UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)





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





For the
quarterly period ended September
30, 2009




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





For
the transition period from ____________ to ____________





Commission
File Number 000-51379




CHINA MEDICINE
CORPORATION


(Exact
name of small business issuer as specified in its charter)




Nevada
              
              51-0539830(State
      or other jurisdiction of
              
              (IRS
      Employerincorporation
      or organization)
              
              Identification
      No.)





Guangri
Mansion, Suite 702


No. 9
Siyou Nan Rd, Wuyang Xincheng


Guangzhou, China
510600


(Address
of principal executive offices) (Zip Code)





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


(Issuer's
telephone number, including area code)





Indicate
by check mark whether the issuer (1) 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. Yes x  No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o  No o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filero
              
              Accelerated fileroNon-accelerated filero
                (Do not check if a smaller reporting company)
              
              Smaller reporting companyx





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





APPLICABLE
ONLY TO CORPORATE ISSUERS:





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 15,320,139 shares of Common Stock,
$.001 par value, were outstanding as of November 11, 2009.










TABLE OF
CONTENTS





PagePART I
                                                      FINANCIAL INFORMATIONItem
      1.
                                                      Financial
      Statements
                                                      3Consolidated
      Balance SheetsAs
      of September 30, 2009 (Unaudited) and December 31, 2008
                                                      3Consolidated
      Statements of Income and Comprehensive IncomeFor
      the Three Months Ended September 30, 2009 and 2008 (Unaudited)
      andfor
      the Nine Months Ended September 30, 2009 and 2008
    (Unaudited)
                                                      4Consolidated
      Statement of Changes in Equity for the Year Ended December 31, 2008 and
      for the Nine Months Ended September 30, 2009 and 2008
      (Unaudited)
                                                      5Consolidated
      Statements of Cash FlowsFor
      the Three Months Ended September 30, 2009 and 2008 (Unaudited)
      andfor
      the Nine Months Ended September 30, 2009 and 2008
    (Unaudited)
                                                      6Notes
      to Consolidated Financial Statements as of September 30,
    2009(Unaudited)
                                                      7Item
      2.
                                                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                      32Item
      3.
                                                      Quantitative
      and Qualitative Disclosures About Market Risk
                                                      46Item
      4T.
                                                      Controls
      and Procedures.
                                                      46PART II
                                                      OTHER INFORMATIONItem
      6.
                                                      Exhibits
                                                      48Signatures
                                                      49Exhibits/Certifications


2







PART
I - FINANCIAL INFORMATION





Item
1.          Financial
Statements




CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 September
      30,
                              
                              
                              December
      31,2009
                              
                              
                              2008(Unaudited)ASSETSCURRENT
      ASSETSCash
                              
                              $
                              2,242,581
                              
                              
                              $
                              2,791,814Notes
      receivables
                              
                              
                              146,700
                              
                              
                              
                              600,911Accounts
      receivable, trade, net of allowance for doubtful accounts of $96,609 and
      $96,609 as of September 30, 2009 and   December 31, 2008,
      respectively
                              
                              
                              14,943,092
                              
                              
                              
                              19,225,091Other
      receivable
                              
                              
                              1,760,400
                              
                              
                              
                              -Inventories
                              
                              
                              7,947,827
                              
                              
                              
                              4,725,322Advances
      to suppliers
                              
                              
                              8,392,320
                              
                              
                              
                              6,121,974Other
      current assets
                              
                              
                              237,336
                              
                              
                              
                              192,080Total
      current assets
                              
                              
                              35,670,256
                              
                              
                              
                              33,657,192EQUIPMENT,
      NET
                              
                              
                              6,498,621
                              
                              
                              
                              3,761,637OTHER
      ASSETSLong
      term prepayment
                              
                              
                              9,393,293
                              
                              
                              
                              6,014,920Intangible
      assets, net
                              
                              
                              1,482,225
                              
                              
                              
                              1,247,567Total
      other assets
                              
                              
                              10,875,518
                              
                              
                              
                              7,262,487Total
      assets
                              
                              $
                              53,044,395
                              
                              
                              $
                              44,681,316LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIESShort
      term Loan
                              
                              $
                              2,934,000
                              
                              
                              $
                              -Accounts
      payable, trade
                              
                              
                              304,279
                              
                              
                              
                              61,243Other
      payables - related parties
                              
                              
                              
                              
                              
                              
                              -Other
      payables and accrued liabilities
                              
                              
                              29,159
                              
                              
                              
                              50,559Customer
      deposits
                              
                              
                              44,102
                              
                              
                              
                              151,429Taxes
      payable
                              
                              
                              249,360
                              
                              
                              
                              772,289Liquidated
      damages payable
                              
                              
                              44,003
                              
                              
                              
                              44,003Total
      current liabilities
                              
                              
                              3,604,903
                              
                              
                              
                              1,079,523Fair
      value of warrant liabilities
                              
                              
                              2,399,910
                              
                              
                              
                              -Total
      liabilities
                              
                              
                              6,004,813
                              
                              
                              
                              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, 15,320,139 and
      15,226,742 shares issued and outstanding at  September 30, 2009
      and December 31, 2008, respectively
                              
                              
                              1,531
                              
                              
                              
                              1,522Paid-in
      capital
                              
                              
                              12,750,025
                              
                              
                              
                              13,011,012Statutory
      reserves
                              
                              
                              3,178,861
                              
                              
                              
                              3,178,861Retained
      earnings
                              
                              
                              26,084,749
                              
                              
                              
                              22,146,572Accumulated
      other comprehensive income
                              
                              
                              4,432,020
                              
                              
                              
                              4,428,294Total
      shareholders' equity
                              
                              
                              46,447,186
                              
                              
                              
                              42,766,261NONCONTROLLING
      INTERESTS
                              
                              
                              592,396
                              
                              
                              
                              835,532Total
      equity
                              
                              
                              47,039,582
                              
                              
                              
                              43,601,793Total
      liabilities and equity
                              
                              $
                              53,044,395
                              
                              
                              $
                              44,681,316
  See
accompanying notes to the Consolidated Financial Statements.
 3
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 (Unaudited)
 
 Three
      months ended
                          
                          
                          Nine
      months endedSeptember 30,
                          
                          
                          September 30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008REVENUES:Product
      sales
                          
                          $
                          18,789,470
                          
                          
                          $
                          9,963,571
                          
                          
                          $
                          43,942,953
                          
                          
                          $
                          27,882,029Medical
      formula sales
                          
                          
                          366,475
                          
                          
                          
                          553,221
                          
                          
                          
                          366,475
                          
                          
                          
                          1,333,341Total
      revenues
                          
                          
                          19,155,945
                          
                          
                          
                          10,516,792
                          
                          
                          
                          44,309,428
                          
                          
                          
                          29,215,370COST
      OF GOODS SOLD
                          
                          
                          13,322,614
                          
                          
                          
                          7,255,635
                          
                          
                          
                          32,167,242
                          
                          
                          
                          19,485,824GROSS
      PROFIT
                          
                          
                          5,833,331
                          
                          
                          
                          3,261,157
                          
                          
                          
                          12,142,186
                          
                          
                          
                          9,729,546OPERATING
      EXPENSES:Research
      and development
                          
                          
                          213,883
                          
                          
                          
                          288,353
                          
                          
                          
                          684,019
                          
                          
                          
                          484,569Selling,
      general and administrative
                          
                          
                          1,082,234
                          
                          
                          
                          642,919
                          
                          
                          
                          3,375,078
                          
                          
                          
                          2,515,509Total
      operating expenses
                          
                          
                          1,296,117
                          
                          
                          
                          931,272
                          
                          
                          
                          4,059,097
                          
                          
                          
                          3,000,078INCOME  FROM
      OPERATIONS
                          
                          
                          4,537,214
                          
                          
                          
                          2,329,885
                          
                          
                          
                          8,083,089
                          
                          
                          
                          6,729,468OTHER
      INCOME (EXPENSE):Other
      income (expense), net
                          
                          
                          (47,965
                          )
                          
                          
                          7,368
                          
                          
                          
                          (68,812
                          )
                          
                          
                          45,455Change
      in fair value of warrant liabilities
                          
                          
                          (141,682
                          )
                          
                          
                          -
                          
                          
                          
                          (2,113,589
                          )
                          
                          
                          -INCOME
      BEFORE INCOME TAXES  AND NONCONTROLLING
INTERESTS
                          
                          
                          4,347,567
                          
                          
                          
                          2,337,253
                          
                          
                          
                          5,900,688
                          
                          
                          
                          6,774,923PROVISION
      FOR INCOME TAXES
                          
                          
                          1,215,957
                          
                          
                          
                          411,890
                          
                          
                          
                          2,331,457
                          
                          
                          
                          1,252,833NET
      INCOME (CHINA MEDICINE CORPORATION  AND NONCONTROLLING
      INTERESTS)
                          
                          
                          3,131,610
                          
                          
                          
                          1,925,363
                          
                          
                          
                          3,569,231
                          
                          
                          
                          5,522,090Add:
      Net loss attributable to noncontrolling interests
                          
                          
                          88,496
                          
                          
                          
                          39,777
                          
                          
                          
                          242,953
                          
                          
                          
                          85,086NET
      INCOME ATTRIBUTABLE TO CHINA MEDICINE CORPORATION
                          
                          
                          3,220,106
                          
                          
                          
                          1,965,140
                          
                          
                          
                          3,812,184
                          
                          
                          
                          5,607,176OTHER
      COMPREHENSIVE INCOME (LOSS):Foreign
      currency translation adjustment
                          
                          
                          62,711
                          
                          
                          
                          97,869
                          
                          
                          
                          3,726
                          
                          
                          
                          2,169,693Foreign
      currency translation adjustment attributable to noncontrolling
      interests
                          
                          
                          882
                          
                          
                          
                          2,164
                          
                          
                          
                          (183
                          )
                          
                          
                          58,207COMPREHENSIVE
      INCOME
                          
                          $
                          3,283,699
                          
                          
                          $
                          2,065,173
                          
                          
                          $
                          3,815,727
                          
                          
                          $
                          7,835,076EARNINGS
      PER SHARE:Basic
                          
                          $
                          0.21
                          
                          
                          $
                          0.13
                          
                          
                          $
                          0.25
                          
                          
                          $
                          0.37Diluted
                          
                          $
                          0.21
                          
                          
                          $
                          0.13
                          
                          
                          $
                          0.25
                          
                          
                          $
                          0.36WEIGHTED
      AVERAGE SHARES OUTSTANDING:Basic
                          
                          
                          15,265,904
                          
                          
                          
