of $500,000 of convertible debt. In connection
with the conversion, the Company recorded $326,425 of interest expense to fully
amortize the unamortized discount and deferred financing costs related to the
converted dentures.
In
December 2009, the Company issued 62,500 shares of its common stock in
connection with the conversion of $500,000 of convertible debt. In connection
with the conversion, the Company recorded $309,373 of interest expense to fully
amortize the unamortized discount and deferred financing costs related to the
converted dentures.
In
January 2010, the Company issued 301,250 shares of its common stock in
connection with the conversions of $2,410,000 of convertible debt. In connection
with the conversion, the Company recorded $1,822,111 of interest expense to
fully amortize the unamortized discount and deferred financing costs related to
the converted dentures. In connection with one of the conversions, the Company
issued 577 shares of its common stock for the final interest payment. The
Company valued the 577 shares at the fair market value on the date of issuance
of $11.40 per share and recorded $6,429 interest expense in total.
In March
2010, the Company issued 1,143 shares of common stock to a Company’s current
director as part of his compensation for services and 2,286 shares of common
stock to a Company’s officer to pay off part of her accrued compensation. The
Company valued these shares at the fair market value on the date of grant of
$8.75 per share, or $30,000 in total, based on the trading price of common
stock. For the nine months ended March 31, 2010, the Company recorded stock
based compensation expense of $10,000 and reduced $20,000 of other
payable-related parties accordingly.
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, 2010, the
Company has not received the $10,000.
Union
Well was established on May 9, 2007, 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, 2010, the Company has not received the $1,000.
Note
13 - Warrants
In
connection with the $5,000,000 November 2007 Debenture, 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 3 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 Notes, 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
5 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 compensation expense of $126,616 for the nine
months ended March 31, 2010.
A summary
of the warrants as of March 31, 2010, and changes during the period are
presented below:
|
|
Number of warrants
|
|
Outstanding
as of June 30, 2008
|
|
|
2,349,085
|
|
Granted
|
|
|
40,000
|
|
Forfeited
|
|
|
(74,085)
|
|
Exercised
|
|
|
-
|
|
Outstanding
as of June 30, 2009
|
|
|
2,315,000
|
|
Granted
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
Outstanding
as of March 31, 2010 (unaudited)
|
|
|
2,315,000
|
|
The
following is a summary of the status of warrants outstanding at March 31,
2010:
Outstanding Warrants |
|
Exercisable Warrants
|
|
Exercise Price
|
|
Number
|
|
Average
Remaining
Contractual Life
(Years)
|
|
Average
Exercise Price
|
|
Number
|
|
Average Remaining
Contractual Life
(Years)
|
|
$ |
6.00
|
|
|
40,000
|
|
1.88
|
|
$
|
6.00
|
|
40,000
|
|
|
1.88
|
|
$ |
8.00
|
|
|
400,000
|
|
0.58
|
|
$
|
8.00
|
|
400,000
|
|
|
0.58
|
|
$ |
10.00
|
|
|
1,875,000
|
|
3.17
|
|
$
|
10.00
|
|
1,875,000
|
|
|
3.17
|
|
|
Total
|
|
|
2,315,000
|
|
|
|
|
|
|
2,315,000
|
|
|
|
|
The
Company has 2,315,000 warrants outstanding and exercisable at an average
exercise price of $9.58 per share as of March 31, 2010.
Note
14 - 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, 2010, of the 7,500 options held by the Company’s executives,
directors, and employees, are fully vested.
The
following is a summary of the option activity:
|
|
Number of options
|
|
Outstanding
as of June 30, 2008
|
|
|
140,900
|
|
Granted
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
Outstanding
as of June 30, 2009
|
|
|
140,900
|
|
Granted
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
Outstanding
as of March 31, 2010 (unaudited)
|
|
|
140,900
|
|
Following
is a summary of the status of options outstanding at March 31,
2010:
|
Outstanding options
|
|
Exercisable options
|
|
Average
Exercise Price
|
|
Number
|
|
Average
Remaining
Contractual
Life
(years)
|
|
Average
Exercise Price
|
|
Number
|
|
Average
Remaining
Contractual
Life
(years)
|
|
$
|
4.20
|
|
133,400
|
|
0.50
|
|
$
|
4.20
|
|
133,400
|
|
|
0.50
|
|
$
|
12.00
|
|
2,000
|
|
2.95
|
|
$
|
12.00
|
|
2,000
|
|
|
2.95
|
|
$
|
16.00
|
|
1,750
|
|
2.95
|
|
$
|
16.00
|
|
1,750
|
|
|
2.95
|
|
$
|
20.00
|
|
1,875
|
|
2.95
|
|
$
|
20.00
|
|
1,875
|
|
|
2.95
|
|
$
|
24.00
|
|
1,875
|
|
2.95
|
|
$
|
24.00
|
|
1,875
|
|
|
2.95
|
|
$
|
4.93
|
|
140,900
|
|
|
|
$
|
4.93
|
|
140,900
|
|
|
|
|
For the
nine months ended March 31, 2010 and 2009, the company recorded stock-based
compensation expense of $8,848 and $43,000 related to those options. At March
31, 2010 and June 30, 2009, there was $0 and $8,488 total unrecognized
compensation expense related to unvested share-based compensation arrangements
for these options.
Note
15 - 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, 2010 and 2009, the Company made pension contributions in
the amount of $28,096 and $37,003, respectively. For the nine months ended March
31, 2010 and 2009, the Company made pension contributions in the amount of
$58,368 and $109,466, respectively.
Note
16 - 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 People's Republic of China ("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 2008.
Pursuant
to the Company's articles of incorporation, the Company is required to
appropriate 10% of the net profit as statutory surplus reserve up to 50% of the
Company’s registered capital. During the year ended June 30, 2008, the Company’s
statutory surplus reserve reached 50% of its registered capital.
