UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the quarterly period ended:
September 30,
2009
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
For the
transition period from ________________ to ______________
Commission
file number:
000-53037
JIANGBO
PHARMACEUTICALS, INC.
|
(Exact
name of small business issuer as specified in its
charter)
|
Florida
|
|
65-1130026
|
(State
or other jurisdiction of incorporation or organization)
|
|
(IRS
Employer Identification No.)
|
Middle
Section, Longmao Street, Area A, Laiyang Waixiangxing Industrial
Park
Laiyang
City, Yantai, Shandong Province, People’s Republic of China
265200
|
(Address
of principal executive offices)
|
(0086)
535-7282997
|
(issuer’s
telephone number)
|
Genesis
Pharmaceuticals Enterprises, Inc.
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the issuer was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).
Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
Accelerated filer
o
Non-accelerated
filer
o
(Do not
check if smaller reporting company) Smaller reporting company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
Yes
o
No
x
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. The total shares outstanding at
November 13, 2009 was 11,604,546.
|
Page
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
Item
1. Financial Statements
|
3
|
|
|
Consolidated
Balance Sheets as of September 30, 2009 (Unaudited) and June 30,
2009
|
3
|
|
|
Consolidated
Statements of Income and Other Comprehensive Income for the three months
ended September 30, 2009 and 2008 (Unaudited)
|
4
|
|
|
Consolidated
Statements of Shareholders
’
Equity for
the three months ended September 30, 2009 (Unaudited) and the year ended
June 30, 2009
|
5
|
|
|
Consolidated
Statements of Cash Flows for the three months ended September 30, 2009 and
2008 (Unaudited)
|
6
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
7
|
|
|
Item
2. Management’s Discussion and Analysis or Plan of
Operation
|
30
|
|
|
Item
3. Quantitative and Qualitative Disclosure About Market
Risk
|
38
|
|
|
Item
4T. Controls and Procedures
|
38
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
Item
1. Legal Proceedings
|
40
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
41
|
|
|
Item
3. Defaults upon Senior Securities
|
41
|
|
|
Item
4. Submission of Matters to a Vote of Securities Holders
|
41
|
|
|
Item
5. Other Information
|
41
|
|
|
Item
6. Exhibits
|
42
|
JIANGBO
PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY
KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)
CONSOLIDATED
BALANCE SHEETS
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
122,865,467
|
|
|
$
|
104,366,117
|
|
Restricted
cash
|
|
|
14,552,640
|
|
|
|
7,325,000
|
|
Investments
|
|
|
758,238
|
|
|
|
879,228
|
|
Accounts
receivable, net of allowance for doubtful accounts of $822,469 and
$694,370 as of September 30, 2009 and June 30, 2009,
respectively
|
|
|
12,138,964
|
|
|
|
19,222,707
|
|
Other
receivable - related parties
|
|
|
80,685
|
|
|
|
-
|
|
Inventories
|
|
|
2,762,438
|
|
|
|
3,277,194
|
|
Other
receivables
|
|
|
299,998
|
|
|
|
167,012
|
|
Advances
to suppliers
|
|
|
370,424
|
|
|
|
236,496
|
|
Financing
costs - current
|
|
|
669,692
|
|
|
|
680,303
|
|
Total
current assets
|
|
|
154,498,546
|
|
|
|
136,154,057
|
|
|
|
|
|
|
|
|
|
|
PLANT
AND EQUIPMENT, net
|
|
|
13,817,279
|
|
|
|
13,957,397
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
Restricted
investments
|
|
|
902,623
|
|
|
|
1,033,463
|
|
Financing
costs, net
|
|
|
379,191
|
|
|
|
556,365
|
|
Intangible
assets, net
|
|
|
16,662,666
|
|
|
|
17,041,181
|
|
Total
other assets
|
|
|
17,944,480
|
|
|
|
18,631,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
186,260,305
|
|
|
$
|
168,742,463
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
3,902,884
|
|
|
$
|
6,146,497
|
|
Short
term bank loans
|
|
|
2,200,500
|
|
|
|
2,197,500
|
|
Notes
payable
|
|
|
14,552,640
|
|
|
|
7,325,000
|
|
Other
payables
|
|
|
2,678,757
|
|
|
|
2,152,063
|
|
Refundable
security deposits due to distributors
|
|
|
4,107,600
|
|
|
|
4,102,000
|
|
Other
payables - related parties
|
|
|
284,501
|
|
|
|
238,956
|
|
Accrued
liabilities
|
|
|
342,719
|
|
|
|
1,356,898
|
|
Liabilities
assumed from reorganization
|
|
|
1,609,208
|
|
|
|
1,565,036
|
|
Derivative
liabilities
|
|
|
44,369,176
|
|
|
|
-
|
|
Taxes
payable
|
|
|
14,126,847
|
|
|
|
11,248,226
|
|
Total
current liabilities
|
|
|
88,174,832
|
|
|
|
36,332,176
|
|
|
|
|
|
|
|
|
|
|
CONVERTIBLE
DEBT, net of discount $26,412,221 and $28,493,089 as of September 30, 2009
and June 30, respectively
|
|
|
7,927,779
|
|
|
|
6,346,911
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
96,102,611
|
|
|
|
42,679,087
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
Convertible
preferred stock Series A ($0.001 par value; 0 shares issued and
outstanding as of September 30, 2009 and June 30,
2009)
|
|
|
-
|
|
|
|
-
|
|
Common
stock ($0.001 par value, 22,500,000 and 15,000,000 shares authorized,
10,582,046 and 10,435,099 shares issued and outstanding as of
September 30, 2009 and June 30, 2009, respectively)
|
|
|
10,582
|
|
|
|
10,435
|
|
Paid-in-capital
|
|
|
15,285,350
|
|
|
|
48,397,794
|
|
Captial
contribution receivable
|
|
|
(11,000
|
)
|
|
|
(11,000
|
)
|
Retained
earnings
|
|
|
64,919,558
|
|
|
|
67,888,667
|
|
Statutory
reserves
|
|
|
3,253,878
|
|
|
|
3,253,878
|
|
Accumulated
other comprehensive income
|
|
|
6,699,326
|
|
|
|
6,523,602
|
|
Total
shareholders' equity
|
|
|
90,157,694
|
|
|
|
126,063,376
|
|
Total
liabilities and shareholders' equity
|
|
$
|
186,260,305
|
|
|
$
|
168,742,463
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
JIANGBO
PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY
KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
|
|
2009
|
|
|
2008
|
|
REVENUES:
|
|
|
|
|
|
|
Sales
|
|
$
|
24,384,054
|
|
|
$
|
27,320,750
|
|
Sales
- related parties
|
|
|
-
|
|
|
|
243,843
|
|
Total
revenues
|
|
|
24,384,054
|
|
|
|
27,564,593
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
6,260,399
|
|
|
|
5,713,059
|
|
Cost
of sales - related parties
|
|
|
-
|
|
|
|
54,478
|
|
Total
cost of sales
|
|
|
6,260,399
|
|
|
|
5,767,537
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
18,123,655
|
|
|
|
21,797,056
|
|
|
|
|
|
|
|
|
|
|
RESEARCH
AND DEVELOPMENT EXPENSE
|
|
|
1,099,575
|
|
|
|
1,097,925
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
4,341,806
|
|
|
|
13,351,975
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
12,682,274
|
|
|
|
7,347,156
|
|
|
|
|
|
|
|
|
|
|
OTHER
(INCOME) EXPENSE:
|
|
|
|
|
|
|
|
|
Change
in fair value of derivative liabilities
|
|
|
4,821,093
|
|
|
|
-
|
|
Other
(income) expense, net
|
|
|
-
|
|
|
|
914,970
|
|
Other
income - related parties
|
|
|
(80,636
|
)
|
|
|
(143,950
|
)
|
Non-operating
(income) expense
|
|
|
(152,414
|
)
|
|
|
74,621
|
|
Interest
expense, net
|
|
|
2,757,178
|
|
|
|
1,352,794
|
|
Loss
from discontinued operations
|
|
|
77,208
|
|
|
|
45,216
|
|
Total
other expense, net
|
|
|
7,422,429
|
|
|
|
2,243,651
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
5,259,845
|
|
|
|
5,103,505
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
3,287,791
|
|
|
|
1,970,021
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
1,972,054
|
|
|
|
3,133,484
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
152,180
|
|
|
|
330,641
|
|
Unrealized
holding gain (loss)
|
|
|
23,544
|
|
|
|
(1,562,967
|
)
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
2,147,778
|
|
|
$
|
1,901,158
|
|
|
|
|
|
|
|
|
|
|
BASIC
WEIGHTED AVERAGE NUMBER OF SHARES
|
|
|
10,502,527
|
|
|
|
9,769,329
|
|
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS PER SHARE
|
|
$
|
0.19
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
DILUTED
WEIGHTED AVERAGE NUMBER OF SHARES
|
|
|
10,885,535
|
|
|
|
9,861,671
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS PER SHARE
|
|
$
|
0.18
|
|
|
$
|
0.32
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
JIANGBO
PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY
KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par
Vaule $0.001
|
|
|
|
|
|
Capital
|
|
|
Retained Earnings
|
|
|
Accumulated other
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Paid-in
|
|
|
contribution
|
|
|
Statutory
|
|
|
Unrestricted
|
|
|
comprehensive
|
|
|
|
|
|
|
of shares
|
|
|
Amount
|
|
|
capital
|
|
|
receivable
|
|
|
reserves
|
|
|
earnings
|
|
|
income
|
|
|
Totals
|
|
BALANCE,
June 30, 2008
|
|
|
9,767,844
|
|
|
$
|
9,770
|
|
|
$
|
45,554,513
|
|
|
$
|
(11,000
|
)
|
|
$
|
3,253,878
|
|
|
$
|
39,008,403
|
|
|
$
|
7,700,905
|
|
|
$
|
95,516,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for adjustments for 1:40 reverse split
|
|
|
1,104
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Cancellation
of common stock for settlement @ $8 per share
|
|
|
(2,500
|
)
|
|
|
(2
|
)
|
|
|
(19,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,000
|
)
|
Common
stock issued for service @ $8 per share
|
|
|
2,500
|
|
|
|
2
|
|
|
|
19,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
Common
stock issued for service @ $9 per share
|
|
|
2,500
|
|
|
|
2
|
|
|
|
22,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,500
|
|
Common
stock issued to Hongrui @ $4.035 per share
|
|
|
643,651
|
|
|
|
644
|
|
|
|
2,596,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,597,132
|
|
Conversion
of convertible debt to stock
|
|
|
20,000
|
|
|
|
20
|
|
|
|
159,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,000
|
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
|
64,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,314
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,880,264
|
|
|
|
|
|
|
|
28,880,264
|
|
Adjustment
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Change
in fair value on restricted marketable equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,514,230
|
)
|
|
|
(1,514,230
|
)
|
Foreign
currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
336,927
|
|
|
|
336,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
June 30, 2009
|
|
|
10,435,099
|
|
|
$
|
10,435
|
|
|
$
|
48,397,794
|
|
|
$
|
(11,000
|
)
|
|
$
|
3,253,878
|
|
|
$
|
67,888,667
|
|
|
$
|
6,523,602
|
|
|
$
|
126,063,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of reclassification of warrants
|
|
|
|
|
|
|
|
|
|
|
(34,971,570
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,941,163
|
)
|
|
|
|
|
|
|
(39,912,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
July 1, 2009 as adjusted
|
|
|
10,435,099
|
|
|
|
10,435
|
|
|
|
13,426,224
|
|
|
|
(11,000
|
)
|
|
|
3,253,878
|
|
|
|
62,947,504
|
|
|
|
6,523,602
|
|
|
|
86,150,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Common
stock issued for services @ $9.91 per share
|
|
|
1,009
|
|
|
|
1
|
|
|
|
9,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Common
stock issued for interest payment @ $8 per share
|
|
|
83,438
|
|
|
|
84
|
|
|
|
984,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
984,624
|
|
Conversion
of convertible notes
|
|
|
62,500
|
|
|
|
62
|
|
|
|
499,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499,999
|
|
Reclassification
of derivative liabilites to APIC due to conversion of convertible
debt
|
|
|
|
|
|
|
|
|
|
|
364,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
364,650
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,972,054
|
|
|
|
|
|
|
|
1,972,054
|
|
Change
in fair value on restricted marketable equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,544
|
|
|
|
23,544
|
|
Foreign
currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,180
|
|
|
|
152,180
|
|
BALANCE,
June 30, 2009 (Unaudited)
|
|
|
10,582,046
|
|
|
$
|
10,582
|
|
|
$
|
15,285,350
|
|
|
$
|
(11,000
|
)
|
|
$
|
3,253,878
|
|
|
$
|
64,919,558
|
|
|
$
|
6,699,326
|
|
|
$
|
90,157,694
|
|
The
accompanying notes are an integral part of these consolidated
statements.
