UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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


For the
quarterly period ended March 31,
2009


or





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


For the
transition period from _______ to _________





Commission
File No. 000-51379





CHINA
MEDICINE CORPORATION


(Exact
name of registrant as specified in its charter)




Delaware
            
            51-0539830(State
      or other jurisdiction of incorporation)
            
            I.R.S.
      Employer Identification Number




Guangri
Mansion, Suite 702


No. 9
Siyou Nan Rd, Wuyang Xincheng


Guangzhou, China
510600


(Address
of principal executive offices)





(86-20) 8739-1718 and
(86-20) 8737-8212


(Registrant's
telephone number, including area code)





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





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 “small
reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer
             ̈
            
            Accelerated filer
             ̈Non-accelerated filer
             ̈
            (Do not check if a smaller reporting company)
            Smaller reporting company
            x





Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).  ̈
Yesx No





The
number of shares of the Registrant's Common Stock, par value $0.0001 per share,
outstanding at May 12, 2009 was 15,226,742.








CHINA
MEDICINE CORPORATION





TABLE OF
CONTENTS





PagePART I
                      FINANCIAL INFORMATIONItem
      1.
                      Financial
      Statements
                      3Item
      2.
                      Management’s
      Discussion and Analysis or Plan of Operation
                      26Item
      4T.
                      Controls
      and Procedures
                      39PART II
                      OTHER INFORMATION
                      40Item
      6.
                      Exhibits
                      40Signatures
                      41Exhibits/Certifications




2





PART
I. FINANCIAL INFORMATION





Item
1. Financial Statements


CHINA MEDICINE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
BALANCE SHEETS
 AS OF
MARCH 31, 2009 AND DECEMBER 31, 2008
  March 31,
                      
                      
                      December 31,2009
                      
                      
                      2008UnauditedASSETSCURRENT
      ASSETSCash
                      
                      $
                      1,770,955
                      
                      
                      $
                      2,791,814Notes
      receivables
                      
                      
                      996,200
                      
                      
                      
                      600,911Accounts
      receivable, trade, net of allowance for doubtful accounts of $96,477 and
      $96,609 as of March 31, 2009 and December 31, 2008,
      respectively
                      
                      
                      14,919,635
                      
                      
                      
                      19,225,091Inventories
                      
                      
                      7,879,305
                      
                      
                      
                      4,725,322Advances
      to suppliers
                      
                      
                      9,415,546
                      
                      
                      
                      6,121,974Other
      current assets
                      
                      
                      230,801
                      
                      
                      
                      192,080Total
      current assets
                      
                      
                      35,212,442
                      
                      
                      
                      33,657,192EQUIPMENT,
      net
                      
                      
                      3,559,893
                      
                      
                      
                      3,761,637OTHER
      ASSETSLong
      term prepayment
                      
                      
                      5,536,804
                      
                      
                      
                      6,014,920Intangible
      assets, net
                      
                      
                      1,245,844
                      
                      
                      
                      1,247,567Total
      other assets
                      
                      
                      6,782,648
                      
                      
                      
                      7,262,487Total
      assets
                      
                      $
                      45,554,983
                      
                      
                      $
                      44,681,316LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIESAccounts
      payable, trade
                      
                      $
                      57,758
                      
                      
                      $
                      61,243Other
      payables and accrued liabilities
                      
                      
                      23,292
                      
                      
                      
                      50,559Customer
      deposits
                      
                      
                      88,914
                      
                      
                      
                      151,429Taxes
      payable
                      
                      
                      570,184
                      
                      
                      
                      772,289Liquidated
      damages payable
                      
                      
                      44,003
                      
                      
                      
                      44,003Total
      current liabilities
                      
                      
                      784,151
                      
                      
                      
                      1,079,523Fair
      value of warrant liabilities
                      
                      
                      1,174,231
                      
                      
                      
                      -Total
      liabilities
                      
                      
                      1,958,382
                      
                      
                      
                      1,079,523Commitment
      and contingenciesSHAREHOLDERS'
      EQUITYPreferred
      stock, $0.0001 par value; 10,000,000 shares authorized, no shares issued
      and outstanding
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, $0.0001 par value; 90,000,000 shares authorized, 15,226,742 shares
      issued and outstanding at March 31, 2009 and December 31,
    2008
                      
                      
                      1,522
                      
                      
                      
                      1,522Paid-in
      capital
                      
                      
                      12,470,726
                      
                      
                      
                      13,011,012Statutory
      reserves
                      
                      
                      3,178,861
                      
                      
                      
                      3,178,861Retained
      earnings
                      
                      
                      22,822,647
                      
                      
                      
                      22,146,572Accumulated
      other comprehensive income
                      
                      
                      4,369,586
                      
                      
                      
                      4,428,294Total
      shareholders' equity
                      
                      
                      42,843,342
                      
                      
                      
                      42,766,261NONCONTROLLING
      INTEREST
                      
                      
                      753,259
                      
                      
                      
                      835,532Total
      shareholders' equity
                      
                      
                      43,596,601
                      
                      
                      
                      43,601,793Total
      liabilities and shareholders' equity
                      
                      $
                      45,554,983
                      
                      
                      $
                      44,681,316
 
 The
accompanying notes are an integral part of this consolidated
statement.
  3
 
 CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR THE
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 
 2009
                    
                    
                    2008REVENUES:Product
      sales
                    
                    $
                    10,098,390
                    
                    
                    $
                    6,851,384Medical
      formula sales
                    
                    
                    -
                    
                    
                    
                    209,655Total
      revenues
                    
                    
                    10,098,390
                    
                    
                    
                    7,061,039COST
      OF GOOD SOLD
                    
                    
                    7,318,762
                    
                    
                    
                    4,749,019GROSS
      PROFIT
                    
                    
                    2,779,628
                    
                    
                    
                    2,312,020OPERATING
      EXPENSES:Research
      and development
                    
                    
                    184,880
                    
                    
                    
                    88,392Selling,
      general and administrative
                    
                    
                    827,184
                    
                    
                    
                    812,508Total
      operating expenses
                    
                    
                    1,012,064
                    
                    
                    
                    900,900INCOME  FROM
      OPERATIONS
                    
                    
                    1,767,564
                    
                    
                    
                    1,411,120OTHER
      INCOME (EXPENSE):Other
      Income, Net
                    
                    
                    5,553
                    
                    
                    
                    5,983Change
      in Fair Value of Warrants
                    
                    
                    (758,689
                    )
                    
                    
                    -INCOME
      BEFORE INCOME TAXES AND NONCONTROLLING INTEREST
                    
                    
                    1,014,428
                    
                    
                    
                    1,417,103PROVISION
      FOR INCOME TAXES
                    
                    
                    545,486
                    
                    
                    
                    268,767NET
      INCOME BEFORE NONCONTROLLING INTEREST
                    
                    
                    468,942
                    
                    
                    
                    1,148,336Add:
      Net Income Attributable to Noncontrolling Interest
                    
                    
                    81,140
                    
                    
                    
                    27,477NET
      INCOME ATTRIBUTABLE TO CHINA MEDICINE CORPORATION
                    
                    
                    550,082
                    
                    
                    
                    1,175,813OTHER
      COMPREHENSIVE (LOSS) INCOME:Foreign
      Currency Translation Adjustment
                    
                    
                    (58,708
                    )
                    
                    
                    1,290,620Comprehensive
      (loss) attributable to noncontrolling interest
                    
                    
                    (1,133
                    )
                    
                    
                    36,546COMPREHENSIVE
      INCOME
                    
                    $
                    490,241
                    
                    
                    $
                    2,502,979EARNINGS
      PER SHARE:Basic
                    
                    $
                    0.04
                    
                    
                    $
                    0.08Diluted
                    
                    $
                    0.04
                    
                    
                    $
                    0.08WEIGHTED
      AVERAGE SHARES OUTSTANDING:Basic
                    
                    
                    15,226,742
                    
                    
                    
                    15,029,865Diluted
                    
                    
                    15,226,742
                    
                    
                    
                    15,339,834
 
 The
accompanying notes are an integral part of this consolidated
statement.
  4
 
 CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 AccumulatedRetainedEarnings
                        
                        
                        otherPreferredStock
                        
                        
                        CommonStock
                        
                        
                        Paid-in
                        
                        
                        Statutory
                        
                        
                        
                        
                        
                        comprehensive
                        
                        
                        NoncontrollingShares
                        
                        
                        Par Value
                        
                        
                        Shares
                        
                        
                        Par Value
                        
                        
                        capital
                        
                        
                        reserves
                        
                        
                        Unrestricted
                        
                        
                        income
                        
                        
                        Interest
                        
                        
                        TotalsBALANCE,
      December 31, 2007
                        
                        
                        111,649
                        
                        
                        $
                        11
                        
                        
                        
                        14,821,641
                        
                        
                        $
                        1,482
                        
                        
                        $
                        12,560,078
                        
                        
                        $
                        2,191,230
                        
                        
                        $
                        14,008,587
                        
                        
                        $
                        2,122,795
                        
                        
                        $
                        893,337
                        
                        
                        $
                        31,777,520Net
      income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,175,813
                        
                        
                        
                        
                        
                        
                        
                        (27,477
                        )
                        
                        
                        1,148,336Preferred
      stock converted to common stock
                        
                        
                        (51,649
                        )
                        
                        
                        (5
                        )
                        
                        
                        53,246
                        
                        
                        
                        5
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Stock
      options exercised for cash @ $1.25
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        290,000
                        
                        
                        
                        29
                        
                        
                        
                        362,471
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        362,500Stock
      option and warrant compensation
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        26,157
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        26,157Foreign
      currency translation adjustments
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,290,620
                        
                        
                        
                        36,546
                        
                        
                        
                        1,327,166BALANCE,
      March 31, 2008 (UNAUDITED)
                        
                        
                        60,000
                        
                        
                        $
                        6
                        
                        
                        
                        15,164,887
                        
                        
                        $
                        1,516
                        
                        
                        $
                        12,948,706
                        
                        
                        $
                        2,191,230
                        
                        
                        $
                        15,184,400
                        
                        
                        $
                        3,412,940
                        
                        
                        $
                        902,406
                        
                        
                        $
                        34,641,204Net
      income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        7,949,803
                        
                        
                        
                        
                        
                        
                        
                        (90,789
                        )
                        
                        
                        7,859,014Adjustment
      of statutory reserve
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        987,631
                        
                        
                        
                        (987,631
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Preferred
      stock converted to common stock
                        
                        
                        (60,000
                        )
                        
                        
                        (6
                        )
                        
                        
                        61,855
                        
                        
                        
                        6
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Stock
      options exercised for cash @ $1.25
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Stock
      option and warrant compensation
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        62,306
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        62,306Foreign
      currency translation adjustments
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,015,354
                        