Note
17 - 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
|
|
|
336,927
|
|
Unrealized
loss on marketable securities
|
|
|
(1,514,230
|
)
|
Balance,
June 30, 2009
|
|
$
|
6,523,602
|
|
Foreign
currency translation gain (loss)
|
|
|
197,393
|
|
Unrealized
gain on marketable securities
|
|
|
88,535
|
|
Balance,
March 31, 2010 (unaudited)
|
|
$
|
6,809,530
|
|
|
|
|
|
|
Note
18 - Commitments and Contingencies
Operations based in
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 the 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.
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 trainings to the Company. As part
of the CRADA, the Company will pay approximately $3.5 million (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 university will also provide technical services and trainings
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.
For the
three months ended March 31, 2010 and 2009, approximately $1,093,000 and
$1,099,000, respectively was incurred as research and development expense. For
the nine months ended March 31, 2010 and 2009, approximately $3,299,000 and
$3,295,000, respectively was incurred as research and development expense. As of
March 31, 2010, the Company’s future estimated payments to those two CRADAs
amounted to approximately $6.7 million.
Legal
proceedings
The
Company is involved in various legal matters arising in the ordinary course of
business. The following summarizes the Company’s pending legal proceeding as of
March 31, 2010:
China West II, LLC and Genesis Technology
Group, Inc., n/k/a Jiangbo Pharmaceuticals, Inc.
(Arbitration)
In April
2010, China West II, LLC (“CW II”) filed a Demand For Arbitration with the
American Arbitration Association the case of CW II and Genesis
Technology Group, Inc. n/k/a Jiangbo Pharmaceuticals, Inc. In that
matter, CW II seeks repayment and interest of a $190,000 promissory note dated
August 3, 2007 made by Genesis Equity Partners II LLC (“GEP”), a subsidiary of
the Company prior to the October 2007 reverse merger, and guaranteed by the
Company. The Company believes the promissory note has been paid in full by
members of GEP and CWII’s demand is without merit and plans to vigorously defend
its position. As of the date of these consolidated financial statements, the
Company is unable to estimate a loss, if any, the Company may incur related
expenses to this lawsuit.
Note
19- Subsequent event
In April
2010, the Company issued 43,750 shares of its common stock in connection with
the conversion of $350,000 of May 2008 Convertible Debentures.
The
Company has performed an evaluation of subsequent events through the date
these consolidated financial statements were issued.
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,” “us,” “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, 2010 and 2009 should be
read in conjunction with Jiangbo’s 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,” “expec t,” “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.
Pursuant
to a Certificate of Amendment to our Amended and Restated Articles of
Incorporation filed with 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.
RESULTS
OF OPERATIONS
Comparison of three months and nine months ended March 31, 2010 and
2009
The
following table sets forth the results of our operations for the periods
indicated as a percentage of total net sales ($ in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended |
|
|
|
March 31,
|
|
|
March 31, |
|
|
|
2010
|
|
|
%
of Revenue
|
|
|
2009
|
|
|
%
of Revenue
|
|
|
2010
|
|
|
%
of Revenue
|
|
|
2009
|
|
|
%
of Revenue
|
|
SALES
|
|
$ |
25,571 |
|
|
|
100.0 |
% |
|
$ |
25,726 |
|
|
|
100.0 |
% |
|
$ |
68,135 |
|
|
|
100.0 |
% |
|
$ |
85,991 |
|
|
|
99.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES-
RELATED PARTY
|
|
|
- |
|
|
|
- |
% |
|
|
- |
|
|
|
- |
% |
|
|
- |
|
|
|
- |
% |
|
|
244 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
6,974 |
|
|
|
27.3 |
% |
|
|
6,854 |
|
|
|
26.6 |
% |
|
|
17,902 |
|
|
|
26.3 |
% |
|
|
19,705 |
|
|
|
22.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES- RELATED PARTIES
|
|
|
- |
|
|
|
- |
% |
|
|
- |
|
|
|
- |
% |
|
|
- |
|
|
|
- |
% |
|
|
55 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
18,597 |
|
|
|
72.7 |
% |
|
|
18,872 |
|
|
|
73.4 |
% |
|
|
50,233 |
|
|
|
73.7 |
% |
|
|
66,476 |
|
|
|
77.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
3,799 |
|
|
|
14.9 |
% |
|
|
4,477 |
|
|
|
17.40 |
% |
|
|
13,400 |
|
|
|
19.7 |
% |
|
|
31,112 |
|
|
|
36.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESEARCH
AND DEVELOPMENT
|
|
|
1,093 |
|
|
|
4.30 |
% |
|
|
1,099 |
|
|
|
4.3 |
% |
|
|
3,299 |
|
|
|
4.8 |
% |
|
|
3,295 |
|
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
13,704 |
|
|
|
53.6 |
% |
|
|
13,296 |
|
|
|
51.7 |
% |
|
|
33,534 |
|
|
|
49.2 |
% |
|
|
32,069 |
|
|
|
37.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(INCOME) EXPENSES, NET
|
|
|
(5,020 |
|
|
|
(19.6 |
)% |
|
|
1,137 |
|
|
|
4.4 |
% |
|
|
2,252 |
|
|
|
3.3 |
% |
|
|
6,587 |
|
|
|
7.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
18,724 |
|
|
|
73.2 |
% |
|
|
12,159 |
|
|
|
47.3 |
% |
|
|
31,282 |
|
|
|
45.9 |
% |
|
|
25,482 |
|
|
|
29.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
3,540 |
|
|
|
13.8 |
% |
|
|
3,303 |
|
|
|
12.8 |
% |
|
|
8,618 |
|
|
|
12.6 |
% |
|
|
8,093 |
|
|
|
9.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
15,184 |
|
|
|
59.4 |
% |
|
|
8,856 |
|
|
|
34.4 |