JIANGBO
PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY
KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)
|
|
2009
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,972,054
|
|
|
$
|
3,133,484
|
|
Loss
from discontinued operations
|
|
|
77,208
|
|
|
|
45,216
|
|
Income
from continuing operations
|
|
|
2,049,262
|
|
|
|
3,178,700
|
|
Adjustments
to reconcile net income to net cash, net of acquisition, provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
196,353
|
|
|
|
146,694
|
|
Amortization
of intangible assets
|
|
|
401,533
|
|
|
|
73,540
|
|
Amortization
of deferred debt issuance costs
|
|
|
187,785
|
|
|
|
170,076
|
|
Amortization
of debt discount
|
|
|
2,080,868
|
|
|
|
662,551
|
|
Loss
from issuance of shares in lieu of interest
|
|
|
317,124
|
|
|
|
-
|
|
Bad
debt expense
|
|
|
127,073
|
|
|
|
63,350
|
|
Realized
gain on marketable securities
|
|
|
(19,065
|
)
|
|
|
(124,523
|
)
|
Unrealized
(gain) loss on marketable securities
|
|
|
(251,004
|
)
|
|
|
1,044,083
|
|
Other
non-cash settlement
|
|
|
-
|
|
|
|
(20,000
|
)
|
Change
in fair value of derivative liabilities
|
|
|
4,821,093
|
|
|
|
-
|
|
Stock-based
compensation
|
|
|
87,400
|
|
|
|
23,854
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
6,978,550
|
|
|
|
(1,039,428
|
)
|
Other
receivable - related parties
|
|
|
(80,636
|
)
|
|
|
488,446
|
|
Inventories
|
|
|
518,912
|
|
|
|
851,126
|
|
Other
receivables
|
|
|
(133,676
|
)
|
|
|
(48,205
|
)
|
Other
receivables - related parties
|
|
|
-
|
|
|
|
(378,174
|
)
|
Advances
to suppliers and other assets
|
|
|
(132,555
|
)
|
|
|
839,097
|
|
Accounts
payable
|
|
|
(2,250,601
|
)
|
|
|
188,211
|
|
Accrued
liabilities
|
|
|
(410,403
|
)
|
|
|
138,310
|
|
Other
payables
|
|
|
523,435
|
|
|
|
901,863
|
|
Other
payables - related parties
|
|
|
45,400
|
|
|
|
227,135
|
|
Liabilities
assumed from reorganization
|
|
|
(33,036
|
)
|
|
|
-
|
|
Taxes
payable
|
|
|
2,861,529
|
|
|
|
6,289,257
|
|
Net
cash provided by operating activities
|
|
|
17,885,341
|
|
|
|
13,675,963
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of marketable securities
|
|
|
498,353
|
|
|
|
88,743
|
|
Purchase
of equipment
|
|
|
(37,280
|
)
|
|
|
(19,877
|
)
|
Net
cash provided by investing activities
|
|
|
461,073
|
|
|
|
68,866
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Change
in restricted cash
|
|
|
(7,213,212
|
)
|
|
|
(39,795
|
)
|
Principal
payments on short term bank loans
|
|
|
-
|
|
|
|
(2,781,410
|
)
|
Proceeds
from notes payable
|
|
|
7,653,042
|
|
|
|
2,036,285
|
|
Principal
payments on notes payable
|
|
|
(439,830
|
)
|
|
|
-
|
|
Net
cash used in financing activities
|
|
|
-
|
|
|
|
(784,920
|
)
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
|
|
152,936
|
|
|
|
114,229
|
|
|
|
|
|
|
|
|
|
|
INCREASE
IN CASH
|
|
|
18,499,350
|
|
|
|
13,074,138
|
|
|
|
|
|
|
|
|
|
|
CASH,
beginning
|
|
|
104,366,117
|
|
|
|
48,195,798
|
|
|
|
|
|
|
|
|
|
|
CASH,
ending
|
|
$
|
122,865,467
|
|
|
$
|
61,269,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid for Interest
|
|
$
|
390,861
|
|
|
$
|
58,650
|
|
Cash
paid for Income taxes
|
|
$
|
1,289,849
|
|
|
$
|
62,943
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Common
stock issued for interest payment
|
|
$
|
667,500
|
|
|
$
|
-
|
|
Common
stock issued for convertible notes conversion
|
|
$
|
500,000
|
|
|
$
|
-
|
|
Derivative
liability reclassified to equity upon conversion
|
|
$
|
369,324
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
JIANGBO PHARMACEUTICALS, INC. AND
SUBSIDIARIES
(FORMERLY
KNOWN AS GENESIS PHARMACEUTICALS ENTERPRISES, INC.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
Note
1 – Organization and business
Jiangbo
Pharmaceuticals, Inc. (the “Company” or “Jiangbo”) was originally incorporated
in the state of Florida on August 15, 2001, under the name Genesis Technology
Group, Inc.
Pursuant
to a Certificate of Amendment to the Amended and Restated Articles of
Incorporation filed with the state of Florida which took effect as of April 16,
2009, the Company's name was changed from "Genesis Pharmaceuticals Enterprises,
Inc." to "Jiangbo Pharmaceuticals, Inc." (the "Corporate Name Change").
The Corporate Name Change was approved and authorized by the Board of
Directors of the Company as well as the holders of a majority of the outstanding
shares of the Company’s voting stock by written consent. As a result of the
Corporate Name Change, the stock symbol changed to "JGBO" with the opening of
trading on May 12, 2009, on the OTCBB.
Our
primary operations consist of the business and operations of our direct and
indirect subsidiaries and Variable Interest Entity (“VIE”), which
produce and sell western pharmaceutical products in China and focuses on
developing innovative medicines to address various medical needs for patients
worldwide.
Note
2 - Summary of significant accounting policies
Basis of
presentation
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America ("US
GAAP") for interim financial information and pursuant to the requirements for
reporting on Form 10-Q. Accordingly, they do not include all the information and
footnotes required by US Generally Accepted Accounting Principles (“GAAP”)
for complete financial statements. In the opinion of management, the
accompanying consolidated balance sheets, and related interim consolidated
statements of income and other comprehensive income, shareholders’ 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 Limited
|
|
|
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 variable interest entities
(“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 is a VIE and that the Company is the
primary beneficiary, and accordingly, the financial statements of Laiyang
Jiangbo are consolidated into the financial statements of the
Company.
Reverse stock
split
In July
2008, the board of directors of the Company approved a 40-to-1 reverse stock
split, effective September 4, 2008, and a new trading symbol “GNPH” also became
effective on that day. The accompanying consolidated financial statements have
been retroactively adjusted to reflect the reverse stock split. All share
representations are on a post-split basis. In April, 2009, in connection with
the Company's name change, the Company’s trading symbol changed to
“JGBO.”
Foreign currency
translation
The
reporting currency of the Company is the U.S. dollar. The functional currency of
the Company is the local currency, the Chinese Renminbi (“RMB”). In accordance
with the FASB’s accounting standard governing foreign currency translation,
results of operations and cash flows are translated at average exchange rates
during the period, assets and liabilities are translated at the unified
exchange rates as quoted by the People’s Bank of China at the end of the period,
and equity is translated at historical exchange rates. As a result, amounts
related to assets and liabilities reported on the consolidated statements of
cash flows will not necessarily agree with changes in the corresponding balances
on the consolidated balance sheets. Transaction gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other
than the functional currency are included in the results of operations as
incurred.
Asset and
liability accounts at September 30, 2009, were translated at 6.82 RMB to $1.00
as compared to 6.83 RMB to $1.00 at June 30, 2009. Equity accounts were stated
at their historical rates. The average translation rates applied to statements
of income for the three months ended September 30, 2009 and 2008 were 6.82 RMB
and 6.83 RMB to $1.00, respectively.
Use of
estimates
The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. The significant estimates made in the
preparation of the Company’s consolidated financial statements relate to the
assessment of the carrying values of accounts receivable and related allowance
for doubtful accounts, allowance for obsolete inventory, sales returns, accrual
for estimated advertising costs, fair value of warrants and beneficial
conversion features related to the convertible notes, fair value of derivative
liability and fair value of options granted to employees. Actual results could
be materially different from these estimates upon which the carrying values were
based.
Revenue
recognition
Product
sales are generally recognized when title to the product has transferred to
customers in accordance with the terms of the sale. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably
assured.
The
Company is generally not contractually obligated to accept returns. However, on
a case by case negotiated basis, the Company permits customers to return their
products. Therefore, revenue is recorded net of an allowance for estimated
returns. Such reserves are based upon management's evaluation of historical
experience and estimated costs. The amount of the reserves ultimately required
could differ materially in the near term from amounts included in the
accompanying consolidated statements of income.
Financial
instruments
The
accounting standard governing financial instruments adopted on July 1, 2008,
defines financial instruments and requires fair value disclosures about those
instruments. It defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances
disclosures requirements for fair value measures
.
Investments,
receivables, payables, short term loans and convertible debt all qualify as
financial instruments. Management concluded the receivables, payables
and short term loans approximate their fair values because of the short period
of time between the origination of such instruments and their expected
realization and, if applicable, their stated rates of interest are equivalent to
rates currently available.
The three
levels of valuation hierarchy are defined as follows:
·
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted)
for identical assets or liabilities in active markets.
|
·
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
·
|
Level
3 inputs to the valuation methodology are unobservable and
significant to the fair value
measurement.
|
The
Company analyzes all financial instruments with features of both liabilities and
equity under the FASB’s accounting standard for such instruments. Under this
standard, financial assets and liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value
measurement. Depending on the product and the terms of the transaction, the fair
value of notes payable and derivative liabilities were modeled using a series of
techniques, including closed-form analytic formula, such as the Black-Scholes
option-pricing model.