                          15,226,742
                          
                          
                          
                          15,241,333
                          
                          
                          
                          15,153,824Diluted
                          
                          
                          15,411,154
                          
                          
                          
                          15,547,840
                          
                          
                          
                          15,305,452
                          
                          
                          
                          15,567,627
 See
accompanying notes to the Consolidated Financial Statements.
 4
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
 
 AccumulatedRetained
      Earnings
                                                                                            
                                                                                            
                                                                                            otherPreferred
      Stock
                                                                                            
                                                                                            
                                                                                            Common
      Stock
                                                                                            
                                                                                            
                                                                                            Paid-in
                                                                                            
                                                                                            
                                                                                            Statutory
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            comprehensive
                                                                                            
                                                                                            
                                                                                            NoncontrollingShares
                                                                                            
                                                                                            
                                                                                            Par
      Value
                                                                                            
                                                                                            
                                                                                            Shares
                                                                                            
                                                                                            
                                                                                            Par
      Value
                                                                                            
                                                                                            
                                                                                            capital
                                                                                            
                                                                                            
                                                                                            reserves
                                                                                            
                                                                                            
                                                                                            Unrestricted
                                                                                            
                                                                                            
                                                                                            income
                                                                                            
                                                                                            
                                                                                            Interests
                                                                                            
                                                                                            
                                                                                            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 (loss)
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            5,607,177
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            (85,086
                                                                                            )
                                                                                            
                                                                                            
                                                                                            5,522,091Adjustment
      of statutory reserve
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            623,022
                                                                                            
                                                                                            
                                                                                            
                                                                                            (623,022
                                                                                            )Preferred
      stock converted to common stock
                                                                                            
                                                                                            
                                                                                            (111,649
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (11
                                                                                            )
                                                                                            
                                                                                            
                                                                                            115,101
                                                                                            
                                                                                            
                                                                                            
                                                                                            11
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            -Stock
      options exercised
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            290,000
                                                                                            
                                                                                            
                                                                                            
                                                                                            29
                                                                                            
                                                                                            
                                                                                            
                                                                                            362,471
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            362,500Stock
      option and warrant compensation
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            83,467
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            83,467Foreign
      currency translation adjustments
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,169,693
                                                                                            
                                                                                            
                                                                                            
                                                                                            58,207
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,227,900BALANCE,
      September 30, 2008 (UNAUDITED)
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            15,226,742
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,522
                                                                                            
                                                                                            
                                                                                            
                                                                                            13,006,016
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,814,252
                                                                                            
                                                                                            
                                                                                            
                                                                                            18,992,742
                                                                                            
                                                                                            
                                                                                            
                                                                                            4,292,488
                                                                                            
                                                                                            
                                                                                            
                                                                                            866,458
                                                                                            
                                                                                            
                                                                                            
                                                                                            39,973,478Net
      income
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,518,439
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            (33,140
                                                                                            )
                                                                                            
                                                                                            
                                                                                            3,485,299Adjustment
      of statutory reserve
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            364,609
                                                                                            
                                                                                            
                                                                                            
                                                                                            (364,609
                                                                                            )
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            -Preferred
      stock converted to common stock
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            -Stock
      options exercised for cash @ $1.25
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            -Stock
      option and warrant compensation
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            4,996
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            4,996Foreign
      currency translation adjustments
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            135,806
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,214
                                                                                            
                                                                                            
                                                                                            
                                                                                            138,020BALANCE,
      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 (loss)
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,812,184
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            (242,953
                                                                                            )
                                                                                            
                                                                                            
                                                                                            3,569,231Adjustment
      of statutory reserve
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            -Issuance
      of common stockStock
      options exercised
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            40,000
                                                                                            
                                                                                            
                                                                                            
                                                                                            4
                                                                                            
                                                                                            
                                                                                            
                                                                                            49,996
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            50,000Cashless
      exercise of warrants
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            53,397
                                                                                            
                                                                                            
                                                                                            
                                                                                            5
                                                                                            
                                                                                            
                                                                                            
                                                                                            (5
                                                                                            )
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            -Reclassification
      of warrants from liabilities upon exercise
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            129,221
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            129,221Stock
      option and warrant compensation
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            101,336
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            101,336Foreign
      currency translation adjustments
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,726
                                                                                            
                                                                                            
                                                                                            
                                                                                            (183
                                                                                            )
                                                                                            
                                                                                            
                                                                                            3,543BALANCE,
      September 30, 2009 (UNADUDITED)
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            $
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            15,320,139
                                                                                            
                                                                                            
                                                                                            $
                                                                                            1,531
                                                                                            
                                                                                            
                                                                                            $
                                                                                            12,750,025
                                                                                            
                                                                                            
                                                                                            $
                                                                                            3,178,861
                                                                                            
                                                                                            
                                                                                            $
                                                                                            26,084,749
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,432,020
                                                                                            
                                                                                            
                                                                                            $
                                                                                            592,396
                                                                                            
                                                                                            
                                                                                            $
                                                                                            47,039,582
 See
accompanying notes to the Consolidated Financial Statements.
 5
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 Nine
      months ended September 30,2009
                                                          
                                                          
                                                          2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income attributable to China Medicine Corporation
                                                          
                                                          $
                                                          3,812,184
                                                          
                                                          
                                                          $
                                                          5,607,177Net
      loss attributable to noncontrolling interests
                                                          
                                                          
                                                          (242,953
                                                          )
                                                          
                                                          
                                                          (85,087
                                                          )Net
      income
                                                          
                                                          
                                                          3,569,231
                                                          
                                                          
                                                          
                                                          5,522,090Adjustments
      to reconcile net income to cash provided by (used in) operating
      activities:Depreciation
      and amortization
                                                          
                                                          
                                                          663,645
                                                          
                                                          
                                                          
                                                          289,935Bad
      debt expense
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -Loss
      on sale of assets
                                                          
                                                          
                                                          27,102
                                                          
                                                          
                                                          
                                                          -Stock
      issued for services
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -Stock
      option and warrant compensation
                                                          
                                                          
                                                          101,336
                                                          
                                                          
                                                          
                                                          83,467Amortization
      of deferred expenses
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          265,971Change
      in fair value of warrant liabilities
                                                          
                                                          
                                                          2,113,589
                                                          
                                                          
                                                          
                                                          -Change
      in operating assets and liabilitiesNotes
      receivables
                                                          
                                                          
                                                          453,870
                                                          
                                                          
                                                          
                                                          (1,197,140
                                                          )Accounts
      receivable, trade
                                                          
                                                          
                                                          4,278,788
                                                          
                                                          
                                                          
                                                          (726,513
                                                          )Other
      receivable
                                                          
                                                          
                                                          (1,759,080
                                                          )
                                                          
                                                          
                                                          -Inventories
                                                          
                                                          
                                                          (3,220,094
                                                          )
                                                          
                                                          
                                                          (1,028,416
                                                          )Advances
      to suppliers
                                                          
                                                          
                                                          (2,268,657
                                                          )
                                                          
                                                          
                                                          (3,521,687
                                                          )Other
      current assets
                                                          
                                                          
                                                          (23,232
                                                          )
                                                          
                                                          
                                                          (1,460
                                                          )Change
      in operating liabilitiesAccounts
      payable, trade
                                                          
                                                          
                                                          242,854
                                                          
                                                          
                                                          
                                                          3,731Other
      payables and accrued liabilities
                                                          
                                                          
                                                          (21,402
                                                          )
                                                          
                                                          
                                                          (52,263
                                                          )Customer
      deposits
                                                          
                                                          
                                                          (107,246
                                                          )
                                                          
                                                          
                                                          13,087Taxes
      payable
                                                          
                                                          
                                                          (522,537
                                                          )
                                                          
                                                          
                                                          (395,105
                                                          )Net
      cash provided by (used in) operating activities
                                                          
                                                          
                                                          3,528,167
                                                          
                                                          
                                                          
                                                          (744,303
                                                          )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of equipment
                                                          
                                                          
                                                          (3,469,593
                                                          )
                                                          
                                                          
                                                          (147,935
                                                          )Purchase
      of intangible assets
                                                          
                                                          
                                                          (234,544
                                                          )
                                                          
                                                          
                                                          (2,817,221
                                                          )Proceeds
      from sale of equipment
                                                          
                                                          
                                                          21,989
                                                          
                                                          
                                                          
                                                          -Long
      term prepayment
                                                          
                                                          
                                                          (3,375,766
                                                          )
                                                          
                                                          
                                                          -Net
      cash used in investing activities
                                                          
                                                          
                                                          (7,057,914
                                                          )
                                                          
                                                          
                                                          (2,965,156
                                                          )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from short-term loans
                                                          
                                                          
                                                          2,931,800
                                                          
                                                          
                                                          
                                                          -Proceeds
      from exercise of options
                                                          
                                                          
                                                          50,000
                                                          
                                                          
                                                          
                                                          362,500Net
      cash provided by financing activities
                                                          
                                                          
                                                          2,981,800
                                                          
                                                          
                                                          
                                                          362,500EFFECT
      OF EXCHANGE RATE ON CASH
                                                          
                                                          
                                                          (1,286
                                                          )
                                                          
                                                          
                                                          289,273DECREASE
      IN CASH
                                                          
                                                          
                                                          (549,233
                                                          )
                                                          
                                                          
                                                          (3,057,686
                                                          )CASH,
      beginning of period
                                                          
                                                          
                                                          2,791,814
                                                          
                                                          
                                                          
                                                          5,767,774CASH,
      end of period
                                                          
                                                          $
                                                          2,242,581
                                                          
                                                          
                                                          $
                                                          2,710,088
 See
accompanying notes to the Consolidated Financial Statements.
 6
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Note
1 - Organization
 
 China
Medicine Corporation (“CMC” or the "Company") was incorporated in Delaware on
February 10, 2005.  On June 10, 2009, the Company completed its
reincorporation in Nevada. The reincorporation effected a change in the
Company’s legal domicile from Delaware to Nevada. The Company’s business,
assets, liabilities, and headquarters were unchanged as a result of the
reincorporation and the directors and officers of the Company prior to the
reincorporation continued to serve the Company after the reincorporation. 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. The Company primarily operates through its wholly-owned
subsidiary, Guangzhou Konzern Medicine Co., Ltd. (“Konzern”), a company
organized under the laws of the PRC.
 