% |
|
|
22,664 |
|
|
|
33.3 |
% |
|
|
17,389 |
|
|
|
20.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME (LOSS)
|
|
|
33 |
|
|
|
0.1 |
% |
|
|
(401 |
) |
|
|
(1.6 |
)% |
|
|
286 |
|
|
|
0.4 |
% |
|
|
(1,770 |
|
|
|
(2.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
15,217 |
|
|
|
59.5 |
% |
|
|
8,455 |
|
|
|
32.9 |
% |
|
|
22,950 |
|
|
|
33.7 |
% |
|
|
15,619 |
|
|
|
18.1 |
% |
REVENUES. Revenues by product
categories were as follows: ($ in thousands)
|
|
Nine
Months Ended March 31,
|
|
|
Increase/
|
|
|
Increase
|
|
Product
|
|
2010
|
|
2009
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Western
pharmaceutical medicines
|
|
|
$ |
45,158 |
|
|
$ |
57,794 |
|
|
$ |
(12,636 |
) |
|
|
(21.9 |
)
% |
Chinese
traditional medicines
|
|
|
|
22,977 |
|
|
|
28,441 |
|
|
|
(5,464 |
) |
|
|
(19.2 |
)
% |
TOTAL
|
|
|
$ |
68,135 |
|
|
$ |
86,235 |
|
|
$ |
(18,100 |
) |
|
|
(21.0 |
)
% |
|
|
Three
Months Ended March 31,
|
|
|
Increase/
|
|
|
Increase/
|
|
Product
|
|
2010
|
|
2009
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Western
pharmaceutical medicines
|
|
|
$ |
17,416 |
|
|
$ |
16,012 |
|
|
$ |
1,404 |
|
|
|
8.8
|
% |
Chinese
traditional medicines
|
|
|
|
8,155 |
|
|
|
9,714 |
|
|
|
(1,559 |
) |
|
|
(16.0 |
)
% |
TOTAL
|
|
|
$ |
25,571 |
|
|
$ |
25,726 |
|
|
$ |
(155 |
) |
|
|
(0.6 |
)
% |
REVENUE .
During the nine months ended March 31, 2010, we had revenues of $68.1 million as
compared to revenues of $86.2 million for the nine months ended March 31, 2009,
a decrease of $18.1 million or approximately 21.0%. While the quantities sold
for Clarithromycin Sustained-released tablets and Radix Isatidis granules
increased in the nine months ended March 31, 2010 as compared to the nine months
ended March 31, 2009, we had an overall decrease in the total revenue in the
nine months ended March 31, 2010. The overall decrease was primarily
attributable to the decrease of the per unit sales price by an average of 26%
for Clarithromycin Sustained-released tablets, Itopride Hydrochloride
granules and Baobaole chewable tables in July 2009 through December
2009 as compared to the same period in the prior year. Starting 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 significantly reduced the commission paid to our sales
representatives on those products by 80% to 83%. Additionally, we also
experienced a decrease in sales volumes for Itopride Hydrochloride granules and
Baobaole chewable tables.
For the
three months ended March 31, 2010, we had revenues of $25.6 million which is
consistent with the revenues of $25.7 million for the three months ended March
31, 2009. For the three months ended March 31, 2010, the increased revenue
generated from Clarithromycin Sustained-released tablets and Radix Isatidis
granules was largely offset by the decrease in revenue generated from Itopride
Hydrochloride granules and Baobaole chewable tables. Although our major products
are facing increasing market competition from similar products included in the
National Basic Medical Insurance, the Company’s management will continue to
reinforce its sales efforts and we expect our revenue will continue to improve
for the remainder of the year.
COST OF SALES by product
categories were as follows: ($ in thousands)
|
|
Nine
Months Ended March 31,
|
|
|
Increase/
|
|
|
Increase/
|
|
Product
|
|
2010
|
|
2009
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Western
pharmaceutical medicines
|
|
|
$ |
12,699 |
|
|
$ |
14,243 |
|
|
$ |
(1,544 |
) |
|
|
(10.8 |
)
% |
Chinese
traditional medicines
|
|
|
|
5,203 |
|
|
|
5,517 |
|
|
|
(314 |
) |
|
|
(5.7 |
)
% |
TOTAL
|
|
|
$ |
17,902 |
|
|
$ |
19,760 |
|
|
$ |
(1,858 |
) |
|
|
(9.4 |
)
% |
|
|
Nine
Months Ended March 31,
|
|
|
Increase/
|
|
|
Increase/
|
|
Product
|
|
2010
|
|
2009
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Western
pharmaceutical medicines
|
|
|
$ |
4,986 |
|
|
$ |
4,729 |
|
|
$ |
257 |
|
|
|
5.4
|
% |
Chinese
traditional medicines
|
|
|
|
1,988 |
|
|
|
2,125 |
|
|
|
(137 |
) |
|
|
(6.4 |
)
% |
TOTAL
|
|
|
$ |
6,974 |
|
|
$ |
6,854 |
|
|
$ |
120 |
|
|
|
1.8
|
% |
Cost of
sales for the nine months ended March 31, 2010 decreased $1.8 million or 9.4%,
from $19.8 million for the nine months ended March 31, 2009 to $17.9 million for
the nine months ended March 31, 2010. The decrease in cost of sales and cost of
sales - related parties for the nine months ended March 31, 2010 was primarily
due to decrease in Itopride Hydrochloride granules and Baobaole chewable tables,
two products with lower costs, quantities sold and partially offset by the
increase in the quantities sold for Clarithromycin Sustained-released tablets
and Radix Isatidis granules.
For the
three months ended March 31, 2010, cost of sales increased $0.1 million or 1.8%,
from $6.9 million for the three months ended March 31, 2009 to $7.0 million for
the three months ended March 31, 2010. The slight increase in cost of sales for
the three months ended March 31, 2010 as compared to the three months ended
March 31, 2009 was due to more Clarithromycin Sustained-released tablets and
Radix Isatidis granules which have higher product costs, being sold.
The
overall cost of sales as a percentage of net revenue for the nine months ended
March 31, 2010, was approximately 26.3% as compared to 22.9% for the nine months
ended March 31, 2009, and 27.3% for the three months ended March 31, 2010 as
compared to 26.6% the three months ended March 31, 2009.