Effective
July 1, 2009, as a new accounting standard took effect, the Company’s two
convertible notes with principal amounts totaling $34,840,000 and 2,275,000
warrants previously treated as equity pursuant to the derivative treatment
exemption are no longer afforded equity treatment because the strike price of
the warrants is denominated in US dollar, a currency other than the Company’s
functional currency, the Chinese Renminbi. As a result, those
financial instruments are not considered indexed to the Company’s own stock, and
as such, all future changes in the fair value of these convertible notes and
warrants will be recognized currently in earnings until such time as the
convertible notes and warrants are converted, exercised or expired.
As such,
effective July 1, 2009, the Company reclassified the fair value of the
conversion features on the convertible notes and warrants from equity to
liability, as if these conversion features on the convertible notes and warrants
were treated as a derivative liability since their initial issuance dates. On
July 1, 2009, the Company reclassified approximately $35 million from
additional paid-in capital and approximately $4.9 million from beginning
retained earnings to warrant liabilities, as a cumulative effect adjustment, to
recognize the fair value of the conversion features on the convertible notes and
warrants. In September 2009, $500,000 convertible notes were converted. As of
September 30, 2009, the Company has $34,340,000 convertible notes and 2,275,000
warrants outstanding. The fair value of the conversion features on the
convertible notes was approximately $27.4 million and the fair value of the
warrants was approximately $17 million. The Company recognized $4.8
million loss from the change in fair value of the conversion features on the
convertible notes and warrants for the three months ended September 30,
2009.
These
common stock purchase warrants do not trade in an active securities market, and
as such, the Company estimates the fair value of the fair value of the
conversion features on the convertible notes and warrants using the
Black-Scholes option pricing model using the following assumptions:
|
|
September
30, 2009
|
|
|
July
1, 2009
|
|
|
|
Annual
dividend
yield
|
|
|
Expected
term
(years)
|
|
|
Risk-free
interest
rate
|
|
|
Expected
volatility
|
|
|
Annual
dividend
yield
|
|
|
Expected
term
(years)
|
|
|
Risk-free
interest
rate
|
|
|
Expected
volatility
|
|
Conversion
feature on the $5 million convertible notes
|
|
|
-
|
|
|
|
1.10
|
|
|
|
0.95
|
%
|
|
|
97.00
|
%
|
|
|
-
|
|
|
|
1.35
|
|
|
|
1.11
|
%
|
|
|
95.8
|
%
|
Conversion
feature on the $30 million convertible notes
|
|
|
-
|
|
|
|
1.67
|
|
|
|
0.95
|
%
|
|
|
89.73
|
%
|
|
|
-
|
|
|
|
1.92
|
|
|
|
1.11
|
%
|
|
|
102
|
%
|
400,000
warrants issued in November 2007
|
|
|
-
|
|
|
|
1.10
|
|
|
|
0.95
|
%
|
|
|
97.0
|
%
|
|
|
-
|
|
|
|
1.35
|
|
|
|
1.11
|
%
|
|
|
95.8
|
%
|
1,875,000 warrants
issued in May 2008
|
|
|
-
|
|
|
|
3.67
|
|
|
|
2.31
|
%
|
|
|
90.5
|
%
|
|
|
-
|
|
|
|
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
September 30,
2009
|
|
|
Fair Value Measurements at
September
30, 2009,
Using
Fair Value Hierarchy
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Investments
|
|
$
|
758,238
|
|
|
$
|
758,238
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Investments,
restricted
|
|
|
902,623
|
|
|
|
902,623
|
|
|
|
-
|
|
|
|
-
|
|
$5M
Convertible Debt (November 2007)
|
|
|
3,744,655
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,744,655
|
|
$29.3M
Convertible Debt (May 2008)
|
|
|
23,682,874
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,682,874
|
|
400,000
warrants issued in November 2007
|
|
|
2,396,579
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,396,579
|
|
1,875,000
warrants issued in May 2008
|
|
|
14,545,067
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,545,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,030,036
|
|
|
$
|
1,660,861
|
|
|
$
|
-
|
|
|
$
|
44,369,176
|
|
The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented on the consolidated balance sheets at fair value in
accordance with the relevant accounting standards.
An
accounting standard became effective for the Company on July 1, 2008 which
provides the Company with the irrevocable option to elect fair value for the
initial and subsequent measurement for certain financial assets and liabilities
on a contract-by-contract basis with the difference between the carrying value
before election of the fair value option and the fair value recorded upon
election as an adjustment to beginning retained earnings. The Company chose not
to elect the fair value option.
Stock-based
compensation
The
Company records stock-based compensation expense pursuant to the governing
accounting standard which requires companies to measure compensation cost for
stock-based employee compensation plans at fair value at the grant date and
recognize the expense over the employee's requisite service period. The Company
estimates the fair value of the awards using the Black-Scholes option
pricing model. Under this accounting standard, the Company’s expected volatility
assumption is based on the historical volatility of Company’s stock or the
expected volatility of similar entities. The expected life assumption is
primarily based on historical exercise patterns and employee post-vesting
termination behavior. The risk-free interest rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of
grant.
Stock-based
compensation expense is recognized based on awards expected to vest, and there
were no estimated forfeitures as the Company has a short history of issuing
options.
The
Company uses the Black-Scholes option-pricing model which was developed for use
in estimating the fair value of options. Option-pricing models require the input
of highly complex and subjective variables including the expected life of
options granted and the Company’s expected stock price volatility over a period
equal to or greater than the expected life of the options. Because changes in
the subjective assumptions can materially affect the estimated value of the
Company’s employee stock options, it is management’s opinion that the
Black-Scholes option-pricing model may not provide an accurate measure
of the fair value of the Company’s employee stock options. Although the
fair value of employee stock options is determined in accordance with the
accounting standards using an option-pricing model, that value may not be
indicative of the fair value observed in a willing buyer/willing seller market
transaction.
Comprehensive
income
FASB’s
accounting standard regarding comprehensive income establishes standards for
reporting and display of comprehensive income and its components in financial
statements. It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The accompanying consolidated financial statements include
the provisions of this accounting standard.
Cash and cash
equivalents
Cash and
cash equivalents include cash on hand and demand deposits in accounts maintained
with state-owned banks within the PRC. The Company considers all highly liquid
instruments with original maturities of three months or less, and money market
accounts to be cash and cash equivalents.
The
Company maintains cash deposits in financial institutions that exceed the
amounts insured by the U.S. government. Balances at financial institutions or
state-owned banks within the PRC are not covered by insurance. Non-performance
by these institutions could expose the Company to losses for amounts in excess
of insured balances. As of September 30, 2009 and June 30, 2009, the Company’s
bank balances, including restricted cash balances, exceeded government-insured
limits by approximately $137,318,000 and $111,684,000,
respectively.
Restricted
cash
Restricted
cash represent amounts set aside by the Company in accordance with the Company’s
debt agreements with certain financial institutions. These cash amounts are
designated for the purpose of paying down the principal amounts owed to the
financial institutions, and these amounts are held at the same financial
institutions with which the Company has debt agreements. Due to the short-term
nature of the Company’s debt obligations to these banks, the corresponding
restricted cash balances have been classified as current in the consolidated
balance sheets.
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
to sell them within the year. Restricted investments are marketable equity
securities of publicly traded companies that were acquired through the reverse
merger and contained certain SEC Rule 144 restrictions on the securities. These
securities are classified as available-for-sale and are reflected as restricted
and noncurrent, as the Company intends to hold them beyond one year. Restricted
investments are carried at fair value based on the trade price of these
securities.
The
following is a summary of the components of the gain/loss on investments and
restricted investments for the three months and nine months ended September 30,
2009 and 2008:
|
|
For
the Three Months Ended
|
|
|
|
September,
|
|
|
|
2009
|
|
|
2008
|
|
Investments
- trading securities
|
|
|
|
|
|
|
Realized
loss
|
|
$
|
(19,065
|
)
|
|
$
|
(124,523
|
)
|
Unrealized
(gain) loss
|
|
|
(251,004
|
)
|
|
|
1,044,083
|
|
|
|
|
|
|
|
|
|
|
Restricted
investments – available-for-sale securities
|
|
|
|
|
|
|
|
|
Unrealized
(gain) loss
|
|
|
(23,544
|
)
|
|
|
1,562,967
|
|
All
unrealized gains and losses related to available-for-sale securities have been
properly reflected as a component of accumulated other comprehensive
income.
Accounts
receivable
During
the normal course of business, the Company extends credit to its customers
without requiring collateral or other security interests. Management reviews its
accounts receivables at each reporting period to provide for an allowance
against accounts receivable for an amount that could become uncollectible. This
review process may involve the identification of payment problems with specific
customers. The Company estimates this allowance based on the aging of the
accounts receivable, historical collection experience, and other relevant
factors, such as changes in the economy and the imposition of regulatory
requirements that can have an impact on the industry. These factors continuously
change, and can have an impact on collections and the Company’s estimation
process. These impacts may be material.
Certain
accounts receivable amounts are charged off against allowances after
unsuccessful collection efforts. Subsequent cash recoveries are recognized as
income in the period when they occur.
The
activities in the allowance for doubtful accounts are as follows for the periods
ended September 30, 2009 and June 30, 2009:
|
|
September 30, 2009
|
|
|
June 30, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Beginning
allowance for doubtful accounts
|
|
$
|
694,370
|
|
|
$
|
155,662
|
|
Bad
debt additions
|
|
|
127,073
|
|
|
|
538,068
|
|
Foreign
currency translation adjustments
|
|
|
1,026
|
|
|
|
640
|
|
Ending
allowance for doubtful accounts
|
|
$
|
822,469
|
|
|
$
|
694,370
|
|
Inventories
Inventories,
consisting of raw materials and finished goods related to the Company’s
products, are stated at the lower of cost or market utilizing the weighted
average method. The Company reviews its inventory periodically for possible
obsolete goods or to determine if any reserves are necessary. As of September
30, 2009 and June 30, 2009, the Company determined that no reserves were
necessary.
Advance to
suppliers
Advances
to suppliers represent partial payments or deposits for future inventory and
equipment purchases. These advances to suppliers are non-interest bearing and
unsecured. From time to time, vendors require a certain amount of money to be
deposited with them as a guarantee that the Company will receive their purchase
on a timely basis.
Plant and
equipment
Plant and
equipment are stated at cost less accumulated depreciation. Additions and
improvements to plant and equipment accounts are recorded at cost. When assets
are retired or disposed of, the cost and accumulated depreciation are removed
from the accounts, and any resulting gains or losses are included in the results
of operations in the year of disposition. Maintenance, repairs, and minor
renewals are charged directly to expense as incurred. Major additions and
betterments to plant and equipment accounts are capitalized. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets. The estimated useful lives of the assets are as
follows:
|
Useful
Life
|
Building
and building improvements
|
5 – 40 Years
|
Manufacturing
equipment
|
5 –
20 Years
|
Office
equipment and furniture
|
5 –
10 Years
|
Vehicle
|
5
Years
|
Intangible
assets
All land
in the PRC is owned by the PRC government and cannot be sold to any individual
or company. The Company has recorded the amounts paid to the PRC government to
acquire long-term interests to utilize land underlying the Company’s facilities
as land use rights. This type of arrangement is common for the use of land in
the PRC. Land use rights are amortized on the straight-line method over the
terms of the land use rights, which range from 20 to 50 years. The Company
acquired land use rights in August 2004 and October 2007 in the amounts of
approximately $879,000 and $8,871,000, respectively, which are included in
intangible assets.