 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 September 30, 2009, Co-Win was still
in development and had not undertaken significant operating
activities.
 
 On May
20, 2009, Guangzhou Konzern Bio-Tech Co., Ltd. ("Konzern Bio-Tech") was
incorporated.  Konzern Bio-Tech was established for the purpose of
engaging in research and development and utilizing the supports from the Chinese
Government for domestic Hi-Tech companies. Konzern has 100% ownership of Konzern
Bio-Tech. Konzern Bio-Tech 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, its 100% owned
subsidiary, Konzern Bio-Tech, all of which are 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
 September
30, 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.  Management believes that the estimates
utilized in preparing its consolidated financial statements are reasonable and
prudent.  Actual results could differ from those
estimates.
 
 Cash and Cash
Equivalents
 
 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.
 
 Concentrations and
Risks
 
 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 September 30, 2009
and December 31, 2008, the Company had deposits in excess of federally insured
limits total of $2,121,056 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.
  8
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Five
suppliers accounted for approximately 57% and 47% of the Company’s purchases for
the nine months ended September 30, 2009 and 2008 and approximately 56% and 50%
for the three months ended September 30, 2009 and 2008, respectively. Advances
to these five suppliers represented 14% and 33% of the Company’s total advances
to suppliers as of September 30, 2009 and 2008, respectively. As of September
30, 2009 and 2008, no accounts payables were due to these
suppliers.
 
 Five
customers accounted for approximately 47% and 50% of the Company's total sales
for the nine months ended September 30, 2009 and 2008 and 46% and 52% for the
three months ended September 30, 2009 and 2008, respectively. The accounts
receivable balance of these five customers amounted $9,471,668, representing 63%
of the total accounts receivable as of September 30, 2009, and $8,794,247,
representing 57% of the total accounts receivable as of September 30, 2008,
respectively.
 
 The top
three products accounted for approximately 22% and 20% of the Company’s total
sales for the nine months ended September 30, 2009 and 2008 and 27% and 23% for
the three months ended September 30, 2009 and 2008, respectively.
  Accounts receivable,
trade
 
 The
Company extends unsecured credit to its customers in the ordinary course of
business.  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.
 
 Other
receivable
 
 The
Company extends unsecured credit to a third party for the purpose of business
relationship.  There is no binding contract. The full amount will be
repaid within one year.
  9
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Inventories
 
 Inventories
are stated at the lower of cost or market value, cost is determined using the
weighted average method. Management reviews inventories for obsolescence or cost
in excess of net realizable value periodically and records an inventory
write-down and additional cost of goods sold when the carrying value exceeds net
realizable value.
 
 Equipment
 
 Equipment
is stated at the actual cost of acquisition less accumulated depreciation and
amortization. Expenditures for maintenance and repairs are charged to earnings
as incurred. Major additions and betterments are capitalized. When assets are
retired or otherwise disposed of, the related cost and accumulated depreciation
are removed from the respective accounts, and any gain or loss is included in
operations. Depreciation and amortization are provided in amounts sufficient to
relate the costs of depreciation of assets to operations principally using the
straight-line method for substantially all assets with residual value of 5% of
the actual cost and estimated lives as follows:
 
 Leasehold
      improvements
                5
      yearsEquipment
                5
      yearsFurniture
                5
      yearsMotor
      vehicles
                5 -
      8 years
 
 Construction
in progress represents the costs incurred in connection with the construction of
equipment for manufacturing ADTZ.  No depreciation is provided for
construction in progress until such time as the assets are completed and placed
into service.
 
 Long term
prepayment
 
 Long term
prepayment represents partial payments or deposits on acquiring technology and
exclusive distribution rights.
 
 Intangibles
 
 Under the
FASB’s accounting standard of 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.
  10
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Beginning
in 2007, the Company acquired technology to manufacture ADTZ.  The
major costs of intangibles includes patent and technology acquired and related
final experiment costs required by the government.  The Company will
begin amortizing costs once manufacturing begins.  As of September 30,
2009, the Company has started trial production to meet government requirements
and is in the process of applying the government permit to allow the Company to
manufacture ADTZ. The Company expects to obtain the permit prior to the end of
2009. For the nine and three months ended September 30, 2009, the Company
capitalized an additional $234,000 of expenses related to the
acquisition.
 
 As of
September 30, 2009, the future amortization for the years ending December 31,
are as follows assuming the Company begins amortizing the intangibles in the
fourth quarter of 2009:
 
 2009
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  ThereafterAmortization
      expense
                  
                  $
                  39,500
                  
                  
                  $
                  158,000
                  
                  
                  $
                  158,000
                  
                  
                  $
                  158,000
                  
                  
                  $
                  149,000
                  
                  
                  $
                  819,000
 
 Impairment of long-lived
assets
 
 Per
FASB’s accounting standards, 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 September 30, 2009, the Company believes
that there were no impairments of long-lived assets.
 
 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 the FASB’s standard regarding noncontrolling interests
in consolidated financial statements.  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 $592,396 and $835,532 from the
mezzanine section to equity in the September 30, 2009 and December 31, 2008
balance sheets, respectively.
  11
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 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 accounting standard regarding revenue recognition 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 $7,452,936 and $5,999,027, respectively
for the nine months ended September 30, 2009,  $4,835,986 and
$3,552,541, respectively for the nine months ended September 30,
2008,  $3,183,223 and $2,242,909, respectively for the three months
ended September 30, 2009 and $1,702,953 and $1,271,097, respectively for the
three months ended September 30, 2008. 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 $400,065 and $344,360 for the nine
months ended  September 30, 2009 and 2008 and totaled $88,013 and
$96,906 for the three months ended September 30, 2009 and 2008.
  12
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Advertising
costs
 
 The
Company expenses the cost of advertising as incurred in selling, general and
administrative costs. For the nine months ended September 30, 2009 and 2008,
advertising expenses amounted to $332,780 and $117,363, respectively. For three
months ended September 30, 2009 and 2008, advertising expenses amounted to
$20,321 and $39,777, 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 September 30, 2009 were translated at 6.82 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 nine months ended September 30, 2009 and 2008 were 6.82 RMB
and 6.97 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 were
recognized during the nine and three months ended September 30, 2009, and 2008.
Historically, the Company has not entered into any currency trading or hedging
transactions, although there is no assurance that the Company will not enter
into such transactions in the future.
  13
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Income
taxes
 
 The
Company records income taxes pursuant to the FASB’s accounting standards for
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 September 30, 2009
and December 31, 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 the
FASB’s accounting standards, 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.
 
 Fair value of financial
instruments
 
 The
accounting standards regarding fair value of financial instruments and related
fair value measurements defines financial instruments and requires fair value
disclosures of those financial instruments.  The fair value measurement
accounting standard 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 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:
   14
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 ·
              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
                          September 30, 2009
                        
                        Fair Value Measurements at September 30,
      2009Level
      1
                        
                        Level
      2
                        
                        Level
      3Warrant
      liabilities
                        
                        $
                        2,399,910
                        
                        
                        
                        $
                        2,399,910
  A
discussion of the valuation techniques used to measure fair value for the
liabilities listed above and activity for these liabilities for the nine months
ended September 30, 2009 is provided elsewhere in the
footnotes.
 
 In
addition to assets and liabilities that are recorded at fair value on a
recurring basis, the Company is required to record assets and liabilities at
fair value on a non-recurring basis.  Generally, assets are recorded
at fair value on a non-recurring basis as a result of impairment
charges.  For the three and nine months ended September 30, 2009,
there were no impairment charges.  Refer to elsewhere in the notes for
impairment valuation.
 
 Stock-based
compensation
 
 The
Company records and reports employee stock-based compensation in accordance with
FASB’s accounting standards for share-based payments. This accounting standard
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 the FASB’s accounting standards regarding accounting for stock
based compensation and 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.
  15
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Earnings per
share
 
 The
Company reports earnings per share in accordance with the FASB’s accounting
standards for 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 nine months and three months ended September
30:
  2009
                    
                    
                    2008For
      the nine months ended
                    
                    (Unaudited)
                    
                    
                    (Unaudited)Net
      income
                    
                    $
                    3,812,184
                    
                    
                    $
                    5,607,177Shares
      of common stock and common stock equivalents:Weighted
      average shares used in basic computation
                    
                    
                    15,241,333
                    
                    
                    
                    15,153,824Diluted
      effect of stock options, warrants, and preferred stock
                    
                    
                    64,119
                    
                    
                    
                    413,803Weighted
      average shares used in diluted computation
                    
                    
                    15,305,452
                    
                    
                    
                    15,567,627Earnings
      per share:Basic
                    
                    $
                    0.25
                    
                    
                    $
                    0.37Diluted
                    
                    $
                    0.25
                    
                    
                    $
                    0.36
  For the
nine months ended September 30, 2009, 3,239,212 warrants whose exercise price is
between $1.70 and $2.43 and 22,500 options whose exercise price is between $2.01
and $3.00 are excluded from the calculation because of their anti-dilutive
nature.
  16
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 2009
                    
                    
                    2008For
      the three months ended
                    
                    (Unaudited)
                    
                    
                    (Unaudited)Net
      income
                    
                    $
                    3,220,106
                    
                    
                    $
                    1,965,140Shares
      of common stock and common stock equivalents:Weighted
      average shares used in basic computation
                    
                    
                    15,265,904
                    
                    
                    
                    15,226,742Diluted
      effect of stock options, warrants, and preferred stock
                    
                    
                    145,250
                    
                    
                    
                    321,098Weighted
      average shares used in diluted computation
                    
                    
                    15,411,154
                    
                    
                    
                    15,547,840Earnings
      per share:Basic
                    
                    $
                    0.21
                    
                    
                    $
                    0.13Diluted
                    
                    $
                    0.21
                    
                    
                    $
                    0.13
 
 For the
three months ended September 30, 2009, 3,039,738 warrants whose exercise price
is between $2.26 to $2.43 and 22,500 options whose exercise price is between
$2.01 and $3.00 are excluded from the calculation because of their anti-dilutive
nature.
 