GROSS PROFIT by product
categories as a percentage of sales were as follows:
|
|
Nine
Months Ended
|
|
|
Increase/
|
|
|
|
March
31 |
|
|
(Decrease)
|
|
Product
|
|
2010
|
|
|
2009
|
|
|
|
|
Western
pharmaceutical medicines
|
|
|
|
71.88
|
% |
|
|
75.36
|
% |
|
|
(3.48 |
)
% |
Chinese
traditional medicines
|
|
|
|
77.36
|
% |
|
|
80.60
|
% |
|
|
(3.24 |
)
% |
|
|
Three
Months Ended
|
|
|
Increase/
|
|
|
|
March
31,
|
|
|
(Decrease)
|
|
Product
|
|
2010
|
|
|
2009
|
|
|
|
|
Western
pharmaceutical medicines
|
|
|
|
72.9
|
% |
|
|
70.5
|
% |
|
|
2.4
|
% |
Chinese
traditional medicines
|
|
|
|
76.9
|
% |
|
|
78.1
|
% |
|
|
(1.2 |
)
% |
Gross
profit was $50.2 million for the nine months ended March 31, 2010, as compared
to $66.5 million for the nine months ended March 31, 2009, and $18.6 million for
the three months ended March 31, 2010, as compared to $18.9 million for the
three months ended March 31, 2009, representing gross margins of approximately
73.7% and 77.1% for the nine months ended March 31, 2010 and 2009, and 72.7% and
73.4% for the three months ended March 31, 2010 and 2009, respectively. The decrease in the gross
profit for the periods ended March 31, 2010 was primarily due to the lower unit
price charged as a result of the sales network restructure mentioned above and
more products with lower margin were sold.
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES
Selling,
general and administrative expenses totaled $13.4 million for the nine months
ended March 31, 2010, as compared to $31.1 million for the nine months ended
March 31, 2009, a decrease of $17.7 million or approximately
56.9%. Selling, general and administrative expenses totaled $3.8 million
for the three months ended March 31, 2010, as compared to $4.5 million for the
three months ended March 31, 2009, a decrease of $0.7 million or approximately
15.6% as summarized below ($ in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
March 31,
2010
|
|
|
March 31,
2009
|
|
|
March 31,
2010
|
|
|
March 31,
2009
|
|
Advertisement,
marketing and promotion
|
|
$
|
1,077
|
|
|
$
|
1,400
|
|
|
$
|
4,346
|
|
|
$
|
7,235
|
|
Travel
and entertainment - sales related
|
|
|
104
|
|
|
|
129
|
|
|
|
371
|
|
|
|
1,441
|
|
Salaries,
wages, commissions and related benefits
|
|
|
1,926
|
|
|
|
2,022
|
|
|
|
5,397
|
|
|
|
19,860
|
|
Travel
and entertainment - non sales related
|
|
|
19
|
|
|
|
41
|
|
|
|
126
|
|
|
|
171
|
|
Depreciation
and amortization
|
|
|
492
|
|
|
|
399
|
|
|
|
1,437
|
|
|
|
836
|
|
Shipping
and handling
|
|
|
147
|
|
|
|
153
|
|
|
|
411
|
|
|
|
405
|
|
Other
|
|
|
34
|
|
|
|
333
|
|
|
|
1,312
|
|
|
|
1,164
|
|
Total
|
|
$
|
3,799
|
|
|
$
|
4,477
|
|
|
$
|
13,400
|
|
|
$
|
31,112
|
|
The
changes in these expenses during the third quarter and first nine months of
fiscal year 2010, as compared to the corresponding periods in 2009 included the
following:
·
|
A
decrease of $0.3 million or approximately 23.1% in advertisement,
marketing and promotion spending for the third quarter of fiscal 2010 and
a decrease of $2.8 million or 39.9% for the nine months ended March 31,
2010 of fiscal 2010 as compared to the corresponding period in fiscal
2009. The decrease in advertisement, marketing and promotion spending was
primarily due to less marketing and promotion spending and better managed
advertising and promotional costs in fiscal year 2010.
|
·
|
Travel
and entertainment - sales related expenses remained materially consistent
for the third quarter of fiscal 2010 as compared to the corresponding
period in fiscal 2009 and decreased by $1.1 million or 74.3% for the nine
months ended March 31, 2010 of fiscal 2010 as compared to the
corresponding period in fiscal 2009. As a result of the distribution
system restructuring, we rely more on the distributors to work with us to
promote our products and the traveling and entertainment activities
incurred by our sales representatives decreased
accordingly.
|
·
|
Salaries, wages, commissions and
related benefits decreased by $0.1 million or 4.7% during the third
quarter of fiscal 2010 and decreased by $14.5 million or 72.8% during the
nine months ended March 31, 2010 of fiscal 2010 as compared to the
corresponding period of fiscal 2009. The slight decrease in the three
months ended March 31, 2010 as compared to March 31, 2009 was primarily
due to less salary expenses incurred for administrative
staff. The decrease in the nine months ended March 31, 2010 as
compared to the nine months ended March 31, 2009 was primarily due to
the significant decrease in commissions paid to our sales representatives.