Patents
and licenses include purchased technological know-how, secret formulas,
manufacturing processes, technical and procedural manuals, and the certificate
of drugs production and is amortized using the straight-line method over the
expected useful economic life of 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 September 30, 2009, the Company
expects these assets to be fully recoverable.
Beneficial conversion
feature of convertible notes
In
accordance with accounting standards governing the beneficial conversion feature
of convertible notes, the Company has determined that the convertible notes
contained a beneficial conversion feature because on November 6, 2007, the
effective conversion price of the $5,000,000 convertible note was $5.81 when the
market value per share was $16.00, and on May 30, 2008, the effective conversion
price of the $30,000,000 convertible note was $5.1 when the market value per
share was $12.00. Total value of beneficial conversion
feature of $2,904,092 for the November 6, 2007 convertible note and
$19,111,323 for the May 30, 2008 convertible debt was discounted from the
carrying value of the convertible notes. The beneficial conversation feature is
amortized using the effective interest method over the term of the note. As of
September 30, 2009 and June 30, 2009, total of $16,641,148 and $17,955,637,
respectively, remained unamortized for the beneficial conversion
feature.
Income
taxes
The
Company accounts for income taxes in accordance with the FASB’s accounting
standard for income taxes. Deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Under
this accounting standard, the effect on deferred income taxes of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is recognized if it is more likely than not that some
portion, or all of, a deferred tax asset will not be realized. As of September
30, 2009 and June 30, 2009, the Company did not have any net deferred tax assets
or liabilities.
The
FASB’s accounting standards clarify the accounting and disclosure for uncertain
tax positions and prescribe a recognition threshold and measurement attribute
for recognition and measurement of a tax position taken or expected to be taken
in a tax return. The accounting standards also provide guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.
Under
this accounting standard, evaluation of a tax position is a two-step process.
The first step is to determine whether it is more-likely-than-not that a tax
position will be sustained upon examination, including the resolution of any
related appeals or litigation based on the technical merits of that position.
The second step is to measure a tax position that meets the
more-likely-than-not threshold to determine the amount of benefit to be
recognized in the financial statements. A tax position is measured at the
largest amount of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement. Tax positions that previously failed to meet
the more-likely-than-not recognition threshold should be recognized in the first
subsequent period in which the threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not criteria should be
de-recognized in the first subsequent financial reporting period in which the
threshold is no longer met.
The
Company’s operations are subject to income and transaction taxes in the United
States and in the PRC jurisdictions. Significant estimates and judgments are
required in determining the Company’s worldwide provision for income taxes. Some
of these estimates are based on interpretations of existing tax laws or
regulations, and as a result the ultimate amount of tax liability may be
uncertain. However, the Company does not anticipate any events that would lead
to changes to these uncertainties.
Value added
tax
The
Company is subject to value added tax (“VAT”) for manufacturing products and
business tax for services provided. The applicable VAT rate is 17% for products
sold in the PRC. The amount of VAT liability is determined by applying the
applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT
paid on purchases made with the relevant supporting invoices (input VAT). Under
the commercial practice of the PRC, the Company pays
VAT based on tax
invoices issued. The tax invoices may be issued subsequent to the date on which
revenue is recognized, and there may be a considerable delay between the date on
which the revenue is recognized and the date on which the tax invoice is issued.
In the event that the PRC tax authorities dispute the date on which revenue is
recognized for tax purposes, the PRC tax office has the right to assess a
penalty, which can range from zero to five times the amount of the taxes which
are determined to be late or deficient, and will be charged to operations in the
period if and when a determination is made by the taxing authorities that a
penalty is due.
VAT on
sales and VAT on purchases amounted to $4,145,289 and $844,035 for the three
months ended September 30, 2009, respectively, and $4,683,100 and $374,264 for
the three months ended September 30, 2008, respectively. 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
$151,062 and $121,864, respectively, for the three months ended September 30,
2009, and 2008, respectively.
Advertising
Expenses
incurred in the advertising of the Company and the Company’s products are
charged to operations. Advertising expenses amounted to $1,067,007 and $904,444
for the three months ended September 30, 2009 and 2008,
respectively.
Research and
development
Research
and development costs are expensed as incurred. These costs primarily consist of
cost of materials used and salaries paid for the development of the Company’s
products, and fees paid to third parties to assist in such
efforts.
Recent accounting
pronouncements
In April
2009, the FASB issued an accounting standard for accounting for assets acquired
and liabilities assumed in a business combination that arise from contingencies.
It amends and clarifies a previously issued accounting standard in regards to
the initial recognition and measurement, subsequent measurement and accounting,
and disclosures of assets and liabilities arising from contingencies in a
business combination. The accounting standard applies to all assets acquired and
liabilities assumed in a business combination that arise from contingencies. The
accounting standard will be effective for the first annual reporting period
beginning on or after December 15, 2008. The accounting standard will apply
prospectively to business combinations for which the acquisition date is after
fiscal years beginning on or after December 15, 2008. The adoption of the
accounting standard will not have a material impact on the Company’s results of
operations or financial condition.
In April
2009, the FASB issued an accounting standard to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This standard will
replace the existing requirement that the entity’s management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This standard provides increased disclosure
about the credit and noncredit components of impaired debt securities that are
not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this standard does not result in a
change in the carrying amount of debt securities, it does require that the
portion of an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This standard became effective
for interim and annual periods ending after June 15, 2009. The adoption of
this standard did not have a material impact on the Company’s consolidated
financial statements.
In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this accounting standard, fair values for these assets and
liabilities were only disclosed annually. This standard applies to all financial
instruments within its scope and requires all entities to disclose the method(s)
and significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. The adoption of this standard did
not have a material impact on the disclosures related to its consolidated
financial statements.
In May
2009, the FASB an accounting standard which provides guidance to establish
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The standard also requires entities to disclose the date
through which subsequent events were evaluated as well as the rationale for
why that date was selected. The standard is effective for interim and annual
periods ending after June 15, 2009, and accordingly, the Company adopted
this Standard during the second quarter of 2009. The standard requires that
public entities evaluate subsequent events through the date that the
financial statements are issued.
In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for transfers
of financial assets and the entity’s continuing involvement with them and
changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity (“QSPE”). This
accounting standard is effective for financial statements issued for fiscal
years beginning after November 15, 2009. The Company has not completed the
assessment of the impact this new standard will have on the Company’s
financial condition, results of operations or cash flows.
In June
2009, the FASB also issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of variable interest entities
(“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes
the exception from applying the consolidation guidance within
this accounting standard. Further, this accounting standard requires a
company to perform a qualitative analysis when determining whether or not
it must consolidate a VIE. It also requires a company to continuously
reassess whether it must consolidate a VIE. Additionally, it requires enhanced
disclosures about a company’s involvement with VIEs and any significant
change in risk exposure due to that involvement, as well as how its
involvement with VIEs impacts the company’s financial statements. Finally, a
company will be required to disclose significant judgments and assumptions used
to determine whether or not to consolidate a VIE. This accounting standard
is effective for financial statements issued for fiscal years beginning after
November 15, 2009. The Company has not completed their
assessment of the impact that this pronouncement will have on the Company’s
financial condition, results of operations or cash flows.
In June
2009, the FASB issued an accounting standard which establishes the FASB
Accounting Standards Codification™ (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in
one place. The Codification is effective for interim and annual periods ending
after September 15, 2009, and as of the effective date, all existing
accounting standard documents were superseded. Pursuant to the provisions of the
Codification, the Company updated references to GAAP in the Company’s
consolidated financial statements. The Codification did not change GAAP and
therefore did not impact the Company’s consolidated financial statements other
than the change in references.
In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU. The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements.
In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation. This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning
of those fiscal years. The Company is currently evaluating the impact of
this ASU on its consolidated financial statements.
Note
3 - Earnings per share
The
FASB’s accounting standard for earnings per share requires presentation of basic
and diluted earnings per share in conjunction with the disclosure of the
methodology used in computing such earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock.
All
shares and per share amounts used in the Company’s financial statements and
notes thereto have been retroactively restated to reflect the 40-to-1 reverse
stock split, which occurred on September 4, 2008.
The
following is a reconciliation of the basic and diluted earnings per share
computations for the three months ended September 30, 2009 and
2008:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
income for basic and diluted earnings per share
|
|
$
|
1,972,054
|
|
|
$
|
3,133,484
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
10,502,527
|
|
|
|
9,769,329
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.19
|
|
|
$
|
0.32
|
|
Diluted
earnings per share
|
|
2009
|
|
|
2008
|
|
For
the three months ended September 30, 2009 and 2008
|
|
|
|
|
|
|
Net
income for basic earnings per share
|
|
$
|
1,972,054
|
|
|
$
|
3,133,484
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
10,502,527
|
|
|
|
9,769,329
|
|
Diluted
effect of stock option
|
|
|
82,534
|
|
|
|
65,086
|
|
Diluted
effect of warrants
|
|
|
300,474
|
|
|
|
27,256
|
|
Weighted
average shares used in diluted computation
|
|
|
10,885,535
|
|
|
|
9,861,671
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share-Diluted
|
|
$
|
0.18
|
|
|
$
|
0.32
|
|
For the
three months ended September 30, 2009, 5,625 vested stock options with an
average exercise price of $15.91 were not included in the diluted earnings per
share calculation because of the anti-dilutive effect. The $5 million and $29.3
million convertible notes effect was also excluded from the calculation due to
the anti-dilutive effect. For the three months ended September 30, 2008, 2,000
vested stock options and 1,875,000 warrants with an average exercise price of
$12 and $10.00, respectively, were not included in the diluted earnings per
share calculation because of the anti-dilutive effect. The $5 million and $30
million convertible notes effect were also excluded from the calculation due to
the anti-dilutive effect.
Note
4 - Inventories
Inventories
consisted of the following:
|
|
September 30, 2009
|
|
|
June 30, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Raw
materials
|
|
$
|
1,152,742
|
|
|
$
|
1,539,602
|
|
Work-in-process
|
|
|
-
|
|
|
|
55,992
|
|
Packing
materials
|
|
|
597,429
|
|
|
|
483,297
|
|
Finished
goods
|
|
|
1,012,267
|
|
|
|
1,198,303
|
|
Total
|
|
$
|
2,762,438
|
|
|
$
|
3,277,194
|
|
Note
5 - Plant and equipment
Plant and
equipment consisted of the following:
|
|
September 30, 2009
|
|
|
June 30, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Buildings
and building improvements
|
|
$
|
12,815,847
|
|
|
$
|
12,798,375
|
|
Manufacturing
equipment
|
|
|
2,755,292
|
|
|
|
2,603,114
|
|
Office
equipment and furniture
|
|
|
221,165
|
|
|
|
291,061
|
|
Vehicles
|
|
|
478,044
|
|
|
|
477,396
|
|
Total
|
|
|
16,270,348
|
|
|
|
16,169,946
|
|
Less:
accumulated depreciation
|
|
|
(2,453,069
|
)
|
|
|
(2,212,549
|
)
|
Total
|
|
$
|
13,817,279
|
|
|
$
|
13,957,397
|
|
For the
three months ended September 30, 2009 and 2008, depreciation expense amounted to
approximately $196,000 and $147,000, respectively.