 Recently issued accounting
pronouncements
 
 In
January 2009, the FASB issued an accounting standard amending the Impairment
Guidance of recognition of interest income and impairment on purchased and
retained beneficial interests in securitized financial assets. The newly issued
accounting standard changes the impairment model included to be more consistent
with the impairment model of another accounting standard for accounting for
securities.  The new accounting standard 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 adoption of this FASB Staff Positions did not have
a material impact the Company’s consolidated financial
statements.
  17
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 In April
2009, the FASB issued three related FASB Staff Positions: (i) Recognition of
Presentation of Other-Than-Temporary Impairments, (ii) Interim Disclosures about
Fair Value of Financial Instruments, and (iii) Determining the Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, which are effective
for interim and annual reporting periods ending after June 15, 2009. The first
Staff Position modifies the requirement for recognizing other-than-temporary
impairments, changes the existing impairment model, and modifies the
presentation and frequency of related disclosures. The second Staff Position
requires disclosures about fair value of financial instruments for interim
reporting periods as well as in annual financial statements.  The
third Staff Position requires new disclosures
regarding the categories of fair value instruments, as well as the inputs andvaluation
techniques utilized to determine fair value and any changes to the inputs and
valuation techniques during the period.The adoption of these FASB Staff
Positions did not have a material impact the Company’s consolidated financial
statements.
 
 In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires entities to provide more information regarding sales of
securitized financial assets and similar transactions, particularly if the
entity has continuing exposure to the risks related to transferred financial
assets. In addition, it eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets and
requires additional disclosures.  This accounting standard is
effective for financial statements issued for fiscal years beginning after
November 15, 2009; The Company is currently assessing the impact of the standard
on its consolidated financial statements.
 
 In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of variable interest entities
(“VIEs”).   This standard modifies how a company determines when
an entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. It clarifies that the
determination of whether a company is required to consolidate an entity is
based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. An ongoing reassessment is
required of whether a company is the primary beneficiary of a
variable interest entity. Further, it also requires additional disclosures
about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. The standard
is effective for fiscal years beginning after November 15, 2009. The Company is
currently assessing the impact of the standard on its consolidated financial
statements.
 
 In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU. The adoption of this ASU did not have a material impact the
Company’s consolidated financial statements.
  18
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing.  This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation.  This ASU is
effective for fiscal years beginning on or after December 15, 2009, and
interim periods within those fiscal years for arrangements outstanding as of the
beginning of those fiscal years. The Company is currently assessing the impact
of this ASU on its consolidated financial statements.
 
 Note
3 – Accounts receivable
 
 Accounts
receivable consisted of the following:
 
 September
      30, 2009
                  
                  
                  December 31, 2008(Unaudited)Trade
      accounts receivable
                  
                  $
                  15,039,701
                  
                  
                  $
                  19,321,700Allowance
      for doubtful accounts
                  
                  
                  (96,609
                  )
                  
                  
                  (96,609
                  )Trade
      accounts receivable, net
                  
                  $
                  14,943,092
                  
                  
                  $
                  19,225,091
 
 September 30, 2009
                                                                            
                                                                            
                                                                            December 31, 2008(Unaudited)Beginning
      allowance for doubtful accounts
                                                                            
                                                                            $
                                                                            96,609
                                                                            
                                                                            
                                                                            $
                                                                            55,640Additions
      charged to bad debt expense
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            36,428Foreign
      currency translation adjustments
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            4,541Ending
      allowance for doubtful accounts
                                                                            
                                                                            $
                                                                            96,609
                                                                            
                                                                            
                                                                            $
                                                                            96,609
  19
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Note
4 – Inventories
 
 Inventories
mostly consisted of finished goods, as follows:
 
 September
      30, 2009
                  
                  
                  December 31, 2008(Unaudited)Raw
      Materials
                  
                  $
                  2,059
                  
                  
                  $
                  -Pharmaceutical
      Medicine
                  
                  $
                  7,945,768
                  
                  
                  $
                  4,725,322Totals
                  
                  $
                  7,947,827
                  
                  
                  $
                  4,725,322
 
 Note
5 – Advances to suppliers
 
 Advances
on inventory purchases are down payments or deposits for inventory
purchases.  The inventory is normally delivered within one to two
months after the payments have been made except for vendors who have agency
relationship with the Company.  This amount is refundable and bears no
interest. The Company has legally binding contracts with its vendors, which
required the payments to be returned to the Company when the contract
ends.  The total outstanding amount was $8,392,320 as of September 30,
2009 and $6,121,974 as of December 31, 2008, respectively.  The
Company advanced $3.2 million to LifeTech as of September 30,
2009.  On October 26, 2009, the Company acquired
LifeTech.  Refer to Note 15 for additional information.
 
 Note
6 - Equipment
 
 Equipment
consisted of the following:
 
 September
      30, 2009
                  
                  
                  December 31, 2008(Unaudited)Furniture
      and fixtures
                  
                  $
                  185,130
                  
                  
                  $
                  169,305Equipment
                  
                  
                  3,784,695
                  
                  
                  
                  3,761,419Motor
      vehicles
                  
                  
                  380,224
                  
                  
                  
                  433,768Leasehold
      improvement
                  
                  
                  545,401
                  
                  
                  
                  318,398Construction-In-Progress
                  
                  
                  3,051,360
                  
                  
                  
                  -Total
                  
                  
                  7,946,810
                  
                  
                  
                  4,682,890Less
      accumulated depreciation
                  
                  
                  (1,448,189
                  )
                  
                  
                  (921,253
                  )Equipment,
      net
                  
                  $
                  6,498,621
                  
                  
                  $
                  3,761,637
 
 Construction
in progress represents the costs incurred in connection with the construction of
equipments for manufacturing “ADTZ”.  Management
expects the equipments will be completed by the second quarter of 2010 and has
outstanding commitment of approximately $777,000 as of September 30,
2009.  No depreciation is provided for construction in progress until
such time as the assets are completed and placed into service.
  20
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Depreciation
expense amounted to $229,690 and $96,363 for the three months ended September
30, 2009 and 2008, respectively, and $663,583 and $289,935 for the nine months
ended September 30, 2009 and 2008, respectively.
 
 Note 7 – Long term
prepayment
 
 Long term
prepayment consists of the following:
  September
      30, 2009
                    
                    
                    December 31, 2008(Unaudited)Prepayment
      for purchase of assets
                    
                    $
                    90,716
                    
                    
                    $
                    362,864Prepayment
      for agency fee
                    
                    
                    880,200
                    
                    
                    
                    880,200Long
      term deferred assets
                    
                    
                    88,937
                    
                    
                    
                    150,806Long
      term deposit
                    
                    
                    2,797,270
                    
                    
                    
                    1,687,050Deposit
      - technology know-how
                    
                    
                    5,536,170
                    
                    
                    
                    2,934,000Total
      long term prepayment
                    
                    $
                    9,393,293
                    
                    
                    $
                    6,014,920
 
 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. The payment 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. As of September 30, 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.
  On May
10, 2009, the Company entered into a series of agreements with a purpose of
acquiring a non-prescription drug know-how developed by a third party. The
payments represent a deposit for acquiring the know-how and a deposit for
manufacturing rights. As of September 30, 2009, the Company paid $2.6 million
(RMB 17,700,000) with $337,410 (RMB 2,300,000) remained unpaid.
  In July
2009, the Company made a long term deposit of $2.2 million to security its
position of purchasing two national exclusive distribution rights.
 
 Note
8 – Short term loan
 
 On July
1, 2009, the company received a RMB 20 million (approximately $2.9 million) loan
from the Bank of China. The term of the loan is one year with an annual interest
rate of 5%. The loan is guaranteed by Co-Win and three officers of the
Company.  The Company had no outstanding loan as of December 31,
2008.  Total interest expense on the short term loan for the three and
nine months ended September 30, 2009 amounted to $33,735.
  21
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Note
9 - 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.
 
 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%.
 
 Commencing
in 2009, the Company is subject to the standard tax rate and no longer benefits
from tax savings.  The estimated tax savings for the nine months and
three months ended September 30, 2008 amounted $1,252,833 and $411,890,
respectively. The net effect on earnings per share if the income tax had been
applied would decrease earnings per share from $0.24 to $0.19 for the nine
months and from $0.16 to $0.13 for three months ended September 30, 2008,
respectively.
  22
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 The
provision for income taxes for the nine and three months ended September 30,
2009 and 2008 consisted of the following:
 
 For the nine months ended
                            September 30,
                          
                          
                          For the three monthsended
                            September 30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Provision
      for China income tax
                          
                          $
                          2,331,457
                          
                          
                          $
                          1,138,939
                          
                          
                          $
                          1,215,957
                          
                          
                          $
                          374,445Provision
      for local tax
                          
                          
                          -
                          
                          
                          
                          113,894
                          
                          
                          
                          -
                          
                          
                          
                          37,445Tax
      provision - PRC
                          
                          $
                          2,331,457
                          
                          
                          $
                          1,252,833
                          
                          
                          $
                          1,215,957
                          
                          
                          $
                          411,890
 
 The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate for the nine and three months ended September 30:
  For the nine months ended
                          September 30,
                        
                        
                        For the three monthsended
                          September 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008U.S.
      Statutory rates
                        
                        
                        
                        
                        
                        34.0
                        %
                        
                        
                        34.0
                        %
                        
                        
                        34.0
                        %
                        
                        
                        34.0
                        %Foreign
      Income not recognized
                        
                        
                        
                        
                        
                        (34.0
                        )
                        
                        
                        (35.0
                        )
                        
                        
                        (34.0
                        )
                        
                        
                        (34.0
                        )China
      Tax rates
                        
                        
                        
                        
                        
                        25.0
                        
                        
                        
                        25.0
                        
                        
                        
                        25.0
                        
                        
                        
                        25.0China
      income tax exemption
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        (8.5
                        )
                        
                        
                        -
                        
                        
                        
                        (8.5
                        )Effective
      income tax rates in China
                        
                        
                        
                        
                        
                        
                        25.0
                        %
                        
                        
                        16.5
                        %
                        
                        
                        25.0
                        %
                        
                        
                        16.5
                        %
 
 For the
nine months ended September 30, 2009 and 2008, the Company’s effective tax rate
was 39.5% and 18.5%.  For the three months ended September 30, 2009
and 2008, the Company’s effective tax rate was 28.0% and 17.6%. 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.
  23
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Taxes
payable consisted of the following:
  September 30,
      2009
                
                
                December
      31,2008(Unaudited)Income
      taxes payable
                
                $
                244,153
                
                
                $
                12,042Value
      added tax
                
                
                2,3472,347
                
                
                
                758,168Other
      income tax
                
                
                2,860
                
                
                
                2,079Total
                
                $
                249,360
                
                
                $
                772,289
 
 The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $32,344,372 as of September 30, 2009, is included in consolidated
retained earnings and will continue to be indefinitely reinvested in
international operations.  Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the future.
 