In connection with the sales restructuring in January 2009, we
significantly reduced the commission paid to our sales
representatives on the top three selling products by 80% to
83%.
|
·
|
Travel
and entertainment - non sales related expenses decreased slightly for the
third quarter of fiscal 2010 and the nine months ended March 31, 2010 of
fiscal 2010 as compared to prior year corresponding period was primarily
due to better expense spending controls in fiscal
2010.
|
·
|
Depreciation
and amortization increased by $0.1 million or 23.3% during the third
quarter of fiscal 2010 and increased by $0.6 million or 71.9% during the
nine months ended March 31, 2010 of fiscal 2010 as compared to the
corresponding period of fiscal 2009, primarily due to intangible assets
acquired through Hongrui acquisition in February 2009 which started being
amortized since then.
|
·
|
For
the nine months ended March 31, 2010 and 2009 and for the three months
ended March 31, 2010 and 2009, shipping and handling expenses remained
materially consistent.
|
·
|
Other
selling, general and administrative expenses, which include professional
fees, utilities, office supplies and expenses decreased by $0.3 million or
89.8% for the third quarter of fiscal 2010 and increased by $ 0.1 million
or 12.7% for the nine months ended March 31, 2010 of fiscal 2010 as
compared to the corresponding period in fiscal 2009 primarily due to bad
debt expenses recovery in the third quarter of fiscal 2010 and better
spending controls.
|
RESEARCH AND DEVELOPMENT
COSTS. Research and development costs, which consist of fees paid to
third parties for research and development related activities conducted for the
Company and cost of materials used and salaries paid for the development of the
Company’s products, totaled $3.3 million for the nine months ended March 31,
2010, materially consistent with the nine months ended March 31,
2009. Research and development costs totaled $1.1 million for the
three months ended March 31, 2010, materially consistent with the three months
ended March 31, 2009. Research and development expenses mainly related two
R&D cooperative agreements which obligated us to make monthly payments to
the designated university/institute research and development projects, plus
expenses incurred.
OTHER (INCOME) EXPENSES. Our
other expenses consisted of financial expenses, change in fair value of
derivative liabilities and other non-operating expenses (income). We had other
expenses of $2.3 million for the nine months ended March 31, 2010 as compared to
other expenses $6.6 million for the nine months ended Marh 31, 2009, a decrease
of $4.3 million or approximately 65.2%. For the three months ended March 31,
2010, we had other income of $5.0 million as compared to $1.1 million other
expense for the three months ended March 31, 2009, an increase of $6.1 million
in income or 554.5%. The decrease in other expense for the nine months ended
March 31, 2010 was primarily due to the gain in change of fair value of
derivative liabilities of $13.5 million, decrease in realized and unrealized
loss on trading marketable securities of $0.8 million and decrease in loss from
discontinued operations of $1.5 million, and partially offset by increase in
interest expenses, the debt discount amortization expense and financing cost
amortization related to our financing in November 2007 and May 2008 of $11.4
million. The increase in other income for the three months ended March 31, 2010
was attributed by the gain in change of fair value of derivative liabilities of
$11.6 million and partially offset by increase in interest expenses, debt
discount amortization expense and financing cost amortization related to our
financing in November 2007 and May 2008 of $5.4 million.
NET INCOME. Our net income for
the nine months ended March 31, 2010 was $22.7 million as compared to $17.4
million for the nine months ended March 31, 2009, an increase of $5.3 million or
30.5%. The net income for the three months ended March 31, 2010 was $15.2
million as compared to $8.9 million for the three months ended March 31, 2009,
an increase of $6.3 million or 71.5%. The increase in net come for
the three and nine months ended March 31, 2010 as compared to the three and nine
months ended March 31, 2009 was due to the increase in our income from
operations and significantly reduced other expenses.
LIQUIDITY
AND CAPITAL RESOURCES
Net cash
provided by operating activities for the nine months ended March 31, 2010 was
$8.5 million as compared to net cash provided by operating activities of $41.1
million for the nine months ended March 31, 2009. The decrease in cash provided
by operating activities is primarily attributable to a change in fair value of
derivative liabilities of $13.5 million, an increase
in accounts receivable and accounts receivable-related parties of
$8.8 million, a decrease in accounts payable of $3.9 million and a decrease in
taxes payable of $6.3 million and partially offset by add back of amortization
of debt discount of $11.4 million and decrease in accrued liabilities of $3.3
million.
Net cash
used in investing activities for the nine months ended March 31, 2010 was $16.5
million, and was mainly attributable to purchase of land use right for future
factory expansion of $17 million.
We did
not have any cash provided by or used in financing activities for the nine
months ended March 31, 2010. We had a change in restricted cash of $4.2 million,
payments for bank loans of $2.2 million, and principal payments on notes payable
of $15.0 million and offset by proceeds from notes payable of $19.2 million and
proceeds from bank loans of $2.2 million. Net cash provided by financing
activities was $1.4 million for the nine months ended March 31, 2009 and was
primarily attributable to decrease in restricted cash of $4.1 million, proceeds
from bank loans of $2.2 million and offset by decrease on notes payable of $2.2
million and the principal payments on short term bank loans of $2.8
million.
We
reported a net decrease in cash for the nine months ended March 31, 2010 of $7.9
million as compared to a net increase in cash of $34.1 million for the nine
months ended March 31, 2009.
We have
historically financed our operations and capital expenditures principally
through private placements of debt and equity offerings, bank loans, and cash
provided by operations. At March 31, 2010, the majority of our liquid assets
were held in RMB denominations deposited in banks within the PRC. The PRC has
strict rules for converting RMB to other currencies and for movement of funds
from the PRC to other countries. Consequently, in the future, we may face
difficulties in moving funds deposited within the PRC to fund working capital
requirements in the U.S. The Company’s management is currently evaluating the
situation. Our working capital position is $77.7 million at March 31, 2010 and
$99.8 million at June 30, 2009. The decrease in working capital at March 31,
2010 was primarily due to decrease in cash of $7.9 million increase in
derivative liabilities of $20.1 million, increase in notes payable of 4.2
million, increase in accrued liabilities of $2.6 million and the
reclassification of convertible debentures from long term to short term
liabilities of $10.1 million and offset by the increase in restricted cash of
$4.2 million, increase in net accounts receivable of $8.4 million, decrease in
accounts payable of $3.9 million, , decrease in refundable security deposits due
to distributors of $1.0 million, decrease in liabilities assumed from
reorganization of $1.0 million and decrease in taxes payable of $6.3
million.