Note
6 - Intangible assets
Intangible
assets consisted of the following:
|
|
September 30, 2009
|
|
|
June 30, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Land
use rights
|
|
$
|
11,261,292
|
|
|
$
|
11,245,938
|
|
Patents
|
|
|
4,943,791
|
|
|
|
4,937,050
|
|
Customer
lists and customer relationships
|
|
|
1,125,114
|
|
|
|
1,123,580
|
|
Trade
secrets, formulas and manufacturing process know-how
|
|
|
1,026,900
|
|
|
|
1,025,500
|
|
Licenses
|
|
|
23,398
|
|
|
|
23,368
|
|
Total
|
|
|
18,380,495
|
|
|
|
18,355,436
|
|
Less:
accumulated amortization
|
|
|
(1,717,829
|
)
|
|
|
(1,314,255
|
)
|
Total
|
|
$
|
16,662,666
|
|
|
$
|
17,041,181
|
|
Amortization
expense for the three months ended September 30, 2009, and 2008 amounted to
approximately $402,000, and $74,000, respectively.
Note
7 - Debt
Short term bank
loan
Short
term bank loan represents an amount due to a bank that is due within one year.
This loan can be renewed with the bank upon maturity. The Company’s short term
bank loan consisted of the following:
|
|
September
30,
2009
|
|
|
June 30,
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Loan
from Communication Bank; due December 2009; interest rate of 6.37% per
annum; monthly interest payment; guaranteed by related party, Jiangbo
Chinese-Western Pharmacy.
|
|
$
|
2,200,500
|
|
|
$
|
2,197,500
|
|
Total
|
|
$
|
2,200,500
|
|
|
$
|
2,197,500
|
|
Interest
expense related to the short term bank loan amounted to $35,811 and $58,650 for
three months ended September 30, 2009 and 2008, respectively.
Notes
Payable
Notes
payable represent 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:
|
|
September 30, 2009
|
|
|
June 30, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Commercial
Bank, various amounts, non-interest bearing, due from October 2009 to
March 2010; 100% of restricted cash deposited
|
|
$
|
14,552,640
|
|
|
$
|
7,325,000
|
|
Total
|
|
$
|
14,552,640
|
|
|
$
|
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 September 30, 2009 and 2008, the
Company recorded other income of approximately $81,000 and $144,000 from leasing
the two buildings to this related party. As of September 30, 2009 and June 30,
2009, amount due from this related party was $80,685 and $0,
respectively.
Other payable - related
parties
Other
payable-related parties primarily consist of accrued salary payable to the
Company’s officers and directors, and advances from the Company’s Chief
Executive Officer. These advances are short-term in nature and bear no interest.
The amounts are expected to be repaid in the form of cash.
Other
payable - related parties consisted of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Payable
to Cao Wubo, Chief Executive Officer and Chairman of the
Board
|
|
$
|
223,581
|
|
|
$
|
184,435
|
|
|
|
|
|
|
|
|
|
|
Payable
to Haibo Xu, Chief Operating Officer and Director
|
|
|
33,688
|
|
|
|
33,688
|
|
|
|
|
|
|
|
|
|
|
Payable
to Elsa Sung, Chief Financial Officer
|
|
|
24,732
|
|
|
|
18,333
|
|
|
|
|
|
|
|
|
|
|
Payable
to John Wang, Director
|
|
|
2,500
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
Total
other payable - related parties
|
|
$
|
284,501
|
|
|
$
|
238,956
|
|
Note
9 – Concentration of major customers, suppliers, and products
For the
three months ended September 30, 2009, three products accounted for 36%, 24%,
and 26% of the Company’s total sales. For the three months ended September 30,
2008, three products accounted for 36%, 35%, and 27% of the Company’s total
sales.
For the
three months ended September 30, 2009 and 2008, five customers accounted for
approximately 37% and 17%, respectively, of the Company's sales. These five
customers represented 28% and 31% of the Company's total accounts receivable as
of September 30, 2009 and June 30, 2009, respectively.
For the
three months ended September 30, 2009 and 2008, five suppliers accounted for
approximately 73% and 77%, respectively, of the Company's purchases. These five
suppliers represented 76% and 82% of the Company's total accounts payable as of
September 30, 2009 and June 30, 2009, respectively.
Note 10 - Taxes
payable
The
Company is subject to the United States federal income tax at a tax rate of 34%.
No provision for U.S. income taxes has been made as the Company had no U.S.
taxable income during the three months ended September 30, 2009 and
2008.
The
Company’s wholly owned subsidiaries Karmoya International Ltd. (“Karmoya”) and
Union Well International Ltd. (“Union Well”) were incorporated in the British
Virgin Island (“BVI”) and the Cayman Islands, respectively. Under the current
laws of the BVI and Cayman Islands, the two entities are not subject to income
taxes.
On March
16, 2007, the National People's Congress of China passed the new Enterprise
Income Tax Law ("EIT Law"), and on November 28, 2007, the State Council of China
passed the Implementing Rules for the EIT Law ("Implementing Rules") which
became effective on January 1, 2008. The EIT Law and Implementing Rules impose a
unified EIT rate of 25.0% on all domestic-invested enterprises and FIEs, unless
they qualify under certain limited exceptions. Therefore, nearly all FIEs are
subject to the new tax rate alongside other domestic businesses rather than
benefiting from the EIT Law and its associated preferential tax treatments,
beginning January 1, 2008.
In
addition to the changes to the current tax structure, under the EIT Law, an
enterprise established outside of China with "de facto management bodies" within
China is considered a resident enterprise and will normally be subject to an EIT
of 25.0% on its global income. The Implementing Rules define the term "de facto
management bodies" as "an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise." If the PRC tax authorities subsequently
determine that the Company should be classified as a resident enterprise, then
the organization's global income will be subject to PRC income tax of 25.0%.
Laiyang Jiangbo and GJBT were subject to 25% income tax rate since January 1,
2008 and 33% income tax rate prior to January 1, 2008.
The table
below summarizes the differences between the U.S. statutory federal rate and the
Company’s effective tax rate for the three months ended September 30, 2009 and
2008:
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
U.S.
Statutory rates
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Foreign
income not recognized in the U.S
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
China
income taxes
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
China
income tax exemptions
|
|
|
-
|
|
|
|
-
|
|
Other
items(a)
|
|
|
37.5
|
%
|
|
|
13.6
|
%
|
Total
provision for income taxes
|
|
|
62.5
|
%
|
|
|
38.6
|
%
|
(a) The
37.5% and 13.6% represent the expenses incurred by the Company that are not
deductible for PRC income tax purpose for the three months ended September 30,
2009 and 2008, respectively.
Taxes
payable
|
September 30,
|
|
June 30,
|
|
|
2009
|
|
2009
|
|
|
(Unaudited)
|
|
|
|
Value
added taxes
|
|
$
|
4,874,242
|
|
|
$
|
4,090,492
|
|
Income
taxes
|
|
|
8,703,503
|
|
|
|
6,689,199
|
|
Other
taxes
|
|
|
549,102
|
|
|
|
468,535
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,126,847
|
|
|
$
|
11,248,226
|
|
Note
11 - Convertible Debt
November 2007 Convertible
Deb
entures
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 adjustment as provided therein. The November 2007
Debenture bears interest at the rate of 6% per annum and the initial conversion
price of the debentures is $10 per share. In connection with the offering, the
Company placed in escrow 500,000 shares of its common stock. In connection with
the May 2008 financing, the November 2007 Debenture conversion price was
subsequently adjusted to $8 per share (Post 40-to-1 reverse split).
The
Company evaluated the 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 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 September 30, 2009
and 2008, amortization of debt issuance costs related to the November 2007
Purchase Agreement was $29,534 and $29,534, respectively, which has been
included in interest expense. The remaining balance of unamortized debt issuance
costs of the November 2007 Purchase Agreement at September 30, 2009 and June 30,
2009 was $129,621 and $159,155. The amortization of debt discounts was $353,829
and $141,580, respectively, for the three months ended September 30, 2009 and
2008, which has been included in interest expense on the accompanying
consolidated statements of income. The balance of the debt discount was
$3,283,248 and $3,637,077 at September 30, 2009 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 is $10 per share. If the
Company issues common stock at a price that is less than the effective November
2007 Conversion Price, or common stock equivalents with an exercise or
conversion price less than the then effective November 2007 Conversion Price,
the November 2007 Conversion Price of the November 2007 Debenture and the
exercise price of the warrants will be reduced to such price. 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.
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.
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
adjustment pursuant to customary anti-dilution provisions and automatic downward
adjustments in the event of certain sales or issuances by the Company of common
stock at a price per share less than $8. Interest on the outstanding principal
balance of the May 2008 Notes is 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
Note, in whole or in part, into shares of the Company’s common stock, provided
that such May 2008 Investor shall not effect any conversion if immediately after
such conversion, such May 2008 Investor and its affiliates would, in the
aggregate, beneficially own more than 9.99% of the Company’s outstanding common
stock. The May 2008 Notes are convertible at the option of the Company if the
following four conditions are met: (i) effectiveness of a registration statement
with respect to the shares of the Company’s common stock underlying the May 2008
Notes and the Warrants; (ii) the Volume Weighted Average Price (“VWAP” of the
common stock has been equal to or greater than 250% of the conversion price, as
adjusted, for 20 consecutive trading days on its principal trading market; (iii)
the average dollar trading volume of the common stock exceeds $500,000 on its
principal trading market for the same 20 days; and (iv) the Company achieves
2008 Guaranteed EBT (as hereinafter defined) and 2009 Guaranteed EBT (as
hereinafter defined). A holder of a May 2008 Note may require the Company to
redeem all or a portion of such May 2008 Note for cash at a redemption price as
set forth in the May 2008 Notes, in the event of a change in control of the
Company, an event of default or if any governmental agency in the PRC challenges
or takes action that would adversely affect the transactions contemplated by the
Securities Purchase Agreement. The May 2008 Warrants are exercisable for a
five-year period beginning on May 30, 2008, at an initial exercise price of $10
per share.
The
Company 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 Note should not exceed the $30,000,000 debenture, and the calculated
warrant value was used to determine the allocation between the fair value of the
beneficial conversion feature of the May 2008 debenture and the fair value of
the warrants.
In
connection with the private placement, the Company paid the placement agents a
fee of $1,500,000 and incurred other expenses of $186,500, which were
capitalized as deferred debt issuance costs and are being amortized to interest
expense over the life of the debenture. During the three months ended September
30, 2009 and 2008, amortization of debt issuance costs related to the May 2008
Purchase Agreement was $158,251 $140,542, respectively. The remaining balance of
unamortized debt issuance costs of the May 2008 Purchase Agreement at September
30, 2009 and June 30, 2009 was $919,262 and $1,077,513, respectively. The
amortization of debt discounts was $1,727,040 and $520,971 for the three months
ended September 30, 2009 and 2008 respectively, which has been included in
interest expense on the accompanying consolidated statements of income. The
balance of the unamortized debt discount was $23,128,973 and $24,856,012 at
September 30, 2009 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 requirement 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.
The
security purchase agreement set forth permitted indebtedness which the Company’s
lease obligations and purchase money indebtedness is limited up to $1,500,000
per year in connection with new acquisition of capital assets and lease
obligations. Permitted investment set forth with the security purchase agreement
limits capital expenditure of the Company not to exceed $5,000,000 in any
rolling 12 months.