 The
Company was incorporated in the United States and has incurred net operating
losses for income tax purposes for the nine months ended September 30, 2009 and
2008, respectively. The estimated net operating loss carry forwards for United
States income taxes amounted to $2,626,151 and $2,550,000 as of September 30,
2009 and December 31, 2008, 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 September 30, 2009 was $893,000.
The net change in the valuation allowance for the nine months ended September
30, 2009 was an increase of $26,000. Management will review this valuation
allowance periodically and make adjustments as warranted.
 
 Note
10 - Commitments and contingencies
 
 The
Company entered into non-cancelable purchase commitment with two
vendors.  As of September 30, 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 September 30, 2009.
 
 On May 9,
2008, the Company signed a technology know-how transfer agreement for the amount
of $4,395,000 (RMB 30,000,000) as long term prepayment. As of September 30,
2009, $1,465,000 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.
  24
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 The
future minimum annual lease payments required are as follows:
 
 For the year ended December
    31,
                        
                        Amount2010
                        
                        $
                        86,8102011
                        
                        
                        64,5422012
                        
                        
                        10,0442013
                        
                        
                        1,257Thereafter
                        
                        
                        -
 
 For the
three months ended September 30, 2009 and 2008, total rental expense amounted to
$42,395 and $24,709, respectively.  Total rent expense for the nine
months ended September 30, 2009 and 2008 amounted to $114,183 and
$83,573.
 .
 Notes
11 - Supplemental disclosure of cash flows
 
 The
Company paid $33,735 cash interest for the nine months ended September 30, 2009.
For the nine months ended September 30, 2009, the Company paid no cash
interest.
 
 Cash paid
for income taxes amounted to $2,099,520 and $1,315,776 for the nine months ended
September 30, 2009 and 2008, respectively.
 
 For the
nine months ended September 30, 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 September 30, 2009.
 
 For the
nine months ended September 30, 2009, the Company accrued receivables of
approximately $22,000 related to vehicles disposed.
 
 For the
nine months ended September 30, 2009, holders of Class A warrants cashlessly
exercised 179,474 shares for 53,397 shares of common stock. There were no
warrants exercised for the nine months ended September 30, 2008.
 
 Note
12 - 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.
  25
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 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 September 30, 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 nine months ended September 30, 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 nine months ended September 30, 2009 and 2008,
respectively.
 
 Note
13 - 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 $66,182 and $66,182 ended September 30,
2009 and 2008; and $27,546 and $18,469 for the three months ended September 30,
2009 and 2008, respectively.
  26
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Note
14 - 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. As of December 31, 2008, all convertible preferred stock had
been converted into common stock.
 
 Stock
options
  In
January 2006, the Company created the 2006 Long-Term Incentive
Plan.  This plan authorized the issuance of 1,575,000 shares of the
Company’s common stock.  All grants have been at prices which
approximate the fair market value of the Company’s common stock at the date of
grant.  The contractual term is generally 5 years.
 
 On 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.
 
 On June
2, 2009, 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 grant date fair value was $1.41 per
share.
 
 On August
25, 2009, the Company granted 240,000 shares of stock options to the Company’s
CFO. The options become exercisable for 60,000 shares of common stock one year
from the grant date, and the remaining 180,000 options will become exercisable
on the second anniversary of the grant date at a rate of 15,000 shares per
quarter.  The grant date fair value was $1.10 per share.
 
 The fair
value of the options was estimated on the date of grant using a Black-Scholes
Option Pricing model using the following assumptions:
  2009
                        
                        
                        2008Annual
      dividend yield
                        
                        -
                        
                        
                        -Expected
      life (years)
                        
                        
                        4.00
      - 5.00
                        
                        
                        
                        4.98Risk-free
      interest rate
                        
                        
                        1.52%
      - 2.2
                        %
                        
                        
                        3.25
                        %Expected
      volatility
                        
                        
                        88%
      - 90
                        %
                        
                        
                        76
                        %
  27
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 For the
nine months ended September 30, 2009 and 2008, 40,000 and 290,000 options were
exercised at $1.25 per share.  The Company received a total of $50,000
and $362,500 from the exercise of stock options.  The Company expensed
$24,812 and $31,553 for the three months ended September 30, 2009 and 2008,
respectively and $34,434 and $42,465 for the nine months ended September 30,
2009 and 2008, respectively, for stock-based compensation.
  Summary of option
activity:
  Outstanding
                    Options
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  Average
                    Remaining
                    Contractual
                    Term
                    (Year)
                  
                  Exercisable
                    Options
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Intrinsic
                    Value12/31/2007
                  
                  
                  1,105,000
                  
                  
                  $
                  1.91
                  
                  
                  
                  
                  671,500
                  
                  
                  $
                  1.91
                  
                  
                  $
                  1,041,750Granted
                  
                  
                  15,000
                  
                  
                  $
                  2.01
                  
                  
                  
                  
                  7,500
                  
                  
                  $
                  2.01Exercised
                  
                  
                  (290,000
                  )
                  
                  $
                  1.25
                  
                  
                  
                  
                  (290,000
                  )
                  
                  $
                  1.25
                  
                  
                  $240,000Forfeited
                  
                  
                  (450,000
                  )
                  
                  
                  
                  
                  
                  
                  (16,500
                  )12/31/2008
                  
                  
                  380,000
                  
                  
                  $
                  1.35
                  
                  
                  
                  
                  372,500
                  
                  
                  $
                  1.34Granted
                  
                  
                  255,000
                  
                  
                  $
                  1.67Exercised
                  
                  
                  (40,000
                  )
                  
                  $
                  1.25
                  
                  
                  
                  
                  (40,000
                  )
                  
                  $
                  1.25
                  
                  
                  $
                  29,825Forfeited
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -09/30/2009
                  
                  
                  595,000
                  
                  
                  $
                  1.49
                  
                  2.82
                  
                  
                  332,500
                  
                  
                  $
                  1.35
                  
                  
                  $
                  270,550Exercisable
      at 9/30/2009
                  
                  
                  
                  
                  
                  
                  
                  
                  1.89
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  207,700
 
 Warrants
 
 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.
  28
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Effective
January 1, 2009, the Company adopted the provisions of an accounting
standard regarding whether an instrument (or embedded feature) is indexed to an
entity’s own stock.  This accounting standard 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.  It 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 scope
exception within the standards.
 
 As a
result of adoption, 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 Company
recognized a $2,113,589 and $141,682 loss from the change in fair value for the
nine and three months ended September 30, 2009, respectively.
 
 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:
 
 September 30, 2009
                                    
                                    January 1, 2009(Unaudited)
                                    (Unaudited)Annual dividend yield
                                    
                                    
                                    -
                                    
                                    -Expected
      life (years)
                                    
                                    
                                    1.36
                                    
                                    2.10Risk-free
      interest rate
                                    
                                    
                                    0.68
                                    %
                                    0.76
                                    %Expected
      volatility
                                    
                                    
                                    103
                                    %
                                    84
                                    %
 
 On May
27, 2009, the Company granted a total of 70,000 warrants to a third party for
investor relations services.  These warrants are accounted for as
equity instruments issued in exchange for the receipt of
services.  Costs are measured at the estimated fair value of the
equity instruments issued.  The Company valued these warrants at
$93,679 using the Black Scholes model with the following factors: market price
of $1.85; volatility of 88%; risk free rate of 1.64%; exercise price of $0.85;
and an estimated life of 3.00 years.  For the nine and three ended
September 30, 2009, the Company recorded amortization expense of $66,902 related
to these warrants.
  29
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 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.
 
 On
September 21, 2009, an investor performed a cashless exercise of 179,474 warrant
shares, which were converted to 53,397 shares of common stock.  The
Company valued the conversion on the exercise date and recorded an aggregate of $98,711 losses from
changes in fair value of warrants.
 
 Summary of
warrant activity:
  Outstanding
                                        
                                        
                                        Weighted
                                          Average
                                          Exercise
                                          Price
                                        
                                        Average
                                          Remaining
                                          Contractual
                                          Term
                                          (Years)December
      31, 2007
                                        
                                        
                                        3,418,686
                                        
                                        $
                                        2.35
                                        
                                        3.17Granted
                                        
                                        
                                        -Exercised
                                        
                                        
                                        -Forfeited
                                        
                                        
                                        -December
      31, 2008
                                        
                                        
                                        3,418,686
                                        
                                        $
                                        2.35
                                        
                                        2.17Granted
                                        
                                        
                                        70,000Exercised
                                        
                                        
                                        (179,474
                                        )Forfeited
                                        
                                        
                                        -September
      30, 2009
                                        
                                        
                                        3,309,212
                                        
                                        $
                                        2.35
                                        
                                        1.40
 
 Note
15 – Subsequent events
 
 On
October 26, 2009, the Company entered into an Equity Ownership Transfer
Agreement (the “Transfer Agreement”) with Sinoform Limited, a company registered
under the laws of the British Virgin Islands (“Sinoform”), to acquire 100% of
Sinoform’s equity interests in Guangzhou LifeTech Pharmaceuticals Co., Ltd
(“LifeTech”), a wholly-owned subsidiary of Sinoform.
  30
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 LifeTech
is a developer and manufacturer of pharmaceutical products with a focus on
vascular medicines, anti-inflammatory medicines, women’s health and other
general health traditional Chinese medicines. LifeTech was founded in 1992, and
its corporate headquarters are located in Guangzhou, China.
 
 Pursuant
to the Transfer Agreement, Sinoform will transfer all of its equity interests in
LifeTech for a cash payment of RMB57,000,000 (approximately $8,344,800) in
addition to the assumption of RMB89,800,000 (approximately $13,146,720) of
LifeTech’s outstanding bank debt.  The transfer of the equity
interests will not be effective until the Bureau of Foreign Trade and Economic
Cooperation of Conghua Municipality (the “Bureau”) approves the change in
LifeTech’s sole shareholder and approves the amendments to LifeTech’s articles
of association. The
initial accounting of the acquisition is incomplete; thus, the allocation of the purchase price has not been
determined.
 
 The
Company has performed an evaluation of subsequent events through November 16,
2009 which is the date the financial statements were issued.
  31





Item
2.          Management’s Discussion and
Analysis of Financial Condition andResults of
Operations





Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") should be read in conjunction with our consolidated financial
statements and the notes to those financial statements appearing elsewhere in
this report. This 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 six patents
registered with the State Intellectual Property Office of PRC (“SIPO”), and has
three 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. As of the date of this report, we started trial production to meet PRC
government requirements and are in the process of applying for the government
permit to allow us to manufacture ADTZ. We expect to obtain the permit prior to
the end of 2009. In September 2009, Co-Win received the Mexican patent related
to ADTZ. As of the date of this report, Co-Win holds patents related to ADTZ in
China, Australia, South Africa, South Korea, Russia and Mexico.