                        
                        
                        23,915
                        
                        
                        
                        1,039,269BALANCE,
      December 31, 2008
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        15,226,742
                        
                        
                        $
                        1,522
                        
                        
                        $
                        13,011,012
                        
                        
                        $
                        3,178,861
                        
                        
                        $
                        22,146,572
                        
                        
                        $
                        4,428,294
                        
                        
                        
                        835,532
                        
                        
                        $
                        43,601,793Cumulative
      effect of reclassification of warrants
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (541,535
                        )
                        
                        
                        
                        
                        
                        
                        125,993
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (415,542
                        )BALANCE,
      January 1, 2009, as adjusted
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        15,226,742
                        
                        
                        $
                        1,522
                        
                        
                        $
                        12,469,477
                        
                        
                        $
                        3,178,861
                        
                        
                        $
                        22,272,565
                        
                        
                        $
                        4,428,294
                        
                        
                        
                        835,532
                        
                        
                        $
                        43,186,251Net
      income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        550,082
                        
                        
                        
                        
                        
                        
                        
                        (81,140
                        )
                        
                        
                        468,942Adjustment
      of statutory reserve
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Stock
      option and warrant compensation
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,249
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,249Foreign
      currency translation adjustments
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (58,708
                        )
                        
                        
                        (1,133
                        )
                        
                        
                        (59,841
                        )BALANCE,
      March 31, 2009 (UNADUDITED)
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        15,226,742
                        
                        
                        $
                        1,522
                        
                        
                        $
                        12,470,726
                        
                        
                        $
                        3,178,861
                        
                        
                        $
                        22,822,647
                        
                        
                        $
                        4,369,586
                        
                        
                        $
                        753,259
                        
                        
                        $
                        43,596,601
 
 The
accompanying notes are an integral part of this consolidated
statement.
  5
 
 CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 
 2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income attributable to China Medicine Corporation
                  
                  $
                  550,082
                  
                  
                  $
                  1,175,813Net
      income attributable to noncontrolling interest
                  
                  
                  (81,140
                  )
                  
                  
                  (27,477
                  )Consolidated
      net income
                  
                  
                  468,942
                  
                  
                  
                  1,148,336Adjustments
      to reconcile net income to cash used in operating
    activities:Depreciation
      and amortization
                  
                  
                  216,195
                  
                  
                  
                  96,744Loss
      on sale of assets
                  
                  
                  5,934
                  
                  
                  
                  -Stock
      option and warrant compensation
                  
                  
                  1,249
                  
                  
                  
                  26,157Amortization
      of deferred expenses
                  
                  
                  -
                  
                  
                  
                  86,431Change
      in fair value of warrant liabilities
                  
                  
                  758,689
                  
                  
                  
                  -Change
      in operating assets and liabilitiesNotes
      receivables
                  
                  
                  (396,135
                  )
                  
                  
                  (1,646,491
                  )Accounts
      receivable, trade
                  
                  
                  4,279,540
                  
                  
                  
                  959,968Inventories
                  
                  
                  (3,160,625
                  )
                  
                  
                  (793,559
                  )Advances
      to suppliers
                  
                  
                  (3,302,140
                  )
                  
                  
                  (662,079
                  )Other
      current assets
                  
                  
                  (38,849
                  )
                  
                  
                  (79,904
                  )Accounts
      payable, trade
                  
                  
                  (3,402
                  )
                  
                  
                  (30,774
                  )Other
      payables and accrued liabilities
                  
                  
                  (17,056
                  )
                  
                  
                  (49,957
                  )Customer
      deposits
                  
                  
                  (62,312
                  )
                  
                  
                  (54,499
                  )Taxes
      payable
                  
                  
                  (201,065
                  )
                  
                  
                  (142,540
                  )Net
      cash used in operating activities
                  
                  
                  (1,451,035
                  )
                  
                  
                  (1,142,167
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of equipment
                  
                  
                  (25,478
                  )
                  
                  
                  (4,490
                  )Long
      term prepayment
                  
                  
                  469,949
                  
                  
                  
                  -Net
      cash provided by (used in) investing activities
                  
                  
                  444,471
                  
                  
                  
                  (4,490
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from exercise of options and warrants
                  
                  
                  -
                  
                  
                  
                  362,500Net
      cash provided by financing activities
                  
                  
                  -
                  
                  
                  
                  362,500EFFECT
      OF EXCHANGE RATE ON CASH
                  
                  
                  (14,295
                  )
                  
                  
                  193,444DECREASE
      IN CASH
                  
                  
                  (1,020,859
                  )
                  
                  
                  (590,713
                  )CASH,
      beginning of period
                  
                  
                  2,791,814
                  
                  
                  
                  5,767,774CASH,
      end of period
                  
                  $
                  1,770,955
                  
                  
                  $
                  5,177,061
 
 The
accompanying notes are an integral part of this consolidated
statement.
  6
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 Note
1 - Organization
 
 China
Medicine Corporation (the "Company") is a Delaware corporation, incorporated on
February 10, 2005. The Company, through its subsidiaries in People’s Republic of
China (“PRC” or “China”), engages in the wholesale of prescription and over the
counter medicines, traditional Chinese medicines, which are medicines derived
from Chinese herbs, dietary supplements, medical instruments and the sale of
medical formula in the PRC.
 
 Effective
February 8, 2006, the Company entered into a Stock Exchange Agreement (“Exchange
Agreement”) with Guangzhou Konzern Medicine Co., Ltd.
(“Konzern”).  Konzern was privatized from a state-owned company on
July 25, 2000 in Guangzhou, China.  Konzern US Holding Corporation
(“Konzern Holding”) was registered in New Jersey on January 11, 2006 for the
purpose of distributing and marketing drugs, medical supplies and medical
equipment. Konzern Holding is a wholly-owned subsidiary of Konzern with 100,000
shares of stock authorized. Konzern Holding had no operating activities. As of
March 31, 2009, Konzern Holding received $200,000 from Konzern as an initial
investment.
 
 On July
7, 2006, Konzern formed a PRC joint-venture company with Guangzhou Ji’nan
Science & Technology Industrial Group (“JSIG”) and Mr. Dongsheng Yao, to
develop applications for aflatoxin-detoxifizyme, or ADTZ.  Konzern has
70% ownership in Co-Win. The joint venture’s name is Guangzhou Co-Win
Bioengineering Co., Ltd. (“Co-Win”). As of March 31, 2009, Co-Win is still in
development and has not undertaken significant operating
activities.
 
 Note
2 - Summary of significant accounting policies
 
 Basis of
presentation
 
 The
consolidated financial statements of the Company reflect its wholly-owned
subsidiary, Konzern, its 70% owned subsidiary, Co-Win, both located in the PRC,
and its wholly-owned subsidiary Konzern Holding. The accompanying consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. All material inter-company
transactions and balances have been eliminated in consolidation.
 
 While
management has included all normal recurring adjustments considered necessary to
give a fair presentation of the operating results for the periods presented,
interim results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction with
information included in the 2008 annual report filed on Form
10-K.
  7
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 Use of
estimates
 
 In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and the disclosure of contingent
assets and liabilities at the date of the financial statements, and revenues and
expenses during the reported period. For example, management estimates the fair
value of its options and warrants as well as the amount of potentially
uncollectible accounts. Actual results could differ from those
estimates.
 
 Cash and concentration of
risk
 
 For
purposes of the cash flow statements, the Company considers all highly liquid
investments with original maturities of three months or less at the time of
purchase to be cash equivalents. Cash includes cash on hand and demand deposits
in accounts maintained with the PRC state-owned banks and banks in the United
States.
 
 Financial
instruments, which subject the Company to concentration of credit risk, consist
of cash. The Company maintains balances at financial institutions which, from
time to time, may exceed Federal Deposit Insurance Corporation insured limits
for banks that are located in the Unites States. No deposits with the state
owned banks within the PRC are covered by insurance. As of March 31, 2009 and
December 31, 2008, the Company had deposits in excess of federally insured
limits total of $1,702,853 and $2,613,220, respectively. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant risks on its cash in bank accounts.
 
 The
Company's operations may be adversely affected by significant political,
economic and social uncertainties in China . Although the Chinese government has
pursued economic reform policies in the past, there is no assurance that the
Chinese government will continue to pursue such policies or that such policies
may not be significantly altered, especially in the event of a change in
leadership, social or political disruption or unforeseen circumstances affect
China's political, economic and social conditions. There is also no guarantee
that the Chinese government's pursuit of economic reforms will be consistent or
effective.
 
 For the
three months ended March 31, 2009 and 2008, five suppliers accounted for
approximately 55% and 59%, respectively, of the Company's purchases. Advances to
these five suppliers represent 30% and 39% of the Company’s total advances to
suppliers as of March 31, 2009 and 2008, respectively. As of March 31, 2009 and
2008, no accounts payables were due to these suppliers.
 
 For the
three months ended March 31, 2009 and 2008, five customers accounted for
approximately 51% and 39%, respectively, of the Company's total sales. The
accounts receivable balance of these five customers amounted to $6,874,533 and
$3,368,985 representing 46% and 25% of the total accounts receivable as of March
31, 2009 and 2008, respectively.
 
 For the
three months ended March 31, 2009 and 2008, the top three products accounted for
approximately 47% and 18% of the Company’s total sales,
respectively.
  8
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 Accounts receivable,
trade
 
 The
Company extends unsecured credit to its customers.  Management reviews
the composition of accounts receivable and analyzes historical bad debts,
customer concentrations, customer credit worthiness, current economic trends and
changes in customer payment patterns to determine if the allowance for doubtful
accounts is adequate.  An estimate for doubtful accounts is made when
collection of the full amount is no longer probable. Account balances are
written-off after management has exhausted all collection efforts.
 
 Notes
receivable
 
 Notes
receivable represents trade accounts receivable due from various customers where
the customers’ banks have guaranteed the payment of the receivables. This amount
is non-interest bearing and is normally paid within three to six months. The
Company has the ability to submit a request for payment to the customer’s bank
earlier than the scheduled payment date, but will incur an interest charge and a
processing fee when it submits the early payment request.
 
 Inventories
 
 Inventories
are stated at the lower of cost or market value, cost is determined using the
weighted average method. Management compares the cost of inventory with current
market values and if lower than cost, records an allowance, writing down the
inventory to its market value.
 
 Equipment
 
 Equipment
is stated at the actual cost of acquisition less accumulated depreciation and
amortization. Depreciation and amortization are provided in amounts sufficient
to relate the cost of depreciation of assets to operations over their estimated
service lives, principally on a straight-line basis. The estimated lives used in
determining depreciation are:
 
 Leasehold
      improvements
                  5
      yearsEquipment
                  5
      yearsFurniture
                  5
      yearsMotor
      vehicles
                  5 -
      8 years
 
 The
residual value is estimated to be 5% of the actual cost.
  9
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of operations. Maintenance, repairs and minor renewals are expensed as
incurred.
 