We
anticipate that our working capital requirements may increase as a result of our
anticipated business expansion plan, potential increases in the price of our raw
materials, competition and our relationship with suppliers or customers. We
believe that our existing cash, cash equivalents and cash flows from operations
will be sufficient to meet our present anticipated future cash needs for at
least the next 12 months. We may, however, require additional cash resources due
to foreign currency exchange restrictions imposed by the P.R.C. government,
changed business conditions or other future developments, including any
investments or acquisitions we may decide to pursue.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amount of payments.
Off-balance
Sheet Arrangements
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
Risk
Factors
Interest Rates. Our exposure
to market risk for changes in interest rates primarily relates to our short-term
investments and short-term obligations; thus, fluctuations in interest rates
would not have a material impact on the fair value of these securities. At March
31, 2010, we had approximately $108.0 million in cash and cash equivalent and
restricted cash. A hypothetical 2% increase or decrease in interest rates would
not have a material impact on our earnings or loss, or the fair market value or
cash flows of these instruments.
Foreign Exchange Rates. All
of our sales are denominated in the Chinese Renminbi (“RMB”). As a result,
changes in the relative values of U.S. Dollars and RMB affect our reported
levels of revenues and profitability as the results are translated into U.S.
Dollars for financial reporting purposes. In particular, fluctuations in
currency exchange rates could have a significant impact on our financial
stability due to a mismatch among various foreign currency-denominated sales and
costs. Fluctuations in exchange rates between the U.S. Dollar and RMB
affect our gross and net profit margins and could result in foreign exchange and
operating losses.
Our
exposure to foreign exchange risk primarily relates to currency gains or losses
resulting from timing differences between signing of sales contracts and
settling of these contracts. Furthermore, we translate monetary assets and
liabilities denominated in other currencies into RMB, the functional currency of
our operating business. Our results of operations and cash flows are translated
at average exchange rates during the period, and assets and liabilities are
translated at the unified exchange rate as quoted by the People’s Bank of China
at the end of the period. Translation adjustments resulting from this process
are included in accumulated other comprehensive income in our statements of
shareholders’ equity. We recorded net foreign currency gains (loss) of
approximately $0.2 million and $0.4 million for the nine months ended March 31,
2010 and 2009, respectively. We have not used any forward contracts, currency
options or borrowings to hedge our exposure to foreign currency exchange risk.
We cannot predict the impact of future exchange rate fluctuations on our results
of operations and may incur net foreign currency losses in the future. As
our sales denominated in foreign currencies, such as RMB and Euros, continue to
grow, we will consider using arrangements to hedge our exposure to foreign
currency exchange risk.
Our
financial statements are expressed in U.S. dollars but the functional
currency of our operating subsidiary is the RMB. The value of your investment in
our stock will be affected by the foreign exchange rates between the
U.S. dollar and the RMB. To the extent we hold assets denominated in
U.S. dollars, any appreciation of the RMB against the U.S. dollar
could result in a change to our statements of operations and a reduction in the
value of our U.S. dollar denominated assets. On the other hand, a decline
in the value of RMB against the U.S. dollar could reduce the
U.S. dollar equivalent amounts of our financial results, the value of your
investment in our company and the dividends we may pay in the future, if any,
all of which may have a material adverse effect on the price of our
stock.
Credit Risk. We have not
experienced significant credit risk, as most of our customers are long-term
customers with excellent payment records. We review our accounts receivable on a
regular basis to determine if the allowance for doubtful accounts is adequate at
each quarter-end. We typically extend 30 to 90 day trade credit to our
largest customers and we have not seen any of our major customers’ accounts
receivable go uncollected beyond the extended period of time or experienced any
material write-off of accounts receivable in the past.
Inflation Risk. In recent years,
China has not experienced significant inflation, and thus inflation has not had
a material impact on our results of operations. According to the National Bureau
of Statistics of China (NBS) (www.stats.gov.cn), the change in Consumer Price
Index (CPI) in China was 1.5%, 4.7% and 5.9% in 2006, 2007 and 2008,
respectively. Inflationary factors, such as increases in the cost of our
products and overhead costs, could impair our operating results. Although we do
not believe that inflation has had a material impact on our financial position
or results of operations to date, a high rate of inflation may have an adverse
effect on our ability to maintain current levels of gross margin and selling,
general and administrative expenses as a percentage of sales revenue if the
selling prices of our products do not increase with these increased
costs.
Related
Party Transactions
Other receivable - related
parties
The
Company leases two of its buildings to Jiangbo Chinese-Western Pharmacy, a
company owned by the Company’s Chief Executive Officer and other majority
shareholders. For the three months ended March 31, 2010 and 2009, the Company
recorded other income of approximately $81,000 and $77,000 from leasing the two
buildings to this related party. For the nine months ended March 31, 2010 and
2009, the Company recorded other income of approximately $242,000 and $313,000
from leasing the two buildings to this related party. As of March 31,
2010 and June 30, 2009, amount due from this related party was approximately
$242,000 and $0, respectively.
Other payables - related
parties
Other
payables-related parties primarily consist of accrued salary payable to the
Company’s officers and directors, and advances from the Company’s Chief
Executive Officer. These advances are short-term in nature and bear no interest.
The amounts are expected to be repaid in the form of cash.
Other
payables - related parties consisted of the following:
|
|
March
31,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Payable
to Cao Wubo, Chief Executive Officer and Chairman of the Board
|
|
$ |
901,029 |
|
|
$ |
184,435 |
|
|
|
|
|
|
|
|
|
|
Payable
to Haibo Xu, Director
|
|
|
33,688 |
|
|
|
33,688 |
|
|
|
|
|
|
|
|
|
|
Payable
to Elsa Sung, Chief Financial Officer
|
|
|
11,744 |
|
|
|
18,333 |
|
|
|
|
|
|
|
|
|
|
Payable
to John Wang, Director
|
|
|
5,000 |
|
|
|
2,500 |
|
|
|
|
|
|
|
|
|
|
Total
other payable - related parties
|
|
$ |
951,461 |
|
|
$ |
238,956 |
|
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
We
believe that the application of the following accounting policies, which are
important to our financial position and results of operations, require
significant judgments and estimates on the part of management. Our critical
accounting policies and estimates present an analysis of the uncertainties
involved in applying a principle, while the accounting policies note to the
financial statements (Note 2) describe the method used to apply the accounting
principle.