Pursuant
to a Registration Rights Agreement, the Company agreed to file a registration
statement covering the resale of the shares of common stock underlying the May
2008 Notes and Warrants, (ii) the 2008 Make Good Shares, (iii) the 2009 Make
Good Shares, and (iv) the Settlement Shares. The Company 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 period ended September 30, 2009, the Company issued 62,500 shares of its
common stock upon conversion of $500,000 convertible debt. As of September 30,
2009, a total of $660,000 May 2008 convertible debt has been converted into
common shares.
The above
two convertible debenture liabilities are as follows:
|
|
September
30,
2009
|
|
|
June
30,
2009
|
|
November
2007 convertible debenture note payable
|
|
$
|
5,000,000
|
|
|
$
|
5,000,000
|
|
May
2008 convertible debenture note payable
|
|
|
29,340,000
|
|
|
|
29,840,000
|
|
Total
convertible debenture note payable
|
|
|
34,340,000
|
|
|
|
34,840,000
|
|
Less:
Unamortized discount on November 2007 convertible debenture note
payable
|
|
|
(3,283,248
|
)
|
|
|
(3,637,077
|
)
|
Less:
Unamortized discount on May 2008 convertible debenture note
payable
|
|
|
(23,128,973
|
)
|
|
|
(24,856,012
|
)
|
Convertible
debentures, net
|
|
$
|
7,927,779
|
|
|
$
|
6,346,911
|
|
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 three
months ended September 30, 2009, the Company recorded stock based compensation
expense of $10,000 accordingly.
In August
2009, the Company issued 82,500 shares to Pope Investments LLC (“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 at June 30, 2009 and $314,325 was
recorded as additional interest expense in the three months ended September 30,
2009. For the three months ended September 30, 2009, the Company recorded stock
based compensation of $10,000 accordingly.
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 June 2008. On
August 10, 2009, 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 November 2007 Purchase Agreement, by and
between the Company and Pope with respect to the November 2007 Debentures of the
Company issued to Pope, and (ii) to waive certain provisions set forth in the
May 2008 Securities Purchase Agreement, by and between the Company and the
investors who are parties thereto (collectively, the “Investors”) with respect
to the May 2008 Notes issued to the Investors. Pope is the holder of $5,000,000
principal amount of the November 2007 Debentures and the holder of $17,000,000
aggregate principal amount of the May 2008 Notes (collectively, the “Pope
Notes”). Pursuant to the Letter Agreement, Pope (i) agreed to waive until August
17, 2009 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 on or
prior to August 17, 2009, (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. As of
September 30, 2009, the Company fully satisfied its interest payment obligations
related to the Letter Agreement.
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 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.
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 September 30, 2009, 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 September 30, 2009, the Company has not received the $1,000.
Note
13 - Warrants
In
connection with the $5,000,000 November 2007 Convertible Debenture, 6%
convertible subordinated debentures note, the Company issued a three-year
warrant to purchase 250,000 shares of common stock, at an exercise price of
$12.80 per share. The calculated fair value of the warrants granted with this
private placement was computed using the Black-Scholes
option-pricing model. Variables used in the option-pricing model include
(1) risk-free interest rate at the date of grant (4.5%), (2) expected
warrant life of 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 Convertible Debenture, 6% convertible
subordinated debentures note, 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 $77,400 for the period
ended September 30, 2009.
A summary
of the warrants as of September 30, 2009, 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 September 30, 2009 (unaudited)
|
|
|
2,315,000
|
|
The
following is a summary of the status of warrants outstanding at September 30,
2009:
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
|
|
2.38
|
|
$
|
6.00
|
|
40,000
|
|
|
2.38
|
|
$
|
|
|
8.00
|
|
|
400,000
|
|
1.08
|
|
$
|
8.00
|
|
400,000
|
|
|
1.08
|
|
$
|
|
|
10.00
|
|
|
1,875,000
|
|
3.67
|
|
$
|
10.00
|
|
1,875,000
|
|
|
3.67
|
|
|
|
|
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 September 30, 2009.
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
|
|
|
|
|
|
|
Life
|
|
Volatility
|
|
|
Yield
|
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
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
September 2009, of the 7,500 options held by the Company’s executives,
directors, and employees, 5,625 were 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 September 30, 2009 (unaudited)
|
|
|
140,900
|
|
Following
is a summary of the status of options outstanding at September 30,
2009:
|
|
Outstanding options
|
|
Exercisable options
|
|
|
|
Average
Exercise Pri
ce
|
|
|
Number
|
|
|
Average
Remaining
Contractual
Life
(years)
|
|
Average
Exercise Price
|
|
Number
|
|
Average
Remaining
Contractual
Life
(years)
|
|
|
$
|
4.20
|
|
|
133,400
|
|
|
1.0
|
|
$
|
4.20
|
|
133,400
|
|
|
1.0
|
|
|
$
|
12.00
|
|
|
2,000
|
|
|
3.45
|
|
$
|
12.00
|
|
2,000
|
|
|
3.45
|
|
|
$
|
16.00
|
|
|
1,750
|
|
|
3.45
|
|
$
|
16.00
|
|
1,750
|
|
|
3.45
|
|
|
$
|
20.00
|
|
|
1,875
|
|
|
3.45
|
|
$
|
20.00
|
|
1,875
|
|
|
3.45
|
|
|
$
|
24.00
|
|
|
1,875
|
|
|
3.45
|
|
$
|
24.00
|
|
-
|
|
|
-
|
|
|
$
|
4.93
|
|
|
140,900
|
|
|
1.13
|
|
$
|
4.67
|
|
139,025
|
|
|
1.13
|
|
For the
period ended September 30, 2009 and 2008, the company did not record any
stock-based compensation expense related to those options granted as there were
no options vested during the periods. At September 30, 2009 and June 30, 2009,
there was $8,488 total unrecognized compensation expense related to non vested
share-based compensation arrangements for these options. The cost is expected to
be recognized over a weighted-average period of three
months.
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 September 30, 2009 and 2008, the Company made pension contributions
in the amount of $13,364 and $9,661, 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
|
|
|
152,180
|
|
Unrealized
gain on marketable securities
|
|
|
23,544
|
|
Balance,
September 30, 2009 (unaudited)
|
|
$
|
6,699,326
|
|
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 PRC's economy.
The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic, and legal environments, and foreign currency exchange. The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among
others.
R&D
Agreement
In
September 2007, the Company entered into a three year Cooperative Research and
Development Agreement (“CRADA”) with a provincial university. Under the CRADA,
the university is responsible for designing, researching and developing
designated pharmaceutical projects for the Company. Additionally, the university
will also provide technical services and 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. As of September 30, 2009, the Company’s future estimated payments to
CRADA amounted to $8,929,790.
For the
three months ended September 30, 2009 and 2008, approximately $1,100,000 and
$1,098,000, respectively was incurred as research and development expense. As of
September 30, 2009, the Company’s future estimated payments to those two CRADAs
amounted to approximately $3.0 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 and settled legal
proceedings as of September 30, 2009:
CRG Partners, Inc. and
Capital Research Group, Inc. and Genesis Technology Group, Inc., n/k/a Genesis
Pharmaceuticals Enterprises, Inc. (Arbitration) - Case N
o. 32 145 Y 00976 07,
American Arbitration Association, Southeast Case Management
Center
On
December 4, 2007, CRG Partners, Inc. (“CRGP”), a former consultant of the
Company, filed a demand for arbitration against the Company alleging breach of
contract and seeking damages of approximately $10 million as compensation for
consulting services rendered to the Company. The amount of damages sought by the
claimant was equal to the dollar value of 29,978,900 shares of the Company’s
common stock (Pre 40-to-1 reverse split) in November 2007, in which the claimant
alleged were due and owing to CRGP. On December 5, 2007, the Company gave notice
of termination of the relationship with CRG under the consulting agreement. CRGP
subsequently filed an amendment to the demand for arbitration to include Capital
Research Group, Inc. (“CRG”) as an added claimant and increased the damage
amount sought under this matter to approximately $13.8 million. The Company
subsequently filed counter claims in reference to the aforementioned allegations
of breach of contract.
In
February 2009, the Company was notified by the arbitration panel of American
Arbitration Association (the “Panel”) that the Panel awarded CRG and CRGP
jointly, a net total of $980,070 (the “Award”) to be paid by the Company on or
before February 27, 2009. Once the Award is satisfied, CRG and CRGP would have
no further claims against the Company’s common stock or other property that were
the subject of the arbitration. The amount has been charged to operations for
year ended June 30, 2009, and is included in liabilities assumed from during the
reorganization as of June 30, 2009.
On March
6, 2009, CRG Partners, Inc. (“CRGP”) and Capital Research Group, Inc. (“CRG”),
former consultants of the Company, filed a motion to confirm the arbitration
award conferred by a panel of arbitrators of the American Arbitration
Association on February 2, 2009. On July 15, 2009, the Cicuit Court of the 11th
Judicial Circuit in and for Miami-Dade County confirmed the arbitration award
and entered judgment against Genesis Technology Group, Inc. At September 30,
2009, the award has not been paid and the Company is currently in the process of
settling the arbitration award with CRGP and CRG.
Note
19- Subsequent events
In
October 2009, the Company issued 462,500 shares of its common stock in
connection with the conversion of $3,700,000 of May 2008 Convertible
Debentures.
The
Company has performed an evaluation of subsequent events through November 16,
2009, 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” or “us” or “Jiangbo” or the “Company” means Jiangbo
Pharmaceuticals, Inc. and its subsidiaries.
Item 2.
Management
’
s Discussion and Analysis or Plan of
Operation
The following discussion and
analysis of the results of operations and financi
al condition of
Jiangbo Pharmaceuticals
, Inc. for the three months ended
September 30, 2009 and 2008 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,”
“
expect,”
“
believe,”
“
intend,”
“
may,”
“
will,”
“
should,”
“
could,”
and similar expressions to identify
forward-looking statements.
OVERVIEW
We were
incorporated on August 15, 2001, in the State of Florida under the name Genesis
Technology Group, Inc. On October 12, 2001, we consummated a merger with
NewAgeCities.com, an Idaho public corporation formed in 1969. We were the
surviving entity after the merger. On October 12, 2007, the Company’s
corporate name was changed to Genesis Pharmaceuticals Enterprises,
Inc.
Pursuant
to a Certificate of Amendment to our Amended and Restated Articles of
Incorporation filed with the State of Florida which took effect as of April 16,
2009, our name was changed from "Genesis Pharmaceuticals Enterprises, Inc." to
"Jiangbo Pharmaceuticals, Inc." (the "Corporate Name Change"). The
Corporate Name Change was approved and authorized by our Board of Directors as
well as our holders of a majority of the outstanding shares of voting stock by
written consent.
As a
result of the Corporate Name Change, our stock symbol changed to "JGBO" with the
opening of trading on May 12, 2009, on the OTCBB.
On
October 1, 2007, we completed a share exchange transaction by and among us,
Karmoya International Ltd. (“Karmoya”), a British Virgin Islands company, and
Karmoya’s shareholders. As a result of the share exchange transaction, Karmoya,
a company which was established as a “special purpose vehicle” for the foreign
capital raising activities of its Chinese subsidiaries, became our wholly-owned
subsidiary and our new operating business. Karmoya was incorporated under the
laws of the British Virgin Islands on July 17, 2007, and owns 100% of the
capital stock of Union Well International Limited (“Union Well”), a Cayman
Islands company. Karmoya conducts its business operations through Union Well’s
wholly-owned subsidiary, Genesis Jiangbo (Laiyang) Biotech Technology Co., Ltd.