 Long term
prepayment
 
 Long term
prepayment represents a deposit for the bidding of the Bacillus Calmette-Guerin
(“BCG”) vaccine manufacturing license, a prepayment for agency fees and
prepayment for planned construction. On June 1, 2008, the Company entered into
an agreement with Guangzhou Hongyuan Pharmaceutical Company (“Hongyuan”)
relating to the purchase of the ownership of BCG vaccine. As of March 31, 2009,
the Company paid $2.9 million to Hongyuan as deposit to secure the exclusivity
in the negotiation, the BCG vaccine bidding process had not started nor had the
Company received the BCG vaccine manufacturing license.
 
 Intangibles
 
 Under the
Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other
Intangible Assets", all goodwill and certain intangible assets determined to
have indefinite lives will not be amortized but will be tested for impairment at
least annually. Intangible assets other than goodwill will be amortized over
their useful lives and reviewed for impairment at least annually or more often
whenever there is an indication that the carrying amount may not be
recovered.
 
 The
Company acquired technology during 2007 and 2008 to manufacture
aflatoxin-detoxifizyme ("ADTZ"). The Company will begin amortizing costs once
manufacturing begins. As of March 31, 2009, the Company had not yet begun
operations.
 
 The
future amortization for the years ending December 31, are as follows assuming
the Company will begin amortizing the intangibles from 2009:
 
 December
      31,2009
                              
                              $
                              91,7702010
                              
                              
                              91,7702011
                              
                              
                              91,7702012
                              
                              
                              91,7702013
                              
                              
                              55,095Thereafter
                              
                              
                              825,311
  10
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 Impairment of long-lived
assets
 
 Per SFAS
144, long-lived assets are analyzed for impairment. The Company tests for
impairment of long-lived assets at least annually or more often whenever there
is an indication that the carrying amount of the asset may not be recovered.
Recoverability of these assets is determined by comparing the forecasted
undiscounted cash flows generated by those assets to the assets' net carrying
value. The amount of impairment loss, if any, is measured as the difference
between the net book value of the assets and the estimated fair value of the
related assets.
 
 Management
evaluates the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such flows of certain long-lived assets are
not sufficient to recover the carrying value of such assets, the assets are
adjusted to their fair values. As of March 31, 2009, the Company believes that
there were no impairments of long-lived assets.
  Revenue
recognition
 
 The
Company recognizes revenue when all four of the following criteria are met: (1)
persuasive evidence has been received that an arrangement exists; (2) delivery
of the products and/or services has occurred; (3) the selling price is fixed or
determinable; and (4) collectability is reasonably assured. The Company follows
the provisions of SAB 104 which sets forth guidelines in the timing of revenue
recognition based upon factors such as passage of title, installation, payments
and customer acceptance. Any amounts received prior to satisfying the Company's
revenue recognition criteria is recorded as deferred revenue. The Company
requires its customers to deposit monies with the Company when they place an
order. The Company does not pay interest on these amounts.
 
 Sales
revenue represents the invoiced value of goods, net of a value-added tax (VAT).
All of the Company's products that are sold in the PRC are subject to a Chinese
VAT at a rate of 17% of the gross sales price. This VAT may be offset by VAT
paid by the Company on raw materials and other materials included in the cost of
producing their finished product.
 
 VAT on
sales and VAT on purchases amounted to $1,716,427 and $1,780,250 for the three
months ended March 31, 2009 and $1,189,694 and $971,080 for the three months
ended March 31, 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
costs
  Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative costs and totaled $124,079 and $108,945 for the three
months ended March 31, 2009 and 2008, respectively.
  11
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 Advertising
costs
 
 The
Company expenses the cost of advertising as incurred in selling, general and
administrative costs. For the three months ended March 31, 2009 and 2008,
advertising expenses amounted to $30,127 and $978, respectively.
 
 Research and development
costs
 
 Research
and development costs are expensed as incurred. The costs of material and
equipment that are acquired or constructed for research and development
activities, and have alternative future uses, either in research and
development, marketing, or sales, are classified as property and equipment or
depreciated over their estimated useful lives.
 
 Foreign currency
translation
  The
reporting currency of the Company is the US dollar. The Company uses their local
currency, Renminbi (RMB), as its functional currency. Results of operations and
cash flow 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 the Consolidated Statements of Shareholders’
Equity.  Because cash flows are also translated at average translation
rates, amounts reported on the Consolidated Statements of Cash Flows will not
necessarily agree with changes in the corresponding balances on the Consolidated
Balance Sheets.
 
 Asset and
liability accounts at March 31, 2009 were translated at 6.83 RMB to $1.00 as
compared to 6.82 RMB at December 31, 2008. Equity accounts were stated at their
historical rate. The average translation rates applied to income and cash flow
statements for the three months ended March 31, 2009 and 2008 were 6.82 RMB and
7.16 RMB, respectively.
 
 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. No material transaction gains and losses for
the three months ended March 31, 2009 and 2008. Historically, the Company has
not entered any currency trading or hedging transactions, although there is no
assurance that the Company will not enter into such transactions in the
future.
 
 Reclassifications
 
 Certain
prior period amounts have been reclassified for consistent presentation. These
reclassifications had no material effect on previously reported net
income.
  12
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 Income
taxes
 
 The
Company records income taxes pursuant to SFAS 109, "Accounting for Income Taxes"
and FIN 48, “Accounting for Uncertainty in Income Taxes”.  The
provision consists of the recognition of deferred income tax liabilities and
assets for the expected future tax consequences of temporary differences between
income tax basis and financial reporting basis of assets and liabilities.
Provision for income taxes consist of taxes currently due plus deferred taxes.
There are no deferred tax amounts at March 31, 2009 and 2008.
 
 The
charge for taxation is based on the results for the year as adjusted for items,
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantially enacted as of the balance sheet
date.
 
 Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probable that
taxable profit will be available against which deductible temporary differences
can be utilized. Deferred tax is calculated at the tax rates that are expected
to apply to the period when the asset is realized or the liability is settled.
Deferred tax is charged or credited in the income statement, except when it is
related to items credited or charged directly to equity, in which case the
deferred tax is also dealt with in equity. Deferred tax assets and liabilities
are offset when they relate to income taxes levied by the same taxation
authority and the Company intends to settle its current tax assets and
liabilities on a net basis.
  Under FIN
48, a tax position is recognized as a benefit only if it is “more likely than
not” that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is
recorded.
 
 China
Medicine Corporation was incorporated in the United States and has incurred net
operating losses for income tax purposes for the three months ended March 31,
2009 and 2008, respectively. The net operating loss carry forwards for United
States income taxes amounted to $4,200,000 which may be available to reduce
future years’ taxable income. These carry forwards will expire, if not utilized,
through 2029. Management believes that the realization of the benefits from
these losses appears uncertain due to the Company’s limited operating history
and continuing losses for United States income tax purposes. Accordingly, the
Company has provided a 100% valuation allowance on the deferred tax asset
benefit to reduce the asset to zero. The valuation allowance at March 31, 2009
was $1,428,000. The net change in the valuation allowance for the three months
ended March 31, 2009 was an increase of $561,000. Management will review this
valuation allowance periodically and make adjustments as
warranted.
  13
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 Fair value of financial
instruments
 
 SFAS107,
“Disclosures About Fair Value of Financial Instruments,” defines financial
instruments and requires fair value disclosures of those financial instruments.
SFAS
157, “Fair Value Measurements,” adopted January 1, 2008, defines fair value,
establishes a three-level valuation hierarchy for disclosures of fair value
measurement and enhances disclosures requirements for fair value measures.
Receivables, payables and warrant liabilities each qualify as financial
instruments.  Management believes the carrying amounts of receivables
and payables and are a reasonable estimate of fair value because of the short
period of time between the origination of such instruments and their expected
realization. The three levels are defined as follow:
  ·
              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.
 
 Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates the hierarchy disclosures each
quarter. Liabilities measured at fair value on a recurring basis are summarized
as follows (unaudited):
 
 Carrying
      Value as
                    of
      March 31, 2009
                  
                  Fair
      Value Measurements at March
                    31,
      2009Level
      1
                  
                  Level
      2
                  
                  Level
      3Warrant
      liabilities
                  
                  $
                  1,174,231
                  
                  
                  
                  $
                  1,174,231
  A
discussion of the valuation techniques used to measure fair value for the
liabilities listed above and activity for these liabilities for the three months
ended March 31, 2009 is provided elsewhere in this footnote. There were no
assets or liabilities measured at fair value on a non-recurring basis
during the three months ended March 31, 2009.
  14
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 Stock-based
compensation
 
 The
Company records and reports employee stock-based compensation under FAS 123R,
“Share-Based Payments”. This Statement requires a public entity to measure the
cost of services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. That cost is recognized over the
period during which services are received. Stock compensation for stock granted
to non-employees is determined in accordance with FAS 123R and the EITF 96-18,
"Accounting for Equity Instruments that are issued to Other than Employees for
Acquiring, or in Conjunction with Selling Goods or Services", as the fair value
of the consideration received or the fair value of equity instruments issued,
whichever is more reliably measured.
 
 Earnings per
share
 
 The
Company reports earnings per share in accordance with the provisions of SFAS
128, "Earnings Per Share," which 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 are computed by
dividing income available to common stockholders by the weighted average common
shares outstanding during the period. Diluted earnings per share takes into
account the potential dilution that could occur if securities or other contracts
to issue common stock were exercised and converted into common
stock.
  The
following is a reconciliation of the basic and diluted earnings per share
computations for the three months ended March 31:
 
 2009
                                  
                                  
                                  2008Net
      income
                                  
                                  $
                                  550,082
                                  
                                  
                                  $
                                  1,175,813Shares
      of common stock and common stock equivalents:Weighted
      average shares used in basic computation
                                  
                                  
                                  15,226,742
                                  
                                  
                                  
                                  15,029,865Diluted
      effect of stock options, warrants, and preferred stock
                                  
                                  
                                  -
                                  
                                  
                                  
                                  309,969Weighted
      average shares used in diluted computation
                                  
                                  
                                  15,226,742
                                  
                                  
                                  
                                  15,339,834Earnings
      per share:Basic
                                  
                                  $
                                  0.04
                                  
                                  
                                  $
                                  0.08Diluted
                                  
                                  $
                                  0.04
                                  
                                  
                                  $
                                  0.08
  For the
three months ended March 31, 2009, 3,418,686 warrants whose exercise price is
between $1.70 to $2.43 and 365,000 options whose exercise price is between $1.25
to $3.00 are excluded from the calculation because of their anti-dilutive
nature.
  15
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 Recently Adopted AccountingPronouncements
 
 Warrantsliabilities
 
 Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5,
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock”, which is effective for financial statements for fiscal
years beginning after December 15, 2008 and which replaced the previous guidance
on this topic in EITF 01-6.  Paragraph 11(a) of FAS 133 specifies that
a contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company’s own stock and (b) classified in stockholders’
equity in the statement of financial position would not be considered a
derivative financial instrument.  EITF 07-5 provides a new two-step
model to be applied in determining whether a financial instrument or an embedded
feature is indexed to an issuer’s own stock and thus able to qualify for the FAS
133 paragraph 11(a) scope exception.
 