Most of
our revenues are derived from three sources, the distribution of pharmaceutical
products from suppliers, the distribution of self-developed pharmaceutical
products (including Ozagrel Dried powder injection and Levocarnitine dried
powder injection), as well as the development and transfer of intellectual
property, including drug formulas and production techniques.




32









The
pharmaceutical products we distribute, either from outside suppliers or our
self-developed products, include prescription and over-the-counter drugs,
Chinese herbs, traditional Chinese medicines made from Chinese herbs,
nutritional supplements, dietary supplements and medical equipment. Our
customers typically are wholesale medical product companies, hospitals and
retail drug stores.





Although
the distribution of our suppliers’ pharmaceutical products has been the major
source of revenues, amounting to 96.0% and 87.7% of our total revenues for the
nine months ended September 30, 2009 and 2008 respectively, we strongly believe
that it is our optimal long term strategy is to distribute our self-developed
pharmaceutical products, and to develop intellectual property, including drug
formulas and production techniques.





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), are
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.





Recent
Developments





New
Market




Levocarnitine
Dried Powder Injection (“Levocarnitine”), one of our major self-developed
pharmaceutical products, was registered with Ministry of Health of Pakistan on
September 25, 2009. Konzern entered into a two year Distribution and Supply
Agreement of Levocarnitine (“Agreement”) with RG Pharmaceutica (Pvt.) Ltd.
(“RGP”), a Pakistani pharmaceutical distributor. The agreement stipulates that
RGP will be responsible for the product registration, importation and marketing
within Pakistan. Levocarnitine is used to treat coronary heart disease and acute
myocardial infarction. Currently, there are no pharmaceutical products similar
to Levocarnitine in Pakistan and the potential market for Levocarnitine in
Pakistan is estimated at 2 million vials per year. We expect to launch
Levocarnitine in Pakistan in January 2010.





New members of Management
Team





Richard
P. Wu began serving as our new Chief Financial Officer on August 25, 2009, as
described in our Current Report on Form 8-K, dated August 25,
2009.


33









Acquisition




On
October 26, 2009, Konzern entered into an Equity Ownership Transfer Agreement
(the “Transfer Agreement”) with Sinoform Limited, a company registered under the
laws of the British Virgin Islands (“Sinoform”), to acquire 100% of Sinoform’s
equity interests in Guangzhou LifeTech Pharmaceuticals Co., Ltd (“LifeTech”), a
wholly-owned subsidiary of Sinoform, as described in our Current Report on Form
8-K, dated October 26, 2009.





We
believe that this acquisition represents a strategic move in our evolution to a
vertically integrated pharmaceutical company and we expect it will lay the
foundation for a significant contribution to our profitability in the coming
years. With the acquisition of LifeTech, we will move towards a new business
model—from that of a pharmaceutical distributor to that of an enterprise with a
research and development force, manufacturing facilities, sales channels and a
distribution network. Specifically, in addition to products exclusively owned by
LifeTech, the acquisition of LifeTech allows us to enhance our product line with
high margin pharmaceuticals and improve our manufacturing capabilities for
existing propriety products. In the next three to five years we expect that 70%
of our revenue will be derived from the sales of our own products and the other
30% will be derived from distribution sales.





Results
of Operations




Our
revenue is derived primarily from the sale of prescription and over the counter
medicines, traditional Chinese medicines (“TCM”), which are medicines derived
from Chinese herbs, dietary supplements, medical equipment and rADTZ (each a ,
“Product”) and the sale of medical formulas. rADTZ is a feed additive
manufactured by Co-win that we began selling on a small sale in June 2009 that
we expect to contribute significantly to our revenues in the future. The
following table sets forth our statements of operations for the three months and
nine months ended September 30, 2009 and 2008, respectively, in U.S.
dollars:





Three Months Ended
      September 30,
                                    
                                    
                                    Nine Months Ended September 30,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2009
                                    
                                    
                                    2008Revenue
                                    
                                    $
                                    19,155,945
                                    
                                    
                                    $
                                    10,516,792
                                    
                                    
                                    $
                                    44,309,428
                                    
                                    
                                    $
                                    29,215,370Product
      sales
                                    
                                    
                                    18,789,470
                                    
                                    
                                    
                                    9,963,571
                                    
                                    
                                    
                                    43,942,953
                                    
                                    
                                    
                                    27,882,029Medical
      Formula sales
                                    
                                    
                                    366,475
                                    
                                    
                                    
                                    553,221
                                    
                                    
                                    
                                    366,475
                                    
                                    
                                    
                                    1,333,341Costs
      of goods sold
                                    
                                    
                                    13,322,614
                                    
                                    
                                    
                                    7,255,635
                                    
                                    
                                    
                                    32,167,242
                                    
                                    
                                    
                                    19,485,824Gross
      profit
                                    
                                    
                                    5,833,331
                                    
                                    
                                    
                                    3,261,157
                                    
                                    
                                    
                                    12,142,186
                                    
                                    
                                    
                                    9,729,546R&D
      expenses
                                    
                                    
                                    213,883
                                    
                                    
                                    
                                    288,353
                                    
                                    
                                    
                                    684,019
                                    
                                    
                                    
                                    484,569Selling,
      general and administrative costs
                                    
                                    
                                    1,082,234
                                    
                                    
                                    
                                    642,919
                                    
                                    
                                    
                                    3,375,078
                                    
                                    
                                    
                                    2,515,509Income
      from operations
                                    
                                    
                                    4,537,214
                                    
                                    
                                    
                                    2,329,885
                                    
                                    
                                    
                                    8,083,089
                                    
                                    
                                    
                                    6,729,468Other
      (expense) income, net
                                    
                                    
                                    (47,965
                                    )
                                    
                                    
                                    7,368
                                    
                                    
                                    
                                    (68,812
                                    )
                                    
                                    
                                    45,455Change
      in fair value of warrants
                                    
                                    
                                    (141,682
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (2,113,589
                                    )
                                    
                                    
                                    -Income
      before income taxes and noncontrolling interest
                                    
                                    
                                    4,347,567
                                    
                                    
                                    
                                    2,337,253
                                    
                                    
                                    
                                    5,900,688
                                    
                                    
                                    
                                    6,774,923Provision
      for income taxes
                                    
                                    
                                    1,215,957
                                    
                                    
                                    
                                    411,890
                                    
                                    
                                    
                                    2,331,457
                                    
                                    
                                    
                                    1,252,833Net
      income before noncontrolling interest
                                    
                                    
                                    3,131,610
                                    
                                    
                                    
                                    1,925,363
                                    
                                    
                                    
                                    3,569,231
                                    
                                    
                                    
                                    5,522,090Add:
      net income attributable to noncontrolling interest
                                    
                                    
                                    88,496
                                    
                                    
                                    
                                    39,777
                                    
                                    
                                    
                                    242,953
                                    
                                    
                                    
                                    85,086Consolidated
      net income attributable to CHINA MEDICINE CORPORATION
                                    
                                    $
                                    3,220,106
                                    
                                    
                                    $
                                    1,965,140
                                    
                                    
                                    $
                                    3,812,184
                                    
                                    
                                    $
                                    5,607,176




34









The
following table sets forth our revenues and the percentage of our revenues
derived from each type of Product for the nine months ended September 30, 2009
and 2008, respectively:





Product
      Type
                
                Nine Months Ended September 30,2009
                
                
                2008Medicines
                
                $
                42,868,376
                
                
                
                96.8
                %
                
                $
                27,261,660
                
                
                
                93.3
                %Dietary
      Supplements
                
                
                180,575
                
                
                
                0.4
                %
                
                
                177,949
                
                
                
                0.6
                %Medical
      Equipment
                
                
                766,855
                
                
                
                1.7
                %
                
                
                422,819
                
                
                
                1.4
                %Medical
      Formula
                
                
                366,475
                
                
                
                0.8
                %
                
                
                1,333,341
                
                
                
                4.6
                %rADTZ
                
                
                100,585
                
                
                
                0.2
                %
                
                
                0
                
                
                
                0
                %Others
                
                
                26,562
                
                
                
                0.1
                %
                
                
                19,601
                
                
                
                0.1
                %Total
                
                $
                44,309,428
                
                
                
                100
                %
                
                
                29,215,370
                
                
                
                100
                %





As noted
above, we categorize our medicines as prescription, over the counter, or
traditional Chinese medicines. The following table sets forth the revenues and
percentage of revenues derived from each type of medicine.





Medicine
      Type
                
                Nine Months Ended September 30,2009
                
                
                2008Western
      Prescription Medicines
                
                $
                25,275,463
                
                
                
                57.0
                %
                
                $
                17,899,710
                
                
                
                61.3
                %Western
      Over-the-Counter Medicines
                
                
                4,215,164
                
                
                
                9.5
                %
                
                
                841,969
                
                
                
                2.9
                %TCM
      Prescription Medicines
                
                
                7,603,222
                
                
                
                17.2
                %
                
                
                5,612,014
                
                
                
                19.2
                %TCM
      Over-the-Counter Products
                
                
                5,774,527
                
                
                
                13.0
                %
                
                
                2,907,967
                
                
                
                10.0
                %Total
      Medicines
                
                $
                42,868,376
                
                
                
                96.7
                %
                
                $
                27,261,660
                
                
                
                93.4
                %


35









THE
THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2008





Revenue





Total
revenue for the three months ended September 30, 2009 was $19,155,945, an
increase of $8,639,153, or 82.2%, from the total revenue of $10,516,702 for the
comparable period in 2008. This increase was mainly due to the increase of
393.3% in sales in several regions of Guangdong province, which was the result
of seasonal factors and substantial health care reforms initiated by the
Ministry of Health of PRC and implemented by the governments of the various
provinces, in the first quarter of 2009. The reforms established industry
standards for medicines, consequently limiting who can sell medicine, and
therefore we benefited and companies similar to us also benefited by receiving
more orders and higher revenue. The reforms will make more people, especially
the people living in rural areas, join the PRC medicare system, and more health
allowances will be distributed by the government. The use of TCM in particular
will be encouraged by the reform program, and our subsidiaries, such as Konzern
and Lifetech, that own several licenses and permits to produce TCM should
receive more orders for the purchase of TCM. At the same time, the reforms
strengthen the dominant
position of companies that already have medicine permits and licenses,
such as Konzern and Lifetech.