Recent
Accounting Pronouncements
In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140.The amendments in
this Accounting Standards Update improve financial reporting by eliminating the
exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require enhanced
disclosures about the risks that a transferor continues to be exposed to because
of its continuing involvement in transferred financial assets. Comparability and
consistency in accounting for transferred financial assets will also be improved
through clarifications of the requirements for isolation and limitations on
portions of financial assets that are eligible for sale accounting. This
ASU did not have a material impact on its consolidated financial
statements.
In
December, 2009, FASB issued ASU No. 2009-17,Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company is currently evaluating the impact of this
ASU, however, the Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-01 Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. This ASU did not have a material impact on
its consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-02 Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are
effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date
the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15, 2009. The
amendments in this update should be applied retrospectively to the first period
that an entity adopted SFAS No. 160. The adoption of this ASU did not have a
material impact on the Company’s consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-06 Improving Disclosures about Fair Value
Measurements. This update provides amendments to Subtopic 820-10 that requires
new disclosure as follows: 1) Transfers in and out of Levels 1 and
2. A reporting entity should disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers. 2) Activity in
Level 3 fair value measurements. In the reconciliation for fair value
measurements using significant unobservable inputs (Level 3), a reporting entity
should present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number). This
update provides amendments to Subtopic 820-10 that clarify existing disclosures
as follows: 1) Level of disaggregation. A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities. A
class is often a subset of assets or liabilities within a line item in the
statement of financial position. A reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities.
2) Disclosures about inputs and valuation techniques. A reporting entity
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Thos disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
Company is currently evaluating the impact of this ASU, however, the Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.
In
February 2010, the FASB issued Accounting Standards Update 2010-09, “Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements,” or ASU 2010-09. ASU 2010-09 primarily rescinds the requirement
that, for listed companies, financial statements clearly disclose the date
through which subsequent events have been evaluated. Subsequent events must
still be evaluated through the date of financial statement issuance; however,
the disclosure requirement has been removed to avoid conflicts with other SEC
guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted
in February 2010. The adoption of ASU 2010-09 did not have a material impact on
our consolidated financial statements.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
Not
required for smaller reporting companies.
Item
4: Controls and Procedures
(a) Evaluation of Disclosure Controls
and Procedures.
Our
management, with the participation of our principal executive officer and
principal financial officer, evaluated the effectiveness, as of the end of the
period covered by this report, of our disclosure controls and procedures, as
such term is defined in Exchange Act Rule 13a-15(e). Disclosure
controls and procedures are designed to ensure that information required to be
disclosed by us in our Exchange Act reports is recorded, processed, summarized,
and reported, within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosure. Based
on this evaluation, our principal executive officer and principal financial
officer concluded that, as of such date, the Company‘s 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 do not have extensive experience with U.S. GAAP, and
needs substantial training so as to meet the higher demands of being a
publicly-traded company in the U.S. The accounting skills and understanding
necessary to fulfill the requirements of U.S. 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:
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1.
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We
have started training our internal accounting staff on U.S. GAAP and
financial reporting requirements. Additionally, we are also taking steps
to hire additional accounting personnel to ensure we have adequate
resources to meet the requirements of segregation of
duties.
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2.
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We
plan on involving both internal accounting and operations personnel and
outside consultants with U.S. GAAP technical accounting expertise, as
needed, early in the evaluation of a complex, non-routine transaction to
obtain additional guidance as to the application of generally accepted
accounting principles to such a proposed transaction. During the nine
months ended March 31, 2010, we have continued working with our outside
internal control consultants; a reputable independent accounting firm has
been engaged as internal control consultants to provide advice and
assistance on improving our internal controls. The internal control
consultants have begun working with our internal audit department to
implement new policies and procedures within the financial reporting
process with adequate review and approval
procedures.
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3.
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We
have continued to evaluate the internal audit function in relation to the
Company’s financial resources and requirements. During the nine months
ended March 31, 2010, our staff from the internal audit department has
started working with our internal control consultants and our accounting
staff to evaluate the Company’s current internal control over financial
reporting process. To the extent possible, we will provide necessary
trainings to our internal audit staff and implement procedures to assure
that the initiation of transactions, the custody of assets and the
recording of transactions will be performed by separate
individuals.
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We
believe that the foregoing steps will remediate the significant deficiencies
identified above, and we will continue to monitor the effectiveness of these
steps and make any changes that our management deems appropriate to insure that
the foregoing do not become material weaknesses. We plan to fully implement the
above remediation plan by September 30, 2010.
A
material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis. A significant deficiency is
a deficiency, or a combination of deficiencies, in internal control over
financial reporting that is less severe than a material weakness, yet
important enough to merit attention by those responsible for oversight of
the company's financial reporting.
Our
management is not aware of any material weaknesses in our internal control over
financial reporting, and nothing has come to the attention of management that
causes them to believe that any material inaccuracies or errors exist in our
financial statements as of March 31, 2010. The reportable conditions
and other areas of our internal control over financial reporting identified by
us as needing improvement have not resulted in a material restatement of our
financial statements, nor are we aware of any instance where such reportable
conditions or other identified areas of weakness have resulted in a material
misstatement or omission in any report we have filed with or submitted to the
Commission.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
(b) Changes in internal controls over
financial reporting. During the three months covered by this quarterly
report, there was no change in our internal control over financial reporting
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control systems are met.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. Such limitations include the fact that human
judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures, such as simple errors or mistakes
or intentional circumvention of the established process.
PART
II
Item 1. Legal Proceedings
The
Company is involved in various legal matters arising in the ordinary course of
business. The following summarizes the Company’s pending legal
proceedings as of March 31, 2010:
China West II, LLC and
Genesis Technology Group, Inc., n/k/a Jiangbo Pharmaceuticals, Inc.