 As a
result of adopting EITF 07-5, 3,348,686 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, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expire.
 
 As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in February 2006. On January 1,
2009, we reclassified from additional paid-in capital, as a cumulative effect
adjustment, $125,993 to beginning retained earnings and $415,542 to warrant
liabilities to recognize the fair value of such warrants. The fair value of the
warrants was $1,174,231 on March 31, 2009.  Therefore, the Company
recognized a $758,689 loss from the change in fair value for the three
months ended March 31, 2009.
 
 These
common stock purchase warrants do not trade in an active securities market, and
as such, we estimate the fair value of these warrants using the Black-Scholes
Option Pricing Model using the following assumptions:
 
 March
      31, 2009
                    
                    
                    January
      1, 2009(unaudited)Annual
      dividend yield
                    
                    
                    -
                    
                    
                    
                    -Expected
      life (years)
                    
                    
                    1.85
                    
                    
                    
                    2.10Risk-free
      interest rate
                    
                    
                    0.81
                    %
                    
                    
                    0.81
                    %Expected
      volatility
                    
                    
                    89
                    %
                    
                    
                    84
                    %
 
 Expected
volatility is based on historical volatility. Historical volatility was computed
using daily pricing observations for recent periods that correspond to the term
of the warrants. We believe this method produces an estimate that is
representative of our expectations of future volatility over the expected term
of these warrants. We have no reason to believe future volatility over the
expected remaining life of these warrants likely to 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 warrants.
  16
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 Noncontrolling
interest
 
 Noncontrolling
interest consists of the 30% interest of noncontrolling shareholders in
Guangzhou Co-win Bioengineering Co., Ltd.  Effective January 1,
2009, the Company adopted SFAS 160, “Noncontrolling Interests in Consolidated
Financial Statements - an amendment of Accounting Research Bulletin No. 51”
Certain provisions of this statement are required to be adopted retrospectively
for all periods presented. Such provisions include a requirement that the
carrying value of noncontrolling interests (previously referred to as minority
interests) be removed from the mezzanine section of the balance sheet and
reclassified as equity; and consolidated net income to be recast to include net
income attributable to the noncontrolling interest. As a result of this
adoption, we reclassified noncontrolling interests in the amounts of $753,259
and $835,532 from the mezzanine section to equity in the March 31, 2009 and
December 31, 2008 balance sheets, respectively.
 
 Recently issued accounting
pronouncements
 
 In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model
included within EITF 99-20 to be more consistent with the impairment model of
SFAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in
EITF 99-20 to remove its exclusive reliance on “market participant” estimates of
future cash flows used in determining fair value. Changing the cash flows used
to analyze other-than-temporary impairment from the “market participant” view to
a holder’s estimate of whether there has been a “probable” adverse change in
estimated cash flows allows companies to apply reasonable judgment in assessing
whether an other-than-temporary impairment has occurred. The FSP shall be
effective for annual reporting periods ending after December 15, 2008. The
adoption of FSP EITF 99-20-1 did not have a material impact on the consolidated
financial statements because all of the investments in debt securities are
classified as trading securities.
  In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly”. FSP FAS 157-4 amends SFAS 157
and provides additional guidance for estimating fair value in accordance with
SFAS 157 when the volume and level of activity for the asset or liability have
significantly decreased and also includes guidance on identifying circumstances
that indicate a transaction is not orderly for fair value measurements. This FSP
shall be applied prospectively with retrospective application not permitted.
This FSP shall be effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity early adopting this FSP must also early adopt FSP
FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments”. Additionally, if an entity elects to early adopt either FSP FAS
107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt
this FSP. The Company is currently evaluating this new FSP but do not believe
that it will have a significant impact on the determination or reporting of the
financial results.
  17
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
  In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this FSP does not result in a change
in the carrying amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective
for interim and annual periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. An entity may
early adopt this FSP only if it also elects to early adopt FSP FAS 157-4. Also,
if an entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1
and APB 28-1, the entity also is required to early adopt this FSP. The
Company is currently evaluating this new FSP but do not believe that it
will have a significant impact on the determination or reporting of the
financial results.
  In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS 107 to
require disclosures about fair value of financial instruments not measured on
the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments. This FSP shall be effective for interim periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption. The
Company is currently evaluating the disclosure requirements of this new
FSP.
  18
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 Note
3 – Accounts receivable
 
 Accounts
receivable consisted of the following:
 
 March
      31, 2009
                            (unaudited)
                          
                          
                          December
      31,
                            2008Trade
      accounts receivable
                          
                          $
                          15,016,112
                          
                          
                          $
                          19,321,700Allowance
      for bad debts
                          
                          
                          (96,477
                          )
                          
                          
                          (96,609
                          )Trade
      accounts receivable, net
                          
                          $
                          14,919,635
                          
                          
                          $
                          19,225,091
 
 March 31,
      2009
                      
                      
                      December
      31,(unaudited)
                      
                      
                      2008Beginning
      allowance for doubtful accounts
                      
                      $
                      96,609
                      
                      
                      $
                      55,640Additions
      charged to bad debt expense
                      
                      
                      -
                      
                      
                      
                      36,428Foreign
      currency translation adjustments
                      
                      
                      (132
                      )
                      
                      
                      4,541Ending
      allowance for doubtful accounts
                      
                      $
                      96,477
                      
                      
                      $
                      96,609
 
 Note
4 – Inventories
 
 Inventories
consisted of only finished goods, as follows:
 
 March
      31, 2009
                            (unaudited)
                          
                          
                          December
      31,
                            2008Pharmaceutical
      Medicine
                          
                          $
                          7,879,305
                          
                          
                          $
                          4,725,322Totals
                          
                          $
                          7,879,305
                          
                          
                          $
                          4,725,322
 
 Note
5 - Equipment
 
 Equipment
consisted of the following:
 
 March 31,
      2009
                                  (unaudited)
                                
                                
                                December 31,
      2008Furniture
      and fixtures
                                
                                $
                                193,979
                                
                                
                                $
                                169,305Equipment
                                
                                
                                3,748,072
                                
                                
                                
                                3,761,419Motor
      vehicles
                                
                                
                                323,301
                                
                                
                                
                                433,768Leasehold
      improvement
                                
                                
                                317,964
                                
                                
                                
                                318,398Total
                                
                                
                                4,583,316
                                
                                
                                
                                4,682,890Less
      accumulated depreciation
                                
                                
                                (1,023,423
                                )
                                
                                
                                (921,253
                                )Equipment,
      net
                                
                                $
                                3,559,893
                                
                                
                                $
                                3,761,637
  19
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 Depreciation
expense for the three months ended March 31, 2009 and 2008 amounted to $216,175
and $96,726 respectively.
 
 Note
6 – Long term prepayment
 
 Long term
prepayment consists of the following:
 March
      31, 2009
                            (unaudited)
                          
                          
                          December
      31, 2008Prepayment
      for purchase of assets
                          
                          $
                          271,777
                          
                          
                          $
                          362,864Prepayment
      for agency fee
                          
                          
                          879,000
                          
                          
                          
                          880,200Long
      term deferred assets
                          
                          
                          124,342
                          
                          
                          
                          150,806Long
      term deposit
                          
                          
                          1,331,685
                          
                          
                          
                          1,687,050Deposit
      - technology know-how
                          
                          
                          2,930,000
                          
                          
                          
                          2,934,000Total
      long term prepayment
                          
                          $
                          5,536,804
                          
                          
                          $
                          6,014,920
 
 Note
7 - Taxes
 
 The
Company is organized in the United States and no tax benefit is expected from
tax credits in the future.  Beginning January 1, 2008, the new
Enterprise Income Tax (“EIT”) law replaced the existing laws for Domestic
Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
 
 The key
changes are:
 
 a.
              The
      new standard EIT rate of 25% replaced the 33% rate currently applicable to
      both DES and FIEs, except for High Tech companies who pays a reduced rate
      of 15%;
 
 b.
              Companies
      established before March 16, 2007 will continue to enjoy tax holiday
      treatment approved by local government for a grace period of either for
      the next 5 years or until the tax holiday term is completed, whichever is
      sooner. These companies will pay the standard tax rate as defined in point
      “a” above when the grace period
expires.
 
 The
Company and its subsidiaries were established before March 16, 2007 and
therefore are qualified to continue enjoying the reduced tax rate as described
above.
  20
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 Under the
Income Tax Laws of PRC, the Company is generally subject to income tax at an
effective rate of 33% (30% state income taxes plus 3% local income taxes) on
income reported in the statutory financial statements after appropriate tax
adjustments, unless the enterprise is located in a specially designated region
where it allows foreign enterprises a two-year income tax exemption and a 50%
income tax reduction for the following three years.  The Company’s two
subsidiaries, Konzern and Co-Win are located and are doing business in China.
Konzern was approved as a foreign Joint-venture enterprise in 2004 and as a
wholly-owned foreign enterprise in 2006. Konzern has an income tax exemption for
2004 and 2005 and a 50% reduction on the income tax rate for 2006, 2007 and
2008. Co-Win has not obtained the approval for the tax exemption in 2006, and
was subjected to an effective rate of 25%.  The tax exemption ended in
2008.  Commencing in 2009, the Company is subject to the income tax at
the effective rate of 25%.
 