Revenue
from Product sales for the three months ended September 30, 2009 was
$18,789,470, an increase of $8,825,899, or 88.6%, from $9,963,571 for the
comparable period in 2008. Revenue from Product sales includes sales of
pharmaceutical products that we distribute, sales of products for which we hold
a manufacturing license and sales of rADTZ.





Revenue
from medical formula sales for the three months ended September 30, 2009 was
$366,475, a decrease of $186,746, or 33.8%, from $553,221 for the comparable
period in 2008. Medical formula sales revenues represent the 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 stages and we then sell
the improved technology to other pharmaceutical companies. The government
imposed stricter regulations on medical formulas which increased the burden on
our research and development efforts relating to sales of medical formulas. We
are currently concentrating our R&D efforts on rADTZ. In the future, we
believe our medical formula sales will be largely generated from payments
received from licensing patents and technologies relating to rADTZ,




Cost of
Sales




Cost of
sales for the three months ended September 30, 2009 was $13,322,614, an increase
of $6,066,979, or 83.6%, from $7,255,635 for the comparable period in 2008. Cost
of sales primarily consists of the acquisition cost of the pharmaceutical
products we distribute. The increase in cost of sales was due to an increase in
distribution revenue.




Gross
profit for the three months ended September 30, 2009 was $5,833,331, an increase
of $2,572,174, or 78.9 %, from $3,261,157 for the comparable period in
2008. Our gross margin for the three months ended September 30, 2009 was 30.5%
as compared with 31.0% for the three months ended September 30, 2008, a decrease
of 0.5%. The gross margin of western over-the-counter medicines declined from
31.3% in the third quarter of 2008 to 13.7% in the third quarter of 2009, and
the percentage of western over-the-counter medicines overall declined . This
decline in the percentage of western over-the-counter medicines is attributable
to the adjustment of our distribution strategy and model and is expected to be
temporary.


36









Research and
Development




Research
and development expenses were $213,883 or 1.1% of the total revenue for the
three months ended September 30, 2009. Research and development expenses for the
same period in 2008 were $288,353, or approximately 2.7% of total
revenue.





Selling, General and
Administrative Expenses




Selling,
general and administrative expenses were $1,082,234 for the three months ended
September 30, 2009, an increase of $439,315, or 68.3%, from $642,919 for the
comparable period in 2008. The increase was attributable to an increase in
travel expenses and allowances, interest on bank loans, meals and entertainment,
rent, labor union expenses and salaries.





Net
Income





Consolidated
net income for the third quarter of 2009 was approximately $3.2 million, or
$0.21 per diluted share, which included a $0.1 million non-cash expense related
to a change in the fair value of warrants, compared to approximately $1.9
million, or $0.12 per diluted share, in the third quarter of 2008.





We use
non-GAAP adjusted net earnings to measure the performance of our business
internally by excluding non-cash charges related to the warrants. We believe
that the non-GAAP adjusted financial measure allows us to focus on managing
business operating performance because the measure reflects our essential
operating activities and provides a consistent method of comparison to
historical periods. We believe that providing the non-GAAP measures that we use
internally to its investors is useful to investors for a number of reasons. The
non-GAAP measure provides a consistent basis for investors to understand our
financial performance in comparison to historical periods without variation of
non-recurring items and non-operating related charges. In addition, it allows
investors to evaluate our performance using the same methodology and information
as that used by our management. Non-GAAP measures are subject to inherent
limitations because they do not include all of the expenses included under GAAP
and because they involve the exercise of judgment of which charges are excluded
from the non-GAAP financial measure. However, we compensate for these
limitations by providing the relevant disclosure of the items
excluded.





The
following table provides a non-GAAP financial measure and a reconciliation of
that non-GAAP measure to the GAAP net income:




37









Three Months EndedSeptember 30,2009
                    
                    
                    2008Net
      Income (Loss)
                    
                    $
                    3,220,106
                    
                    
                    $
                    1,965,140Add
      back (Deduct):Change
      in fair value of warrant
                    
                    
                    141,682
                    
                    
                    
                    -Adjusted
      Net Income
                    
                    $
                    3,361,788
                    
                    
                    $
                    1,965,140Diluted
      EPS
                    
                    $
                    0.21
                    
                    
                    $
                    0.13Add
      back (Deduct):Change
      in fair value of warrant
                    
                    
                    0.01
                    
                    
                    
                    0.00Adjusted
      EPS
                    
                    $
                    0.22
                    
                    
                    $
                    0.13





Excluding
this non-cash expense, adjusted net income for the third quarter of 2009 was
approximately $3.4 million, or $0.22 per fully diluted share, which translates
to a 71.1% increase in net income for the third quarter 2009 compared to the
same period last year. Earnings per share were calculated using a diluted
weighted share count of 15.4 million shares for the third quarter of 2009 and
15.5 million shares for the third quarter of 2008.





Income
Taxes




The
provision for income taxes was $1,215,957 for the three months ended September
30, 2009 as compared with $411,890 for the comparable period in 2008. For the
three months ended September 30, 2009 and 2008, the Company’s effective tax rate
in PRC was 25% and 16.5%, respectively. The increase in the provision for income
taxes was due to the increase in operating income and the change in our income
tax rate as a result of the expiration of our tax exemption in 2008. Income
before income taxes and non-controlling interest includes losses from
non-Chinese entities, which are not deductible.





THE NINE
MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30,
2008





Revenue





Total
revenue for the nine months ended September 30, 2009 was $44,309,428, an
increase of $15,094,058, or 51.7%, from total revenue of $29,215,370 for the
comparable period in 2008. This increase was mainly due to the increase of
192.4% in sales in several regions of Guangdong province, which was the result
of seasonal factors and substantial health care reforms initiated by the
Ministry of Health of PRC and implemented by the governments of the various
provinces, in the first quarter of 2009. The reforms established industry
standards for medicines, consequently limiting who can sell medicine, and
therefore we benefited and companies similar to us also benefited by receiving
more orders and higher revenue. The reforms will make more people, especially
the people living in rural areas, join the PRC medicare system, and more health
allowances will be distributed by the government. The use of TCM in particular
will be encouraged by the reform program, and our subsidiaries, such as Konzern
and Lifetech, that own several licenses and permits to produce TCM should
receive more orders for the purchase of TCM. At the same time, the reforms raise
the distribution standards and strengthens the dominant position held by
companies that already have medicine permits and licenses, such as Konzern and
Lifetech.


38









Revenue
from Product sales for the nine months ended September 30, 2009 was $43,942,953,
an increase of $16,060,924, or 57.6%, from $27,882,029 for the comparable period
in 2008. Revenue from Product sales includes revenue from sales of
pharmaceutical products that we distribute, sales of products for which we hold
a manufacturing license and sales of rADTZ.




Revenues
from medical formula sales for the nine months ended September 30, 2009 were
$366,475, a decrease of $966,866, or 72.5%, from $1,333,341 for the comparable
period in 2008. Medical formula sales revenues represent the 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 stages and we then sell
the improved technology to other pharmaceutical companies. The government
imposed stricter regulations on medical formula which increased the burden on
our research and development efforts relating to sales of medical formulas. In
the future, we believe our medical formula sales will be largely generated from
the payments received from licensing patents and technologies relating to rADTZ,
which is where we currently concentrate our R&D efforts.





Revenue
from the distribution of pharmaceutical products from suppliers and revenue from
sales of self-developed pharmaceutical products for the nine months ended
September 30, 2009 accounted for 96.0% and 3.0% of the total revenue,
respectively.





We have
exclusive rights to nationwide distribution of five products made by our
suppliers. The sales from national exclusive distribution products accounted for
$10,185,735, approximately 23.0% of our sales for the nine months ended
September 30, 2009 and $8,752,860, approximately 30.0% of our sales for the nine
months ended September 30, 2008.





Our five
largest suppliers accounted for 56.8% of our total purchases for the nine months
ended September 30, 2009, compared to 47.2% for the comparable period in 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.





Our five
largest customers accounted for 47.1% of total sales for the nine months ended
September 30, 2009, compared to 50.2% for the corresponding period in 2008.
Currently we have approximately 735 customers.





Cost of
Sales




Cost of
sales for the nine months ended September 30, 2009 was $32,167,242, an increase
of $12,681,418 or 65.1%, from $19,485,824 for the same period in 2008. Cost of
sales primarily consists of acquisition cost of the pharmaceutical products we
distribute. The increase in cost of sales was due to an increase in distribution
revenue.


39









Gross
profit for the nine months ended September 30, 2009 was $12,142,186, an increase
of $2,412,640, or 24.8%, from $9,729,546 for the comparable period of 2008. Our
gross margin for the nine months ended September 30, 2009 was 27.4% as compared
with 33.3% for the nine months ended September 30, 2008, a decrease of
5.9%. We commenced a number of promotional campaigns during which we provided
medicine to our customers free of charge. As a result, this led to the
decrease in gross margin for the nine months ended September 30, 2009. We
ended all promotional sales activities at the beginning of the third
quarter.




Research and
Development





Research
and development expenses were $684,019, or 1.5% of total revenue for the nine
months ended September 30, 2009. Research and development expenses for the same
period in 2008 was $484,569, or 1.7% of total revenue.





Selling, General and
Administrative Expenses





Selling,
general and administrative expenses were $3,375,078 for the nine months ended
September 30, 2009, an increase of $859,569, or 34.2%, from $2,515,509 for the
comparable period in 2008. The increase was primarily attributable to an
increase in depreciation and amortization expenses which increased 163% from
$289,775 to $763,325.





Net
Income





Consolidated
net income for the first nine months of 2009 was approximately $3.8 million, or
$0.25 per diluted share, which included a $2.1 million non-cash expense
resulting from a change in the fair value of warrants, compared to approximately
$5.6 million, or $0.36 per diluted share, in the first nine months of
2008.





We use
non-GAAP adjusted net earnings to measure the performance of our business
internally by excluding non-cash charges related to the warrants. We believe
that the non-GAAP adjusted financial measure allows us to focus on managing
business operating performance because the measure reflects our essential
operating activities and provides a consistent method of comparison to
historical periods. We believe that providing the non-GAAP measures that we use
internally to its investors is useful to investors for a number of reasons. The
non-GAAP measure provides a consistent basis for investors to understand our
financial performance in comparison to historical periods without variation of
non-recurring items and non-operating related charges. In addition, it allows
investors to evaluate our performance using the same methodology and information
as that used by our management. Non-GAAP measures are subject to inherent
limitations because they do not include all of the expenses included under GAAP
and because they involve the exercise of judgment of which charges are excluded
from the non-GAAP financial measure. However, we compensate for these
limitations by providing the relevant disclosure of the items
excluded.