(“GJBT”). GJBT was incorporated under the laws of the People’s Republic of China
("PRC") on September 16, 2007, and registered as a wholly foreign owned
enterprise (“WOFE”) on September 19, 2007. GJBT has entered into consulting
service agreements and equity-related agreements with Laiyang Jiangbo
Pharmaceutical Co., Ltd. (“Laiyang Jiangbo”), a PRC limited liability company
incorporated on August 18, 2003.
RESULTS
OF OPERATIONS
Comparison of three months ended
September 30, 2009 and 2008
The
following table sets forth the results of our operations for the periods
indicated as a percentage of total net sales ($ in thousands):
|
|
Three Month
Period Ended
September 30,
|
|
|
% of
|
|
|
Three Month
Period Ended
September 30,
|
|
|
% of
|
|
|
|
2009
|
|
|
Revenue
|
|
|
2008
|
|
|
Revenue
|
|
SALES
|
|
$
|
24,384
|
|
|
|
100
|
%
|
|
$
|
27,321
|
|
|
|
99.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES
- RELATED PARTIES
|
|
|
-
|
|
|
|
-
|
%
|
|
|
244
|
|
|
|
0.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
6,260
|
|
|
|
25.67
|
%
|
|
|
5,713
|
|
|
|
20.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES- RELATED PARTIES
|
|
|
-
|
|
|
|
-
|
%
|
|
|
55
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
18,124
|
|
|
|
74.33
|
%
|
|
|
21,797
|
|
|
|
79.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
4,342
|
|
|
|
17.81
|
%
|
|
|
13,352
|
|
|
|
48.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESEARCH
AND DEVELOPMENT
|
|
|
1,100
|
|
|
|
4.51
|
%
|
|
|
1,098
|
|
|
|
3.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
12,682
|
|
|
|
52.01
|
%
|
|
|
7,347
|
|
|
|
26.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES, NET
|
|
|
7,422
|
|
|
|
30.44
|
%
|
|
|
2,244
|
|
|
|
8.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
5,260
|
|
|
|
21.57
|
%
|
|
|
5,103
|
|
|
|
18.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
3,288
|
|
|
|
13.48
|
%
|
|
|
1,970
|
|
|
|
7.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
1,972
|
|
|
|
8.09
|
%
|
|
|
3,133
|
|
|
|
11.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE (LOSS) INCOME
|
|
|
176
|
|
|
|
0.72
|
%
|
|
|
(1,232
|
)
|
|
|
(5.59
|
)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
2,148
|
|
|
|
8.81
|
%
|
|
$
|
1,
901
|
|
|
|
5.71
|
%
|
REVENUES.
Revenues by product
categories were as follows($ in thousands):
|
|
Periods Ended September 30,
|
|
|
Increase/
(Decrease)
|
|
|
Increase/
(Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
Western
pharmaceutical medicines
|
|
$
|
14,815
|
|
|
$
|
20,216
|
|
|
$
|
(5,401
|
)
|
|
|
(26.72
|
)
%
|
Chinese
traditional medicines
|
|
|
9,569
|
|
|
|
7,349
|
|
|
|
2,220
|
|
|
|
30.21
|
%
|
TOTAL
|
|
$
|
24,384
|
|
|
$
|
27,565
|
|
|
$
|
(3,181
|
)
|
|
|
(11.54
|
)
%
|
Our
revenues included revenues from sales and revenues from sales to a related
party. For the three months ended September 30, 2009, we had revenues of $24.4
million as compared to revenues of $27.6 million for the three months ended
September 30, 2008, a decrease of $3.2 million or 11.5%. While the
quantities sold for Clarithromycin Sustained-released Tablets and Baobaole
chewable tables increased in the three months ended September 30, 2009 as
compared to the three months ended September 30, 2008, the decrease in the total
revenue was primarily attributable to the decrease of the per unit price by an
average of 26% for Clarithromycin Sustained-released
tablets, Itopride Hydrochloride granules and Baobaole chewable tables
for the period ended September 30, 2009. The three products accounted for
approximately 86.5% of our total revenue for the three months ended September
30, 2009. In January 2009, we restructured our distribution and sales system to
sell our products primarily through 28 large independent regional distributors
and lowered the per unit prices of the three major products to the
distributors; at the same time, we significantly reduced
the commission paid to our sales representatives on those products by 80%
to 83% . The decrease in the revenue generated from the three major products
were partially offset by the increase in revenue from Radix Isatidis
Dispersible tablets which was first released in the second quarter of fiscal
year 2009. While we expect our sales from the Chinese traditional medicines
continue to grow, our sales from the western pharmaceutical medicines will have
minimal growth as both Clarithromycin Sustained-release tablets and Itopride
Hydrochloride granules have entered into their maturity.
COST OF SALES and COST OF SALES
–
RELATED PARTIES
by product
categories were as follows ($ in thousands):
|
|
Three MonthsEnded
September 30,
|
|
Increase/
(Decrease)
|
|
|
Increase/
(Decrease)
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
Western
pharmaceutical medicines
|
|
|
$
|
4,169
|
|
|
$
|
4,539
|
|
|
$
|
(370
|
)
|
|
|
(8.15
|
)
%
|
Chinese
traditional medicines
|
|
|
|
2,091
|
|
|
|
1,229
|
|
|
|
862
|
|
|
|
70.14
|
%
|
TOTAL
|
|
|
$
|
6,260
|
|
|
$
|
5,768
|
|
|
$
|
(492
|
)
|
|
|
(8.52
|
)
%
|
Cost of
sales and cost of sales – related parties for the three months ended September
30, 2009 increased $0.5 million or 8.6%, from $5.8 million for the three months
ended September 30, 2008 to $6.3 million for the three months ended September
30, 2009. The increase in cost of sales and cost of sales - related parties was
primarily due to increase in our product quantities sold. The increase in
cost of sales as a percentage of net revenue for the three months ended
September 30, 2009, was approximately 25.7% as compared to 20.9% for the three
months ended September 30, 2008. The increase was primarily attributable to the
decrease in the per unit price mentioned above.
GROSS PROFIT
by product
categories as a percentage of sales were as follows:
|
|
Three Months Ended
September
30,
|
|
|
Increase/
(Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Western
pharmaceutical medicines
|
|
|
71.86
|
%
|
|
|
77.35
|
%
|
|
|
(5.49
|
)
%
|
Chinese
traditional medicines
|
|
|
78.15
|
%
|
|
|
83.13
|
%
|
|
|
(4.98
|
)
%
|
Gross
profit was $18.1 million for the three months ended September 30, 2009, as
compared to $21.8 million for the three months ended September 30, 2008,
representing gross margins of approximately 74.3% and 79.1%, respectively.
The decrease in the gross
profit for the period ended September 30, 2009 was primarily due to the lower
unit price charged as a result of sales net work restructure mentioned above,
including a reduction in the selling prices.
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.
Selling, general and administrative expenses totaled $4.3
million for the three months ended September 30, 2009, as compared to $13.4
million for the three months ended September 30, 2008, a decrease of
$9.1 million or approximately 67.3% as summarized below ($ in
thousands):
|
|
Three months ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Advertisement,
marketing and promotion spending
|
|
$
|
1,066
|
|
|
$
|
3,229
|
|
Travel
and entertainment - sales related
|
|
|
127
|
|
|
|
642
|
|
Depreciation
and amortization
|
|
|
473
|
|
|
|
151
|
|
Shipping
and handling
|
|
|
151
|
|
|
|
122
|
|
Salaries,
wages and related benefits
|
|
|
1,983
|
|
|
|
8,638
|
|
Travel
and entertainment - non sales related
|
|
|
83
|
|
|
|
82
|
|
Other
|
|
|
459
|
|
|
|
488
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,342
|
|
|
$
|
13,352
|
|
The
changes in these expenses from the three months ended September 30, 2009, as
compared to the three months ended September 30, 2008, included the
following:
|
·
|
A
decrease of $2.2 million or approximately 67% in advertisement, marketing
and promotion spending 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 decreased by $0.5 million or
approximately 80% primarily due to the sales distribution system
restructuring in January 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.
|
|
·
|
Depreciation
and amortization increased by $0.3 million or 213.2% primarily due to more
intangible assets being depreciated and amortized in fiscal year
2009.
|
|
·
|
Salaries,
wages, and related benefits decreased by $6.7 million or 77.0% during the
period ended September 30, 2009 as compared to September 30,
2008. The decrease in the period ended September 30, 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%
.
|
|
·
|
Shipping
and handling, travel and entertainment – non-sales related expenses, and
other expenses remained materially consistent for the periods ended
September 30, 2009 and 2008.
|
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 $1.1 million for the three months ended September
30, 2009, as compared to $1.1 million for the three months ended September 30,
2008. 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 EXPENSES
. Our other
expenses consisted of financial expenses, change in fair value of derivative
liabilities and other non-operating expenses (income). We had net other expense
of $7.4 million for the three months ended September 30, 2009 as compared to
$2.2 million for the three months September 30, 2008. The increase in other
expense was primarily due to the increase in the debt discount amortization
expense related to our financing in November 2007 and May 2008 of $1.4 million,
and the loss in fair value of derivative liabilities of $4.8 million for the
three month ended September 30, 2009, which we did not incur in the prior
corresponding period, and partially offset by the increase in other income of
$1.2 million which was primarily contributed by the unrealized gain on trading
marketable securities.
NET INCOME.
Our net income
for the three months ended September 30, 2009 was $2.0 million as compared to
$3.1 million for the three months ended September 30, 2008, a $1.2 million or
37.1% decrease. Although we had a $5.3 million or 72.6 % increase in
our income from operations, the amount was largely offset by the significant
increase of $5.2 million in other expenses.
LIQUIDITY
AND CAPITAL RESOURCES
Net cash
provided by operating activities for the three months ended September 30, 2009
was $17.9 million as compared to net cash provided by operating activities
of $13.7 million for the three months ended September 30, 2008. The increase in
cash provided by operating activities included the following: 1) decrease in
accounts receivable of $7.0 million 2) an add-back of amortization on debt
discount and deferred debt costs of $2.2 million, 3) an add-back of loss from
the derivative liabilities of $4.8 million, and 4) increase in tax payable of
$2.9 million partially offset by the decrease in accounts payable of $2.3
million.
Net cash
provided by investing activities for the three months ended September 30, 2009,
was mainly attributable to proceeds from sale of marketable
securities.
Net cash
used in financing activities was $0 for the three months ended September, 30,
2009 and $0.8 million for the three months ended September 30,
2008.
We
reported a net increase in cash for the three months ended September 30, 2009 of
$18.5 million as compared to a net increase in cash of $13.1 million for the
three months ended September 30, 2008.
We have
historically financed our operations and capital expenditures principally
through private placements of debt and equity offerings, bank loans, and cash
provided by operations. At September 30, 2009, 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 reduced by $33.1 million to
$66.3 million at September 30, 2009, from $99.8 million at June 30, 2009. This
decrease in working capital is primarily attributable to a decrease in accounts
receivable of $7 million, an increase in tax payable of $2.9 million, and an
increase in derivative liabilities of $44.4 million and partially offset by an
increase in cash of $18.5 million, a decrease in accounts payable of
approximately $2.3 million, and a decrease in accrued liabilities of $1.1
million.