 The
estimated tax savings for the three months ended March 31, 2009 and 2008
amounted to $0 and $268,767, respectively. The net effect on earnings per share
if the income tax had been applied would decrease earnings per share from $0.08
to $0.06 for the three months ended March 31, 2008.
  The
provision for income taxes for the three months ended March 31, 2009 and 2008
consisted of the following:
  2009
                          
                          
                          2008Provision
      for China income tax
                          
                          $
                          545,486
                          
                          
                          $
                          244,334Provision
      for local tax
                          
                          
                          -
                          
                          
                          
                          24,433Total
                          
                          $
                          545,486
                          
                          
                          $
                          268,767
 
 The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate for the three months ended March 31:
 
 2009
                                  
                                  2008U.S.
      statutory rates
                                  
                                  
                                  34.0
                                  %
                                  34.0
                                  %Foreign
      income not recognized in USA
                                  
                                  
                                  (34.0
                                  )
                                  (34.0
                                  )China
      income taxes
                                  
                                  
                                  25.0
                                  
                                  25.0China
      income tax exemption
                                  
                                  
                                  -
                                  
                                  (8.5
                                  )Effective
      income tax rate in China
                                  
                                  
                                  25.0
                                  %
                                  16.5
                                  %
 
 For the
three months ended March 31, 2009 and 2008, the Company’s effective tax rate was
53.8% and 19.0%.  Income before income taxes and noncontrolling
interest includes losses from non-Chinese entities, which are not
deductible.  After adjusting these losses, the Company’s effective
rate was equivalent to the effective rate in China for both
years.
  21
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 Taxes
payable consisted of the following:
 
 March 31,
      2009
                                (unaudited)
                              
                              
                              December 31,
      2008Income
      taxes payable
                              
                              $
                              36,602
                              
                              
                              $
                              12,042Value
      added tax
                              
                              
                              531,121
                              
                              
                              
                              758,168Other
      income tax
                              
                              
                              2,461
                              
                              
                              
                              2,079Total
                              
                              $
                              570,184
                              
                              
                              $
                              772,289
 
 Note
8 - Commitments and contingencies
 
 The
Company entered into non-cancelable purchase commitment with two
vendors.  As of March 31, 2009, the Company was obligated under the
non-cancelable commitment to purchase products amounting to
$1,907,100.  The Company has experienced no losses on this purchase
commitment as of March 31, 2009.
 
 On May 9,
2008, the Company signed a technology know-how transfer agreement for the amount
of $4,401,000 (RMB 30,000,000) as long term prepayment. As of March 31, 2009,
$1,467,000 remains unpaid.
 
 The
Company leases its facilities under short-term and long-term, non-cancelable
operating lease agreements expiring through November 2013. The non-cancelable
operating lease agreement states for various lease periods that the Company pays
certain monthly operating expenses applicable to the leased
premises.
  The
future minimum annual lease payments required are as follows:
 
 Year Ending March 31,
                      
                      Amount2010
                      
                      $
                      86,8102011
                      
                      
                      64,5422012
                      
                      
                      10,0442013
                      
                      
                      1,257
 
 Total
rent expense for the three months ended March 31, 2009 and 2008 amounted to
$33,449 and $29,282, respectively.
 
 Notes
9 - Supplemental disclosure of cash flows
 
 The
Company paid no cash interest for the three months ended March 31, 2009 and
2008, respectively.
 
 Cash paid
for income taxes amounted to $520,872 and $79,539 for the three months ended
March 31, 2009 and 2008, respectively.
  22
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 For the
year ended December 31, 2008, holders of Series A convertible preferred stock
converted 111,649 shares of Series A preferred stock into 115,101 shares of
common stock, par value $0.0001 per share.  There was no conversion as
of March 31, 2009.
 
 Note
10 - Statutory reserves
 
 The laws
and regulations of the People’s Republic of China require that before an
enterprise distributes profits to its partners, it must first satisfy all tax
liabilities, provide for losses in previous years, and make allocations, in
proportions determined at the discretion of the board of directors, after the
statutory reserve. The statutory reserves include surplus reserve fund and the
enterprise fund and represent restricted retained earnings.
 
 Surplus reserve
fund
 
 The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital, the Company has total registered capital approximately $6,205,694 (RMB
49,287,414).
 
 The
transfer to this reserve must be made before distribution of any dividend to
shareholders.  The 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 the shares currently held by them, provided
that the remaining reserve balance after such issue is not less than 25% of the
registered capital.
 
 Konzern
has met the statutory surplus reserve requirement; no additional contribution is
needed from future earnings.  As of March 31, 2009, Co-Win is still in
the development stage and has not undertaken significant operating
activities.  Co-Win is required to contribute an additional $1,833,750
from future earnings.  For the three months ended March 31, 2009 and
2008, the Company did not allocate funds to the statutory reserves.
 
 Enterprise
fund
 
 The
enterprise fund may be used to acquire plant and equipment or to increase the
working capital to expend on production and operation of the business. No
minimum contribution is required and the Company did not make any contribution
to this fund for the three months ended March 31, 2009 and 2008,
respectively.
  23
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 Note
11 - Retirement benefit plans
 
 Regulations
in the PRC require the Company to contribute to a defined contribution
retirement plan for all permanent employees. The contribution is based on a
percentage required by the local government and the employees' current
compensation. The Company contributed $18,749 and $14,273 for the three months
ended March 31, 2009 and 2008, respectively.
 
 Note
12 - Shareholders’ equity
 
 Common
stock
  During
the period ended December 31, 2008, holders of Series A convertible preferred
stock converted 111,649 shares into 115,101 shares of common stock, par value
$0.0001 per share. For the year ended December 31, 2007, holders converted
3,008,351 shares of Series A convertible preferred stock into 3,063,351 shares
of common stock, par value $0.0001 per share. As of December 31, 2008, all
convertible preferred stock had been converted into common stock.
 
 Stock options and
warrants
  In July
31, 2008, the Company granted a total of 15,000 stock options to three of its
independent directors. The options become exercisable for 7,500 shares of common
stock six months from the grant date and the remaining 7,500 options, eighteen
months from the grant date.  The fair value of the options was
estimated on the date of grant using a Black-Scholes Option Pricing model using
the following assumptions:
 
 2008Annual
      dividend yield
                    
                    
                    -Expected
      life (years)
                    
                    
                    4.98Risk-free
      interest rate
                    
                    
                    3.25
                    %Expected
      volatility
                    
                    
                    76
                    %
 
 For the
period ended December 31, 2008, 290,000 options were exercised at $1.25 per
share.  The Company received a total of $362,500 cash from the
exercise of stock options.  For the three months ended March 31, 2009
and 2008, the Company had stock-based compensation expense of $1,249 and
$26,127, respectively.
  24
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2009
 (UNAUDITED)
 
 Summary of option
activity:
  Outstanding
                    
                    
                    Weighted-Average
                      Exercise
      Price of
                      outstanding
      options
                    
                    
                    Exercisable
                    
                    
                    Weighted-Average
                      Exercise
      Price of
                      excisable
      options
                    
                    
                    Weighted-Average
                      Remaining
                      Contractual
                      Term (years)
                    
                    
                    Intrinsic
      Value12/31/2007
                    
                    
                    1,105,000
                    
                    
                    $
                    1.91
                    
                    
                    
                    671,500
                    
                    
                    $
                    1.91
                    
                    
                    
                    0.53
                    
                    
                    $
                    1,041,750Granted
                    
                    
                    15,000
                    
                    
                    $
                    2.01
                    
                    
                    
                    7,500
                    
                    
                    $
                    2.01
                    
                    
                    
                    4.83
                    
                    
                    
                    18,776Exercised
                    
                    
                    (290,000
                    )
                    
                    $
                    1.25
                    
                    
                    
                    (290,000
                    )
                    
                    $
                    1.25Forfeited
                    
                    
                    (450,000
                    )
                    
                    
                    
                    
                    
                    
                    (16,500
                    )12/31/2008
                    
                    
                    380,000
                    
                    
                    $
                    1.35
                    
                    
                    
                    372,500
                    
                    
                    $
                    1.34
                    
                    
                    
                    2.48
                    
                    
                    $
                    -Granted
                    
                    
                    -
                    
                    
                    $
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $Exercised
                    
                    
                    -
                    
                    
                    $
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $Forfeited03/31/2009
                    
                    
                    380,000
                    
                    
                    $
                    1.35
                    
                    
                    
                    372,500
                    
                    
                    $
                    1.34
                    
                    
                    
                    2.48
                    
                    
                    $
                    -
 
 Contemporaneously
with the reverse acquisition, the Company entered into a Preferred Stock
Purchase Agreement (“PSPA”), dated February 8, 2006, with Barron Partners L.P.,
Ray and Amy Rivers, JTROS, Steve Mazur and William Denkin pursuant to which the
Company issued and sold 3,120,000 shares of its Series A convertible preferred
stock, a newly-created series of preferred stock, and warrants to purchase
3,694,738 shares of common stock at $1.75 per share and 3,694,738 shares of
common stock at $2.50 per share.  On April 23, 2007, the Company and
the holders of the warrants executed a Waiver and Agreement that reduced the
conversion price for preferred stock and the exercise price of the warrants by
3% of the original conversion amounts.  The warrants have a term of
five years and are exercisable by the holder at any time within the
term.
 
 Summary of
warrant activity:
  WarrantsOutstanding
                                                      
                                                      Fair Market
                                                        Value
                                                      
                                                      Weighted-Average
                                                        Exercise
      Price
                                                      
                                                      Weighted-Average
                                                        Remaining
      Contractual Term
                                                        (years)December
      31, 2007
                                                      
                                                      
                                                      3,418,686
                                                      
                                                      2.85
                                                      
                                                      
                                                      2.35
                                                      
                                                      3.17Granted
                                                      
                                                      
                                                      -Exercised
                                                      
                                                      
                                                      -Forfeited
                                                      
                                                      
                                                      -December
      31, 2008
                                                      
                                                      
                                                      3,418,686
                                                      
                                                      2.85
                                                      
                                                      
                                                      2.35
                                                      
                                                      2.17Granted
                                                      
                                                      
                                                      -Exercised
                                                      
                                                      
                                                      -Forfeited
                                                      
                                                      
                                                      -March
      31, 2009
                                                      
                                                      
                                                      3,418,686
                                                      
                                                      2.85
                                                      
                                                      
                                                      2.35
                                                      
                                                      1.92
  25




Item 2 Management’s Discussion and Analysis
or Plan of Operation





FORWARD-LOOKING
INFORMATION - Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") includes "forward-looking statements". All
statements, other than statements of historical facts, included in this report
regarding the Company's financial position, business strategy and plans and
objectives of management of the Company for future operations are
forward-looking statements. These forward-looking statements rely on a number of
assumptions concerning future events and are subject to a number of
uncertainties and other factors, many of which are outside of the Company's
control, which could cause actual results to materially differ from such
statements. While the Company believes that the assumptions concerning future
events are reasonable, it cautions that there are inherent difficulties in
predicting certain important factors, especially, the prospects for future
acquisitions; the possibility that a current customer could be acquired or
otherwise be affected by a future event that would diminish their medicine
products requirements; the competition in the medical product market and
governmental price policy on medical products and the impact of such factors on
pricing, revenues and margins; and the cost of attracting and retaining highly
skilled personnel.