(Arbitration)
In April
2010, China West II, LLC (“CW II”) filed a Demand For Arbitration with the
American Arbitration Association the case of CW II and Genesis Technology Group,
Inc. n/k/a Jiangbo Pharmaceuticals, Inc. In that matter, CW II seeks
repayment and interest of a $190,000 promissory note dated August 3, 2007 made
by Genesis Equity Partners II LLC (“GEP”), a subsidiary of the Company prior to
the October 2007 reverse merger, and guaranteed by the Company. The Company
believes the promissory note has been paid in full by members of GEP and CWII’s
demand is without merit and plans to vigorously defend its position. As of the
date of these consolidated financial statements, the Company is unable to
estimate a loss, if any, the Company may incur related expenses to this
lawsuit.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
In
January 2010, the Company issued 301,250 shares of its common stock in
connection with the conversions of $2,410,000 of convertible debt. In connection
with the conversion, the Company recorded $1,822,111 of interest expense to
fully amortize the unamortized discount and deferred financing costs related to
the converted dentures. In connection with one of the conversions, the Company
issued 577 shares of its common stock for the final interest payment. The
Company valued the 577 shares at the fair market value on the date of issuance
of $11.4 per share and recorded $ 6,429 interest expense in total. Each of the
recipients of those shares was an accredited investor, and each of the issuances
of these shares was exempt from registration under the Securities Act in
reliance on an exemption provided by Section 4(2) of that Act.
In March
2010, the Company issued 1,143 shares of common stock to a Company’s current
director, Mr. John Wang as part of his compensation for services and 2,286
shares of common stock to a Company’s officer, Ms. Elsa Sung to pay off
part of her accrued compensation. The Company valued these shares at the fair
market value on the date of grant of $8.75 per share, or $30,000 in total, based
on the trading price of common stock. For the nine months ended March 31, 2010,
the Company recorded stock based compensation expense of $10,000 and reduced
$20,000 of other payable-related parties accordingly. The recipient of those
shares was an accredited investor, and each of the issuances of these shares was
exempt from registration under the Securities Act in reliance on an exemption
provided by Section 4(2) of that Act.
Item
3. Defaults Upon Senior Securities
As a
result of the delay in its ability to transfer cash out of PRC (partially due to
the stricter foreign exchange restrictions and regulations imposed in the PRC
starting in December 2008), the Company became delinquent on the payment of
interest under the 6% Convertible Subordinated Debenture of the Company dated
November 6, 2007 (the “2007 Notes”) and the 6% Convertible Notes of the Company
dated May 30, 2008 (collectively, the “2008 Notes”) in December
2009.
On
February 15, 2010, the Company and Pope Investments LLC (“Pope”) entered into a
Letter Agreement (the “Letter Agreement”), whereby Pope agreed (i) to waive
certain provisions set forth in the Securities Purchase Agreement, by and
between the Company and Pope Asset Management LLC, dated as of November 6, 2007
(the “2007 Securities Purchase Agreement”) with respect to the 2007 Notes, and
(ii) to waive certain provisions set forth in the Securities Purchase Agreement,
by and between the Company and the investors who are parties thereto
(collectively, the “Investors”), dated as of May 30, 2008 (the “2008 Securities
Purchase Agreement”) with respect to the “2008 Notes. Pope is the holder of
$4,000,000 principal amount of the 2007 Notes and the holder of $15,000,000
aggregate principal amount of 2008 Notes.
Pursuant
to the Letter Agreement, Pope (i) agreed to waive until February 25, 2010 the
Events of Default (as defined in the 2007 Notes and 2008 Notes) that have
occurred as a result of the Company’s failure to timely make interest payments
on the 2007 Notes and 2008 Notes that were due and payable on November 30, 2009,
and agreed not to provide written notice to the Company with respect to the
occurrence of either of such Events of Default provided that the Company has
made such interest payment to the holders of the 2007 Notes and the holders of
the 2008 Notes on or prior to February 25, 2010. If the interest payments are
not made by February 25, 2010, all rights and remedies of the holders of the
2007 Notes and the holders of the 2008 Notes , as set forth in the
2007 Securities Purchase Agreement , the 2008 Securities Purchase Agreements,
the 2007 Notes and the 2008 Notes, respectively, shall remain in full force and
effect as if the Letter Agreement had not been executed. The Company
was unable to make the required interest payments by February 25, 2010 due to
continued difficulties encountered in obtaining approvals for converting RMB
into USD and transfering cash out of P.R.C., and, to date, remains unable to
make these payments. The Company has continued dialogue with the holders of the
2007 Notes and the 2008 Notes. To date, no acceleration notice has been received
by the Company from the holders of the 2007 Notes or the 2008 Notes. Accrued
interest and related interest penalties with respect to the 2007 Notes and the
2008 Notes as of March 31, 2010 amounted to $3,958,836.
Item 4. Removed and Reserved.
Item 5. Other
Information.
None.
Item
6. Exhibits
No.
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Description
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10.1
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Contract
for Transfer of State-Owned Construction Land Use Right by and between
Laiyang Jiangbo Pharmaceuticals, Co., Ltd. and the Land and Resources
Bureau of Laiyang City, dated October 27, 2009. (1)
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31.1
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Rule
13a-14(a)/ 15d-14(a) Certification of Chief Executive
Officer
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31.2
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Rule
13a-14(a)/ 15d-14(a) Certification of Chief Financial
Officer
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32.1
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Section
1350 Certification of Chief Executive Officer and Chief Financial
Officer
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(1) Filed
as Exhibit 10.1 to the current report on Form 8-K filed with the Commission on
March 18, 2010 and incorporated herein by reference.
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.
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JIANGBO
PHARMACEUTICALS, INC.
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Date:
May 17, 2010
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By:
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/s/ Cao
Wubo
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Cao
Wubo
Chief
Executive Officer and
President
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