We
anticipate that our working capital requirements may increase as a result of our
anticipated business expansion plan, continued increase in sales, potential
increases in the price of our raw materials, competition and our relationship
with suppliers or customers. We believe that our existing cash, cash equivalents
and cash flows from operations will be sufficient to meet our present
anticipated future cash needs for at least the next 12 months. We may, however,
require additional cash resources due to changed business conditions or other
future developments, including any investments or acquisitions we may decide to
pursue.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amount of payments.
Off-balance
Sheet Arrangements
We have
not entered into any 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
September 30, 2009, we had approximately $122.9 million in cash and cash
equivalents. A hypothetical 2% increase or decrease in interest rates would not
have a material impact on our earnings or loss, or the fair market value or
cash flows of these instruments.
Foreign Exchange Rates
. All
of our sales are denominated in the Chinese 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 of
$152,180 and $330,641 for the three months ended September 30, 2009 and 2008,
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
parti
es
The
Company leases two of its buildings to Jiangbo Chinese-Western Pharmacy, a
company owned by the Chief Executive Officer of the Company and other
majority shareholders. For the three months ended September 30, 2009 and 2008,
the Company recorded other income of $80,636 and $143,950 from leasing the two
buildings to this related party. As of September 30, 2009 and June 30, 2009,
amount due from this related party was $80,685 and $0.
Other payable - related
parties
Other
payable-related parties primarily consist of accrued salary payable to the
Company’s officers and directors, and advances from the Company’s Chief
Executive Officer. These advances are short-term in nature and bear no interest.
The amounts are expected to be repaid in the form of cash.
Other
payable - related parties consisted of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Payable
to Cao Wubo, Chief Executive Officer and Chairman of the
Board
|
|
$
|
223,581
|
|
|
$
|
184,435
|
|
|
|
|
|
|
|
|
|
|
Payable
to Haibo Xu, Chief Operating Officer and Director
|
|
|
33,688
|
|
|
|
33,688
|
|
|
|
|
|
|
|
|
|
|
Payable
to Elsa Sung, Chief Financial Officer
|
|
|
24,732
|
|
|
|
18,333
|
|
|
|
|
|
|
|
|
|
|
Payable
to John Wang, Director
|
|
|
2,500
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
Total
other payable - related parties
|
|
$
|
284,501
|
|
|
$
|
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 April
2009, the FASB issued an accounting standard for accounting for assets acquired
and liabilities assumed in a business combination that arise from contingencies.
It amends and clarifies a previously issued accounting standard in regards to
the initial recognition and measurement, subsequent measurement and accounting,
and disclosures of assets and liabilities arising from contingencies in a
business combination. The accounting standard applies to all assets acquired and
liabilities assumed in a business combination that arise from contingencies. The
accounting standard will be effective for the first annual reporting period
beginning on or after December 15, 2008. The accounting standard will apply
prospectively to business combinations for which the acquisition date is after
fiscal years beginning on or after December 15, 2008. The adoption of the
accounting standard will not have a material impact on the Company’s results of
operations or financial condition.
In April
2009, the FASB issued an accounting standard to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This standard will
replace the existing requirement that the entity’s management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This standard provides increased disclosure
about the credit and noncredit components of impaired debt securities that
are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this standard does not result in a
change in the carrying amount of debt securities, it does require that the
portion of an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This standard became effective
for interim and annual periods ending after June 15, 2009. The adoption of
this standard did not have a material impact on the Company’s consolidated
financial statements.
In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. The adoption of this standard did not
have a material impact on the disclosures related to its consolidated financial
statements.
In May
2009, the FASB an accounting standard which provides guidance to establish
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The standard also requires entities to disclose the date
through which subsequent events were evaluated as well as the rationale for
why that date was selected. The standard is effective for interim and annual
periods ending after June 15, 2009, and accordingly, the Company adopted
this Standard during the second quarter of 2009. The standard requires that
public entities evaluate subsequent events through the date that the
financial statements are issued.
In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for transfers
of financial assets and the entity’s continuing involvement with them and
changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity (“QSPE”). This
accounting standard is effective for financial statements issued for fiscal
years beginning after November 15, 2009. The Company has not completed the
assessment of the impact this new standard will have on the Company’s
financial condition, results of operations or cash flows.
In June
2009, the FASB also issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of variable interest entities
(“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes
the exception from applying the consolidation guidance within
this accounting standard. Further, this accounting standard requires a
company to perform a qualitative analysis when determining whether or not it
must consolidate a VIE. It also requires a company to continuously reassess
whether it must consolidate a VIE. Additionally, it requires enhanced
disclosures about a company’s involvement with VIEs and any
significant change in risk exposure due to that involvement, as well as how its
involvement with VIEs impacts the company’s financial statements. Finally, a
company will be required to disclose significant judgments and assumptions
used to determine whether or not to consolidate a VIE. This accounting
standard is effective for financial statements issued for fiscal years beginning
after November 15, 2009. The Company has not completed their
assessment of the impact that this pronouncement will have on the Company’s
financial condition, results of operations or cash flows.
In June
2009, the FASB issued an accounting standard which establishes the FASB
Accounting Standards Codification™ (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in
one place. The Codification is effective for interim and annual periods ending
after September 15, 2009, and as of the effective date, all existing
accounting standard documents will be superseded. Pursuant to the provisions of
the Codification, the Company updated references to GAAP in the Company’s
consolidated financial statements. The Codification did not change GAAP and
therefore did not impact the Company’s consolidated financial statements other
than the change in references.
In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the
issuance of this ASU. The adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements.
In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation. This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning
of those fiscal years. The Company is currently evaluating the impact of
this ASU on its consolidated financial statements.
Item 3.
Quantitative and Qualitative
Disclosures About Market Risk
Not
required for smaller reporting companies.
Item
4T: Controls and Procedures
(a)
Evaluation of Disclosure Controls
and Procedures
. We maintain "disclosure controls and procedures" as such
term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In
designing and evaluating our disclosure controls and procedures, our management
recognized that disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of disclosure controls and procedures are met. Additionally, in
designing disclosure controls and procedures, our management was required to
apply its judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure controls and
procedures also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Our
management, including our Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report. Based on such evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that, as of
the end of the period covered by this report, our disclosure controls and
procedures were not effective, for the following two reasons:
1. Accounting and Finance
Personnel Weaknesses -
US GAAP expertise - The current staff in
the accounting department 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:
|
1.
|
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.
|
|
2.
|
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 three
months ended September 30, 2009, 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.
|
|
3.
|
We
have continued to evaluate the internal audit function in relation to the
Company’s financial resources and requirements. During the three months
ended September 30, 2009, 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.
|
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 June 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 September 30, 2009. The reportable
conditions and other areas of our internal control over financial reporting
identified by us as needing improvement have not resulted in a material
restatement of our financial statements,nor are we aware of any instance where
such reportable conditions or other identified areas of weakness have resulted
in a material misstatement or omission in any report we have filed with or
submitted to the Commission.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
(b)
Changes in internal controls over
financial reporting
. During the 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 and settled legal
proceedings as of September 30, 2009:
CRG Partners, Inc. and
Capital Research Group, Inc. and Genesis Technology Group, Inc.,
n/k/a Genesis
Pharmaceuticals Enterprises, Inc. (Arbitration) - Case No. 32 145 Y 00976 07,
American Arbitration Association, Southeast Case Management
Center
On
December 4, 2007, CRG Partners, Inc. (“CRGP”), a former consultant of the
Company, filed a demand for arbitration against the Company alleging breach of
contract and seeking damages of approximately $10 million as compensation for
consulting services rendered to the Company. The amount of damages sought by the
claimant was equal to the dollar value of 29,978,900 shares of the Company’s
common stock (Pre 40-to-1 reverse split) in November 2007, in which the claimant
alleged were due and owing to CRGP. On December 5, 2007, the Company gave notice
of termination of the relationship with CRG under the consulting agreement. CRGP
subsequently filed an amendment to the demand for arbitration to include Capital
Research Group, Inc. (“CRG”) as an added claimant and increased the damage
amount sought under this matter to approximately $13.8 million. The Company
subsequently filed counter claims in reference to the aforementioned allegations
of breach of contract.
In
February 2009, the Company was notified by the arbitration panel of American
Arbitration Association (the “Panel”) that the Panel awarded CRG and CRGP
jointly, a net total of $980,070 (the “Award”) to be paid by the Company on or
before February 27, 2009. Once the Award is satisfied, CRG and CRGP would have
no further claims against the Company’s common stock or other property that were
the subject of the arbitration. The amount has been charged to operations for
year ended June 30, 2009, and is included in liabilities assumed from during the
reorganization as of June 30, 2009.
On March
6, 2009, CRG Partners, Inc. (“CRGP”) and Capital Research Group, Inc. (“CRG”),
former consultants of the Company, filed a motion to confirm the arbitration
award conferred by a panel of arbitrators of the American Arbitration
Association on February 2, 2009. On July 15, 2009, the Cicuit Court of the 11th
Judicial Circuit in and for Miami-Dade County confirmed the arbitration award
and entered judgment against Genesis Technology Group, Inc. As of September 30,
2009, the award has not been paid and the Company is currently in the process of
settling the arbitration award with CRGP and CRG.
Item 2.
Unregistered Sales of Equity
Securities and Use of Proceeds
In July
2009, the Company issued 1009 shares of common stock to a director of the
Company 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 three
months ended September 30, 2009, the Company recorded stock based compensation
of $10,000 accordingly. The recipient of the shares was an accredited investor
and the issuance of the shares was exempt from registration under the Securities
Act in reliance on an exemption provided by Section 4(2) of that
Act.
In August
2009, the Company issued 82,500 shares of its common stock, in lieu of a cash
interest payment of $660,000, to Pope Investments LLC (“Pope”) in payment
of the interest on the Company’s 6% Convertible
Subordinated Debentures issued in November 2007 and the Company’s 6%
Convertible Notes issued in May 2008 ( the “May 2008 Notes”) held by
Pope that was due on May 30, 2009. Pope is an accredited investor and the
issuance of these shares to Pope, was exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2)
of that Act.
In
September 2009, the Company issued 62,500 shares of its common stock to a holder
of its May 2008 Notes in connection with the conversion, of $500,000 aggregate
principal amount of May 2008 Notes pursuant to the terms thereof by
the holder. 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.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submissions of Matters to a Vote of Security Holders
None.
Item 5.
Other
Information
.
None.
Item
6. Exhibits
No.
|
|
Description
|
10.1
|
|
Letter
Agreement Between the Company and Pope Investments LLC dated August 10,
2009. (1)
|
|
|
|
31.1
|
|
Rule
13a-14(a)/ 15d-14(a) Certification of Chief Executive
Officer
|
|
|
|
31.2
|
|
Rule
13a-14(a)/ 15d-14(a) Certification of Chief Financial
Officer
|
|
|
|
32.1
|
|
Section
1350 Certification of Chief Executive Officer and Chief Financial
Officer
|
(1)
Incorporated by reference from the Company’s current Report on Form 8-K filed on
August 14, 2009.
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
JIANGBO
PHARMACEUTICALS, INC.
|
|
|
|
Date:
November 16, 2009
|
By:
|
/s/ Cao
Wubo
|
|
|
|
Cao
Wubo
Chief
Executive Officer and
President
|