Overview





China
Medicine Corporation (“we,” “us” or the “Company”), through Guangzhou Konzern
Medicine Co., Ltd. (“Konzern”), our wholly owned subsidiary organized under the
laws of the People’s Republic of China (the “PRC” or “China”), is a distributor
of approximately 2,400 pharmaceutical products in China. Also as a developer of
innovative pharmaceutical products, currently the Company has four patents
registered with the State Intellectual Property Office of PRC (“SIPO”), and has
seven patent applications pending for approval. Our subsidiary, Co-Win
Bio-Engineering Co. Ltd. (“Co-Win”) holds three patents related to ADTZ, an
enzyme designed to eliminate a harmful toxin from food and animal feed, in
China. Co-Win also holds patents related to ADTZ in Australia, South Africa
and South Korea.





Most of
our revenues have derived from three sources, the distribution of pharmaceutical
products from suppliers, the distribution of self-developed pharmaceutical
products (including Bumetanide injection, Ozagrel Dried powder injection,
Levocarnitine dried powder injection), as well as the development and transfer
of intellectual property, including drug formulas and production techniques. The
revenue from the distribution of pharmaceutical products from suppliers and the
revenue from sales of self-developed pharmaceutical products for three months
ended March 31, 2009 accounted for 95.42% and 4.48% of the total revenue for
three months ended March 31, 2009 respectively.





The
pharmaceutical products we distribute, either from outside suppliers or
self-developed, include prescription and over-the-counter drugs, Chinese herbs,
traditional Chinese medicines made from Chinese herbs, nutritional supplements,
dietary supplements and medical instruments.


26





Although
we are competing with large state-owned medicine distributors that are better
capitalized than we are, we believe that our unique competitive advantages
include our excellent after-sale customer service and the sole nationwide or
region-wide distribution rights to certain medical products. Our competitive
pricing and our ability to provide timely delivery are also important factors to
attract and retain our customers.





Our
distribution business greatly depends on our ability both to acquire our
products and to distribute our products in the Chinese markets. Typically,
exclusive rights to nationwide or to certain regions would contribute higher
profit margins than non-exclusive distribution. Besides our exclusive rights to
nationwide distribution of seven products made by our suppliers, we also have
distribution rights throughout Guangdong Province of 516 products made by our
suppliers.





We have
exclusive rights to nationwide distribution of seven products made by our
suppliers. The sales from national exclusive distribution products accounted for
$2,903,862, approximately 28.8% of our sales for three months ended March 31,
2009 and $1,613,032, approximately 22.8% of our sales for three months ended
March 31, 2008.





Revenue
from sales generated from the distribution through the bidding system was
$3,329,040 or 32.97% of our total revenue during three months ended March 31,
2009, and $2,595,407 or 36.76% of our total revenue during the comparable period
of 2008.





Our five
largest suppliers accounted for 54.82% of our total purchases for three months
ended March 31, 2009, compared to 58.7% for the comparable period of 2008. Our
agreements with our suppliers generally have a term of one year and provide that
the suppliers will provide us with the products we order.





We are
frequently required to make a significant down payment when we place an order,
in order to secure the lowest possible purchase price and broadest possible
distribution area. These down payments are made pursuant to contracts with the
suppliers, and to the extent that we reduce the size of the order, we will
receive a credit from the supplier. For three months ended March 31, 2009 and
2008, we had a total balance of such advances to suppliers of $9,415,546 and
$6,908,467 respectively.





Our five
largest customers accounted for 50.7% of total sales for three months ended
March 31, 2009, compared to 39.4% for the corresponding period of 2008.
Currently we have approximately 800 customers.





Our
customers typically are wholesale medical product companies, hospitals and
retail drug stores. Our contracts with our customers do not provide for minimum
purchases, and our customers are not restricted from purchasing competitive
products from others.





Our
typical collection period ranges from three months to one year. In addition, it
generally takes one to two months to receive products from our suppliers after
we place an order. In order to have product available to meet anticipated
orders, we have been increasing our inventory in recent months, which has
required increased advance payments to our suppliers. In some cases, we must
maintain funds on deposit with a supplier. These factors require us to use
significant cash in our operations.


27





Because a
substantial portion of our sales were made to a small number of customers, our
accounts receivable from a small number of customers represented a large
percentage of our accounts receivable and assets. Our largest account receivable
for three months ended March 31, 2009 was approximately $3,531,562, representing
approximately 23.5% of our total accounts receivable, 7.7% of our total assets,
and 10.3% of our working capital. The sales revenue from the customer who had
the largest account receivable for three months ended March 31, 2009 was
$1,838,297, approximately 18.2% of our total revenue. Our three largest accounts
receivable were approximately $7,869,559, representing approximately 52.4% of
our total accounts receivable, or approximately 17.3% of our total assets, and
22.9% of our working capital. The sales revenue from the customers who had our
three largest accounts receivable for three months ended March 31, 2009 was
$3,358,285, approximately 33% of our total revenue. This concentration of
accounts receivable represents a significant credit risk.





Although
the distribution of our suppliers’ pharmaceutical products has been the major
source of revenues, amounting to 95% and 88.0% of our total revenues for three
months ended March 31, 2009 and 2008 respectively, management strongly believes
that it is our long term strategy to distribute our self-developed
pharmaceutical products, and to develop intellectual properties, including drug
formulas and production techniques.





On March
30, 2009 we signed a two-year renewable agreement with Heilongjiang Liao Yuan
Technology, Inc. (“Liao Yuan”) for exclusive provincial-level rights to
distribute Nianlianping in Guangdong province. Nianlianping is a medical
solution used to restrain tissue from adhering to the lesion site after surgical
operation. Compared to similar anti-adhesion drugs for surgical use in China’s
pharmaceutical industry, this product is the only one of its type that can be
stored under room temperature. The Company estimates that “Nianlianping” sales
will reach approximately RMB30 million ($4.4 million) per year over the next
three years.





We expect
to add at least one national distribution product in 2009. Currently, we are
negotiating the distribution of a pharmaceutical product manufactured in Hong
Kong and used in the treatment of skin disease. Meanwhile, we are in the process
of launching a series of our self-developed products such as BeThin Tablets,
multivitamin pack and three types of herbal tea within the territory of China
and the US. In this regard, we will allocate more resources to the promotion of
self-developed products such as multivitamin pack and three types of herbal tea
in the second quarter of 2009.





In March
2009, we participated in Natural Products Expo West, a trade show which was held
in Anaheim, California to promote BeThin Tablets, our self-developed weight-loss
supplement. During the session, we met a number of local distributors to explore
resources and relationships that may assist us in distribution of Bethin Tablets
in the U.S. In August, 2009 we are scheduled to attend Natural Products Expo
Asia, a trade show in Hong Kong to seek the business opportunities and marketing
resources of our self-developed food supplements in Hong Kong and other regions
in Asia.


28





In 2008,
we improved the techniques of zymosis and relevant technologies. Furthermore, we
purchased and installed the equipment for the manufacturing of ADTZ, which had
been examined and approved by the Guangdong Feed Bureau. We expect to undertake
the trial production and trial sales of ADTZ in the second quarter of 2009. With
respect to the technology transfer of ADTZ, we expect to enter into at
least one out licensing agreement relating to the right of the ADTZ patent
in vaious countries in 2009. Management believes that the commercialization of
ADTZ would be one of the most promising drivers to our future
growth.





In April
2009, Co-Win has received a manufacturing license for premixed feed additive and
a manufacturing license for feed additive for its production facility in
Guangzhou. The Company owns 70% of Co-Win’s equity interests through the
Company’s 100% equity ownership of Guangzhou Konzern Medicine Co., Ltd. The two
licenses are both valid for five years from March 23, 2009. In March 2009,
Co-Win has submitted the application for rADTZ’s product permit. As a result, China Medicine may enter
into a trial production and trial sales phase for rADTZ.





In view
of our submission of the application for rADTZ’s product permit, we anticipate
that such permit is to be granted within the next two or three months. Co-Win is
also currently waiting to receive a product safety test report and a product
effectiveness test report for rADTZ from the Chinese Academy of Agriculture and
Science. Upon receiving these reports, Co-Win’s application for rADTZ’s product
permit from China’s Ministry of Agriculture can be finalized.





On April
6, 2009, China unveiled its blueprint for health care reform for the next decade
detailing plans to fix the ailing medical system and ensure fair and affordable
care for all 1.3 billion citizens. China’s central and local government will
spend $124 billion (RMB850 billion) in the next three years on wide-reaching
health care reform. In the new medical reform plan, the government has proposed
to put medical technology innovation as one of the most important national
technology development projects. The new plan encourages technology progress on
China’s medical system, encourage proprietary technology innovation; increase
R&D effort on key diseases treatment and prevention; promote R&D to
combine TCM and Western medicine technology.





This is
the China’s most comprehensive health care reform over the past 30 years. In
addition, the plan outlines the roles of the government and enterprises in terms
of addressing the country’s social benefit and healthcare issues. In the next
three years, the Chinese government is committed to build approximately 2,000
county-level hospitals. The healthcare reform will cover 34,000 town-level
clinics, 695,000 village health care centers, 3,700 city-level health care
centers and 11,000 community service centers. The management believes that the
Chinese government’s plan to focus on innovation in the medical and healthcare
industry in China matches our long-term growth strategy.





The
impact of the new health care reform on China’s pharmaceutical industry is
mainly in two areas: medical care and drug regulation. On one hand, the
pharmaceutical market will grow with the medical care system improving
continuously. According to the new plan, 90% of urban and rural residents will
be covered under the health care system by 2020. By then, there will be 1.28
billion Chinese enjoying benefits from the new system. It is also estimated that
the drug consumption will reach RMB200 billion by year 2020, which represents
approximately 40% of China’s pharmaceutical industry. On the other hand, the
health care reform will encourage pharmaceutical companies and related
enterprises to conduct research and development on new drugs and will also raise
the GSP standard on drug quality control and eliminate unqualified
pharmaceutical entities. Based on the source of People’s Daily Online, it is
estimated within next three years, one third of pharmaceutical manufacturers and
half of all drugs distributors in China will be eliminated. The pharmaceutical
market will be more centralized, consisting of primarily of higher profile
enterprises.


29





In order
to take advantage of this opportunity, we are taking three specific
steps:





Ÿ
            encourage
      all of our employees to collaborate and work together during this
      difficult time;


Ÿ
            pay
      more attention to quality control everywhere across the organization;
      and


Ÿ
            restructure
      our management and executive team while also recruiting more talented
      people to prepare for the next coming
upturn.





Considering
the current economic atmosphere as well as the development history of Chinese
economy, the management believes that we entered the era of high operating cost.
Given the character of our business operations, we should focus on the following
aspects in order to survive in this era:





Ÿ
            develop
      high-tech products and grasp the new
market;


Ÿ
            improve
      our service in order to maintain the friendly relationship with our
      clients; and


Ÿ
            promote
      brand recognition of both our company and
  products.





In order
to achieve the aforesaid goal, we have to take the following steps:





Ÿ
            speed
      up the commercialization of ADTZ and facilitate the entry into
      market;


Ÿ
            improve
      our service and expand our distribution line of products. In particular,
      we intend to obtain an exclusive national distribution rights for certain
      products which will increase our revenue from sales;
  and


Ÿ
            use
      to full extent market opportunities to expand our business in the current
      economic climate, e.g., by taking advantage of favorable pricing terms to
      acquire a business possessing rights to pharmaceutical products with a
      high degree of market recognition. We believe that this is essential for
      the establishment of a corporate
brand.





Because
most of our business is conducted in the PRC, our transactions are predominantly
accounted for in Chinese Renminbi (RMB). Our financial condition and the results
of our operations, expressed in terms of United States dollars (USD), is
dependent upon the applicable currency exchange rate, which can change
significantly from period to period and may be affected by the relationship
between the United States and the PRC.





Results of Operations





The
following table sets forth our statements of operations for the three months
ended March 31, 2009 and 2008, in U.S. dollars:


30





Three Months Ended
      March 312009
                        
                        
                        2008Revenue
                        
                        $
                        10,098,390
                        
                        
                        $
                        7,061,039Product
      sales
                        
                        
                        10,098,390
                        
                        
                        
                        6,851,384Medical
      formula sales
                        
                        
                        -
                        
                        
                        
                        209,655Costs
      of goods sold
                        
                        
                        7,318,762
                        
                        
                        
                        4,749,019Gross
      profit
                        
                        
                        2,779,628
                        
                        
                        
                        2,312,020R&D
      expenses
                        
                        
                        184,880
                        
                        
                        
                        88,392Selling,
      general and administrative costs
                        
                        
                        827,184
                        
                        
                        
                        812,508Income
      from operations
                        
                        
                        1,767,564
                        
                        
                        
                        1,411,120Other
      (expense) income, net
                        
                        
                        5,553
                        
                        
                        
                        5,983Change
      in fair value of warrants
                        
                        
                        (758,689
                        )
                        
                        
                        -Income
      before income taxes and noncontrolling interest
                        
                        
                        1,014,428
                        
                        
                        
                        1,417,103Provision
      for income taxes
                        
                        
                        545,486
                        
                        
                        
                        268,767Net
      income before noncontrolling interest
                        
                        
                        468,942
                        
                        
                        
                        1,148,336Add:
      Net income Attributable to Noncontrolling Interest
                        
                        
                        81,140
                        
                        
                        
                        27,477Consolidated
      net income attributable to CHINA MEDICINE CORPORATION
                        
                        
                        550,082
                        
                        
                        
                        1,175,813Change
      in fair value of warrants
                        
                        
                        758,689
                        
                        
                        
                        -Non-GAAP net income
      (excluding the change in fair value of warrants)
                        
                        $
                        1,308,711
                        
                        
                        $
                        1,175,813





Our
revenue is derived primarily from the sale of prescription and over the counter
medicines, traditional Chinese medicines, which are medicines derived from
Chinese herbs, dietary supplements and medical instruments (collectively
“Product Sales”) and the sale of medical formulas (“Medical Formula Sales”). The
following table sets forth the revenues and percentage of revenues derived from
each of these types of products.





Three Months Ended March 31,2009
                  
                  
                  2008Drugs
                  
                  $
                  10,000,406
                  
                  
                  
                  99.02
                  %
                  
                  $
                  6,751,388
                  
                  
                  
                  95.62
                  %Dietary
      Supplements
                  
                  
                  28,944
                  
                  
                  
                  0.29
                  %
                  
                  
                  37,751
                  
                  
                  
                  0.53
                  %Medical
      Equipment
                  
                  
                  54,389
                  
                  
                  
                  0.54
                  %
                  
                  
                  62,245
                  
                  
                  
                  0.88
                  %Others
                  
                  
                  14,651
                  
                  
                  
                  0.15
                  %
                  
                  
                  -
                  
                  
                  
                  -
                  %Herbs
      & Medicine materials
                  
                  
                  -
                  
                  
                  
                  -
                  %
                  
                  
                  -
                  
                  
                  
                  -
                  %Medical
      Formula
                  
                  
                  -
                  
                  
                  
                  -
                  %
                  
                  
                  209,655
                  
                  
                  
                  2.97
                  %Total
                  
                  $
                  10,098,390
                  
                  
                  
                  100
                  %
                  
                  $
                  7,061,039
                  
                  
                  
                  100
                  %




31





Three Months Ended March 31,2009
                      
                      
                      2008Western
      Prescription Products
                      
                      $
                      5,312,574
                      
                      
                      
                      52.61
                      %
                      
                      $
                      3,941,161
                      
                      
                      
                      55.82
                      %Western
      Over-the-Counter Products
                      
                      
                      362,934
                      
                      
                      
                      3.59
                      %
                      
                      
                      138,332
                      
                      
                      
                      1.96
                      %TCM
      Prescription Products
                      
                      
                      2,523,931
                      
                      
                      
                      24.99
                      %
                      
                      
                      1,387,659
                      
                      
                      
                      19.65
                      %TCM
      Over-the-Counter Products
                      
                      
                      1,800,967
                      
                      
                      
                      17.83
                      %
                      
                      
                      1,284,236
                      
                      
                      
                      18.19
                      %Drugs/Dietary
      Supplements Total
                      
                      $
                      10,000,406
                      
                      
                      
                      99.02
                      %
                      
                      $
                      6,751,388
                      
                      
                      
                      95.62
                      %





THE
THREE MONTHS ENDED MARCH 31, 2009 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2008





Sales





Total
revenue for the three months ended March 31, 2009 was $10,098,390, an increase
of $3,037,351, or 43.02%, from the total revenues of $7,061,039 for the
comparable period in 2008. Total revenue includes revenue from Product Sales and
revenue from Medical Formula Sales, which accounted for 100% and 0% of total
revenue for the three months ended March 31, 2009 respectively.





Revenue
from Product Sales for the three months ended March 31, 2009 was $10,098,390, an
increase of $3,247,006, or 47.39%, from $6,851,384 for the comparable period in
2008. Revenue from Product Sales includes revenue from sales of pharmaceutical
products that we distribute and sales of products for which we hold a
manufacturing license.





Revenue
from sales of pharmaceutical products we distribute for the three months ended
March 31, 2009 was $9,646,422, accounting for 95.52% of the total revenue for
the period, which was an increase of $3,435,866, or 55.32%, from $6,210,556 for
the comparable period in 2008. In particular, revenue from sales of products we
distribute nationwide was $2,454,971, which accounts for 24.3% of the total
revenue for the three months ended March 31, 2009. Revenue from sales of
products we distribute regionally was $2,695,937, which accounts for 26.70% of
the total revenue for the three months ended March 31, 2009. Revenue from sales
of products for which we acquired distribution rights through the Guangdong
Sunshine Bidding System was $3,329,040, which accounts for 32.97% of total
revenue, for the three months ended March 31, 2009, an increase of $733,633 from
$2,595,407 for the same period in 2008.


32





The
abovementioned increase in sales revenues was due to the following reasons: (1)
our continuous extension of existing sales network; (2) increase in sales of
generic products boosted by the new reform aimed at providing affordable medical
care to rural areas population or low-income families; and (3) noticeable
increase in sales of some pharmaceutical products; specifically, the sales of
Iopamidol and Hongxing Xiaojie Capsules for the three months ended March 31,
2009 increased by $1.48 million and $1.24 million or 682% and 444%
respectively.





Revenue
from sales of products for which we hold a manufacturing license for the three
months ended March 31, 2009 was $451,967, accounting for 4.48% of total revenue
for the three months ended March 31, 2009, and representing a decrease of
$188,861 or 29.47% from $640,828 for the comparable period in 2008. The decrease
is mainly due to the decrease of orders from hospitals in municipal
areas.





Revenue
from Medical Formula Sales for the three months ended March 31, 2009 was $0, a
decrease of $209,655 or 100%, from $209,655 for the comparable period in 2008.
Medical Formula Sales revenues represent proceeds from the sale of certain
technology and know-how relating to the production of medicines. We improve and
develop the technology in its preliminary stage and then sell the improved
technology to other pharmaceutical companies. Recent PRC government regulation
has focused increasing attention to the effectiveness and safety of
pharmaceutical products and food, has increased the burdens of our research and
development efforts, and has resulted in the slower pace of our medical formula
sales. In the future, we believe our medical formula sales will be largely
generated from the payments relating to the licensing of patents and
technologies relating to ADTZ.





Cost of
Sales





Cost of
sales for the three months ended March 31, 2009 was $7,318,762, an increase of
$2,569,743, or 54.11%, from $4,749,019 for the comparable period in 2008. Gross
profit for the three months ended March 31, 2009 was $2,779,628, an increase of
$467,608, or 20.23 %, from $2,312,020 for the comparable period of 2008. Our
gross margin for the three months ended March 31, 2009 was 27.53% as compared
with 32.74% for the three months ended March 31, 2008, a decrease of 5.21%. The
main reasons for the decrease in gross profit margin for three months ended
March 31, 2009 are the increase of revenue from sales of over-the-counter
products and decrease of revenue from sales of medical formula. As the further
implementation of new medical reform, the government paid extra attention to
pharmaceutical market in rural areas and restructured the pharmaceutical
products mix in the aforesaid areas. During the process, the reform boosted the
sales of over-the-counter products which have relatively lower gross margin and
therefore dragged down the gross margin of our product mix .Secondly, we
generate no revenue from medical formula sales for the three months ended March
31, 2009. The gross margin of medical formula was recorded as 100%; the gross
margin dropped severely when the revenue from sales of medical formula was $0.
Except for the effect of decrease in medical formula sales, the gross margin
decreased by approximately 3% from that of the comparable period in
2008.


33





Research and
Development





Research
and development expenses for the three months ended March 31, 2009 were
$184,880, an amount equal to 1.83% of total revenue, which was dedicated to
further study of the molecular structure and technology improvement of the
Yutian capsule and testing for ADTZ commercialization. Research and development
expenses for the same period of 2008 were $88,392, or approximately 1.25% of
total revenue. Research and development expense for the whole year 2008 was
$840,437, or 1.56% of total revenue. We expect research and development expense
as a percentage of revenues in 2009 to remain consistent with that of
2008.





Selling, General and
Administrative Expenses





Selling,
general and administrative expenses were $827,184 for the three months ended
March 31, 2009, an increase of $14,676, or 1.81%, from $812,508 for the
comparable period in 2008. Selling, general and administrative expenses include
freight, professional service fees and advertising expenses. The increase in
selling, general and administrative expenses was due primarily to the increase
in depreciation, which was $216,175 for the three months ended March 31, 2009,
compared to $96,726 for the comparable period of 2008. The fixed asset for ADTZ
production that we purchased in the fourth quarter of 2008 started to depreciate
in the first three month in 2009, and the depreciation fees incurred in this
aspect increased accordingly. Meanwhile, as a result of the decrease in the
purchase of shares of our common stock through exercise of warrants and options,
the amortization fees incurred herefrom for three months ended March 31, 2009
was $1,249, a reduction of $24,908 from $26,157 for the comparable period in
2008.





Change in Fair Value of
Warrants





Effective
January 1, 2009, we adopted the provisions of EITF 07-5, “Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”. The
Company reclassified the fair value of these common stock purchase warrants,
which have the “dual-indexed” feature, from equity to liability
status.  All future changes in the fair value of these warrants will
be recognized currently in earnings until such time as the warrants are
exercised or expire.





Net
Income





As a
result of the adoption of EITF 07-5, consolidated net income for the first
quarter of 2009 was approximately $0.55 million, or $0.04 per diluted share,
which included a $0.76 million non cash expense related to change in fair value
of warrants, compared to approximately $1.2 million, or $0.08 per diluted share,
in the first quarter of 2008. Excluding this expense, adjusted net income for
the first quarter of 2009 was approximately $1.3 million, or $0.09 per fully
diluted share, which translates to a 11% increase in net income for the first
quarter 2009 compared to the same period last year. Earnings per share were
calculated using a diluted weighted share count of 15.2 million shares for the
first quarter of 2009 and 15.3 million shares for the first quarter of
2008.


34





Income
Taxes





Provision
for income taxes was $545,486 for the three months ended March 31, 2009 as
compared with $268,767 for the comparable period in 2008. The increase was due
to the increase of product sales and operating income. The favorable tax rate
that we enjoyed before had expired, and therefore we have adopted the new tax
rate of 25% since 2009.





Comprehensive
Income





Comprehensive
income for the three months ended March 31, 2009, was $490,241, a decrease of
$2,012,738 from $2,502,979 for the comparable period in 2008. The decrease was
mainly due to the decrease in effect of foreign currency translation adjustment
of $1,387,007.




Liquidity
and Capital Resources





As of
March 31, 2009, we had working capital of $34,428,291, an increase of $1,850,622
from $32,577,669 as of December 31, 2008.





We used
cash of $1,451,035 in our operations for the three months ended March 31, 2009,
an increase of $308,868 from $1,142,167 of cash used for the comparable period
of 2008.





The
following table sets forth the changes in certain balance sheet items, in
dollars and percentages, from December 31, 2008 to March 31, 2009.





Balance Sheet Caption
                      
                      Change in dollars
                        12/31/08 to 03/31/09
                      
                      
                      Percentage Change
                        12/31/08 to 03/10/09Accounts
      receivable
                      
                      $
                      (4,305,456
                      )
                      
                      
                      (22.39
                      )%Notes
      receivables
                      
                      
                      395,289
                      
                      
                      
                      65.78
                      %Inventories
                      
                      
                      3,153,983
                      
                      
                      
                      66.75
                      %Advances
      to suppliers
                      
                      
                      3,293,572
                      
                      
                      
                      53.80
                      %Accounts
      payable
                      
                      
                      (3,485
                      )
                      
                      
                      (5.69
                      )%Customer
      deposits
                      
                      
                      (62,515
                      )
                      
                      
                      (41.28
                      )%





The
change in these balance sheet captions reflects the nature of the cash
requirements of our business. Our account receivable decreased $4,305,456 or
22.39% from December 31, 2008 to March 31, 2009, reflecting the increase in
collection from our customers. During the period ended March 31, 2009, we
received approximately $1 million in notes receivable from our customers, an
increase of approximately $0.4 million from approximately $0.6 million for the
year ended December 31, 2008. Notes receivable are guarantees of payment from
the customers’ banks. In the three months ended March 31, 2009, our receivables
collection cycle was shortened to 152 days, compared to 171 days for the
comparable period in 2008.





Our
advances to suppliers increased 53.80% in the first three months of 2009 because
of an increase in our purchases resulting from increased sales and our payment
policies, whereby we try to pay our suppliers in advance. Because we require one
to two months to receive products we order, we have been increasing our
inventories in order to be able to meet anticipated increases in sales. From
December 31, 2008 to March 31, 2009, our inventories increased 66.75% for we
anticipate the significant increase in goods order for the upcoming
quarter.


35





We intend
to use our available funds to accelerate the development and testing of new
drugs. We believe that our available funds will provide us with sufficient
capital for at least the next twelve months; however, we may acquire one or two
production facilities to manufacture our own products. To the extent that we
make acquisitions or establish our own production facilities, we may require
additional capital for the acquisition or for the operation of the combined
companies. We cannot assure that such funding will be available.





Recently
Issued and Adopted Accounting Pronouncements




Effective
January 1, 2009, EITF 07-5 was adopted, "Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock”, which is effective
for financial statements for fiscal years beginning after December 15, 2008 and
which replaced the previous guidance on this topic in EITF
01-6.  Paragraph 11(a) of FAS 133 specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to the
Company’s own stock and (b) classified in stockholders’ equity in the statement
of financial position would not be considered a derivative financial
instrument.  EITF 07-5 provides a new two-step model to be applied in
determining whether a financial instrument or an embedded feature is indexed to
an issuer’s own stock and thus able to qualify for the FAS 133 paragraph 11(a)
scope exception.





As a
result of adopting EITF 07-5, 3,348,686 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, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expire.





As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in February 2006. On January 1,
2009, we reclassified from additional paid-in capital, as a cumulative effect
adjustment, $125,993 to beginning retained earnings and $415,542 to warrant
liabilities to recognize the fair value of such warrants. The fair value of the
warrants was $1,174,231 on March 31, 2009.  Therefore, the Company
recognized a $758,689 loss from the change in fair value of the warrants for the
three months ended March 31, 2009.





Effective
January 1, 2009, the Company adopted SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51”. Certain provisions of this statement are required to be adopted
retrospectively for all periods presented. Such provisions include a requirement
that the carrying value of noncontrolling interests (previously referred to as
minority interests) be removed from the mezzanine section of the balance sheet
and reclassified as equity; and consolidated net income to be recast to include
net income attributable to the noncontrolling interest. As a result of this
adoption, we reclassified noncontrolling interests in the amounts of $753,000
and $836,000 from the mezzanine section to equity in the March 31, 2009 and
December 31, 2008 balance sheets, respectively.


36




In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4
amends SFAS 157 and provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value
measurements. This FSP shall be applied prospectively with retrospective
application not permitted. This FSP shall be effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. An entity early adopting this FSP must
also early adopt FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2). Additionally,
if an entity elects to early adopt either FSP FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB
28-1) or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt this
FSP. We are currently evaluating this new FSP but do not believe that it will
have a significant impact on the determination or reporting of our financial
results.




In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this FSP does not result in a change
in the carrying amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity may early
adopt this FSP only if it also elects to early adopt FSP FAS 157-4. Also, if an
entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1,
the entity also is required to early adopt this FSP. We are currently evaluating
this new FSP but do not believe that it will have a significant impact on the
determination or reporting of our financial results.


37





In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments,” to
require disclosures about fair value of financial instruments not measured on
the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments. This FSP shall be effective for interim periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption. We are
currently evaluating the disclosure requirements of this new FSP.





Critical
Accounting Policies and Estimates


Management's
discussion and analysis of its financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
Our financial statements reflect the selection and application of accounting
policies which require management to make significant estimates and judgments.
See note 2 to our consolidated financial statements, "Summary of Significant
Accounting Policies." Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe that the following reflect the more
critical accounting policies that currently affect our financial condition and
results of operations.





Revenue
recognition


We
recognize revenue when all four of the following criteria are met: (1)
persuasive evidence has been received that an arrangement exists; (2) delivery
of the products and/or services has occurred; (3) the selling price is fixed or
determinable; and (4) collectibility is reasonably assured. We follow the
provisions of the SEC’s Staff Accounting Bulleting No. 104, which sets forth
guidelines for the timing of revenue recognition based upon factors such as
passage of title, installation, payments and customer acceptance. Any amounts
received prior to satisfying our revenue recognition criteria are recorded as
deferred revenue.





Sales
revenue represents the invoiced value of goods, net of a value-added tax (VAT).
All of the Company’s products, which are sold exclusively in the PRC, are
subject to a Chinese value-added tax at a rate of 13% to 17% of the gross sales
price. This VAT may be offset by VAT paid by the Company on raw materials and
other materials included in the cost of producing their finished
product.





Research and development
costs


Research
and development costs are expensed as incurred. To the extent that research and
development services are performed for us by third parties, these costs are
expensed when the services are performed by the third party. The costs of
material and equipment that are acquired or constructed for research and
development activities, and have alternative future uses, either in research and
development, marketing, or sales, are classified as property and equipment or
depreciated over their estimated useful lives.


38





Use of
estimates


The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the combined
financial statements and accompanying notes. Management believes that the
estimates utilized in preparing its financial statements are reasonable and
prudent. Actual results could differ from these estimates.





Inventories


We record
reserves against our inventory to provide for estimated obsolete or unsalable
inventory based on assumptions about future demand for our products and market
conditions. If future demand and market conditions are less favorable than
management's assumptions, additional reserve could be required. Likewise,
favorable future demand and market conditions could positively impact future
operating results if previously reserved inventory is sold.





Item
4T. Controls and Procedures




Disclosure
Controls and Procedures





As
required by Rule 13a-15 under the Exchange Act, our management, including our
Chief Executive Officer and our Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of March 31, 2009.





Disclosure
controls and procedures refer to controls and other procedures designed to
ensure that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC and
that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating and
implementing possible controls and procedures.





Management
conducted its evaluation of disclosure controls and procedures under the
supervision of our chief executive officer and our chief financial officer.
Based on that evaluation, management concluded that our disclosure controls and
procedures were not effective as of March 31, 2009.





Changes
in Internal Controls over Financial Reporting





There
were no changes in our internal controls over financial reporting during the
first quarter of the fiscal year 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.


39





PART
II OTHER INFORMATION





Item
6. Exhibits.





31.1 -
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.


31.2 -
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.


32.1 -
              Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002.




40


SIGNATURES





Pursuant
to the requirements of the Securities Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned there unto duly
authorized.





CHINA
      MEDICINE CORPORATIONDate:
      May 12, 2009
                  BY:
                  /s/ Senshan
      YangSenshan
      YangChief
      Executive Officer
                    (principal
      executive officer)BY:
                  /s/ Huizhen
      YuHuizhen
      YuChief
      Financial Officer
                    (principal
      financial officer and accounting
officer)




41