The
following table provides a non-GAAP financial measure and a reconciliation of
that non-GAAP measure to the GAAP net income.


40









Nine Months EndedSeptember 30,2009
                      
                      
                      2008Net
      Income (Loss)
                      
                      $
                      3,812,184
                      
                      
                      $
                      5,607,176Add
      back (Deduct):Change
      in fair value of warrant
                      
                      
                      2,113,589
                      
                      
                      
                      -Adjusted
      Net Income
                      
                      $
                      5,925,773
                      
                      
                      $
                      5,607,176Diluted
      EPS
                      
                      $
                      0.25
                      
                      
                      $
                      0.36Add
      back (Deduct):Change
      in fair value of warrant
                      
                      
                      0.14
                      
                      
                      
                      0.00Adjusted
      EPS
                      
                      $
                      0.39
                      
                      
                      $
                      0.36





Excluding
this non-cash expense, adjusted net income for the first nine months of 2009 was
approximately $5.9 million, or $0.39 per fully diluted share, which translates
to a 5.7% increase in net income for the first nine months of 2009 compared to
the same period last year. Earnings per share were calculated using a diluted
weighted share count of 15.3 million shares for the first nine months of 2009
and 15.6 million shares for the first nine months of 2008.





Income
Taxes





The
provision for income taxes was $2,331,457 for the nine months ended September
30, 2009 as compared to $1,252,833 for the comparable period in 2008. For the
nine months ended September 30, 2009 and 2008, our effective tax rate in PRC was
25% and 16.5%, respectively. The increase in the provision for income taxes was
due to the increase in operating income and the change in our income tax rate as
a result of the expiration of our tax exemption in 2008. Income before income
taxes and non-controlling interest includes losses from non-Chinese entities,
which are not deductible





Income
before income taxes and non-controlling interest includes losses from
non-Chinese entities, which are not deductible. After adjusting these losses,
our effective rate was equivalent to the effective rate of 25% in China for both
years.





Liquidity
and Capital Resources




At
September 30, 2009 and December 31, 2008, we had cash and cash equivalents of
$2,242,581 and $2,791,814, respectively. At September 30, 2009, we had working
capital of $32,065,353, a decrease of $512,316 from $32,577,669 as of December
31, 2008.





For the
nine months ended September 30, 2009, net cash provided by operations was
$3,528,167 and net cash used by operations was $744,303 for the comparable
period in 2008.


41







For the
nine months ended September 30, 2009, net cash used by investing activities was
$7,057,914 and net cash used by investing activities was $2,965,156 for the
comparable period in 2008.





For the
nine months ended September 30, 2009, net cash provided by financing activities
was $2,981,800 and net cash provided by financing activities was $362,500 for
the comparable period in 2008.





On July
1, 2009 we received a $2.9 million loan from the Bank of China. The loan is for
a term of one year at an annual interest rate of 5%. We paid cash interest of
$33,735 in July 2009 and no other interest.




The
following table sets forth the changes in certain balance sheet items, in
dollars and percentages, from December 31, 2008 to September 30,
2009.





Balance Sheet Caption
                  
                  Change in dollars
                    12/31/08 to 09/30/09
                  
                  
                  Percentage Change
                    12/31/08 to 09/30/09Accounts
      receivable
                  
                  $
                  (4,281,999
                  )
                  
                  
                  (22.3
                  )%Notes
      receivables
                  
                  
                  (454,211
                  )
                  
                  
                  (75.6
                  )%Inventories
                  
                  
                  3,222,505
                  
                  
                  
                  68.2
                  %Advances
      to suppliers
                  
                  
                  2,270,346
                  
                  
                  
                  37.1
                  %Accounts
      payable
                  
                  
                  243,036
                  
                  
                  
                  396.8
                  %Customer
      deposits
                  
                  
                  (107,327
                  )
                  
                  
                  (70.9
                  )%





The
change in these balance sheet items reflects the nature of the cash requirements
of our business. Our accounts receivable decreased by $4,281,999 or 22.3% from
December 31, 2008 to September 30, 2009, reflecting the increase in collection
from our customers.




Because a
substantial portion of our sales are made to a small number of customers, our
accounts receivable from these customers represented a large percentage of our
accounts receivable and assets. Our largest account receivable for the nine
months ended September 30, 2009 was approximately $6,378,162, representing
approximately 42.7% of our total accounts receivable, or approximately 12.0% of
our total assets, and 19.9% of our working capital. The sales revenue from the
customer who had the largest account receivable for the nine months ended
September 30, 2009 was $11,066,667, approximately 25.0% of our total revenue.
Our three largest accounts receivable were approximately $8,842,400,
representing approximately 59.2% of our total accounts receivable, or
approximately 16.7% of our total assets, and 27.6% of our working capital. The
sales revenue from the customers who had our three largest accounts receivable
for the nine months ended September 30, 2009 was $15,256,785, approximately
34.4% of our total revenue. This concentration of accounts receivable represents
a significant credit risk.





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.


42









During
the period ended September 30, 2009, we received approximately $146,700 in notes
receivable from our customers, a decrease of approximately $454,211 from
approximately $600,911 for the year ended December 31, 2008. Notes receivable
are guarantees of payment from the customers’ banks. In the nine months ended
September 30, 2009, our receivables collection cycle was shortened to 106 days,
compared to 115 days for in the fiscal year ended December 31,
2008.





We are
frequently required to make significant down payments when we place orders, in
order to secure the lowest possible purchase price and the 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 receive a
credit from the supplier. For the nine months ended September 30, 2009 and the
fiscal year ended December 31, 2008, we had a total balance of such advances to
suppliers of $8,392,320 and $6,121,974, respectively. Our advances to suppliers
increased 37.1% in the first nine 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
September 30, 2009, our inventories increased 68.2%, however, we anticipate a
significant increase in order for the upcoming quarter, that should decrease
inventory levels.





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





In
January 2009, the FASB issued an accounting standard amending the Impairment
Guidance of recognition of interest income and impairment on purchased and
retained beneficial interests in securitized financial assets. The newly issued
accounting standard changes the impairment model included to be more consistent
with the impairment model of another accounting standard for accounting for
securities. The new accounting standard 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 adoption of this FASB Staff Positions did not have a material
impact our consolidated financial statements.


43







In April
2009, the FASB issued three related FASB Staff Positions: (i) Recognition of
Presentation of Other-Than-Temporary Impairments, (ii) Interim Disclosures about
Fair Value of Financial Instruments, and (iii) Determining the Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, which are effective
for interim and annual reporting periods ending after June 15, 2009. The first
Staff Position modifies the requirement for recognizing other-than-temporary
impairments, changes the existing impairment model, and modifies the
presentation and frequency of related disclosures. The second Staff Position
requires disclosures about fair value of financial instruments for interim
reporting periods as well as in annual financial statements. The third Staff
Position requires new disclosures regarding the categories of fair value
instruments, as well as the inputs and valuation techniques utilized to
determine fair value and any changes to the inputs and valuation techniques
during the period. The adoption of these FASB Staff Positions did not have
a material impact our consolidated financial statements.





In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires entities to provide more information regarding sales of
securitized financial assets and similar transactions, particularly if the
entity has continuing exposure to the risks related to transferred financial
assets. In addition, it eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets and
requires additional disclosures. This accounting standard is effective
for financial statements issued for fiscal years beginning after November 15,
2009; we are currently assessing the impact of the standard on our consolidated
financial statements.




In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of variable interest entities
(“VIEs”). This standard modifies how a company determines when an entity
that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. It clarifies that the
determination of whether a company is required to consolidate an entity is
based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. An ongoing reassessment is
required of whether a company is the primary beneficiary of a
variable interest entity. Further, it also requires additional disclosures
about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. The standard
is effective for fiscal years beginning after November 15, 2009. We are
currently assessing the impact of the standard on our consolidated financial
statements.




In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU. The adoption of this ASU did not have a material impact on our
consolidated financial statements.





44









In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the shares in
a share-lending arrangement entered into in contemplation of a convertible debt
offering or other financing, the shares issued shall be measured at fair value
and be recognized as an issuance cost, with an offset to additional paid-in
capital. Further, loaned shares are excluded from basic and diluted earnings per
share unless default of the share-lending arrangement occurs, at which time the
loaned shares would be included in the basic and diluted earnings-per-share
calculation. This ASU is effective for fiscal years beginning on or after
December 15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. We are
currently assessing the impact of this ASU on its consolidated financial
statements.





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 our 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 we paid on raw materials and other materials included
in the cost of producing their finished product.


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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.





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
3.          Quantitative and Qualitative
Disclosures About Market Risk




We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Act of 1934
and are not required to provide the information under this item.




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 September 30, 2009.


46









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 September 30, 2009, due principally to a
material weakness in internal control over financial reporting because of
significant deficiencies in our U.S. GAAP expertise and internal audit
functions. We are working to enhance the effectiveness of our disclosure
controls and procedures. We recently hired a Chief Financial Officer from the
U.S., who has extensive experience in internal control and U.S. GAAP reporting
compliance, to take charge of the financial reporting process and training of
the accounting staff. In addition, we have also hired an experienced finance
manager to strengthen our financial reporting and internal control functions. We
expect that these enhancements, will improve the effectiveness of our disclosure
controls and procedures and remediate the ineffectiveness of certain controls
and procedures that existed as of September 30, 2009.





Changes
in Internal Controls over Financial Reporting




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





PART
II OTHER INFORMATION





Item
1.          Legal
Proceedings





We are
not a party to any pending legal proceedings, and no such proceedings are known
to be contemplated.





Item
1A.          Risk
Factors





We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Act of 1934
and are not required to provide the information under this
item.


47









Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds





In
September 2009, we issued 53,397 shares of Common Stock upon the exercise of
certain Class A common stock purchase warrants previously issued. The holder of
such warrants exercised a total of 179,474 warrants on a "cashless exercise"
basis. Accordingly, the shares of common stock issued upon exercise of the
warrants were not registered under the Securities Act of 1933, as amended, and
were offered and sold in reliance upon the exemption from registration set forth
in reliance in Section 4(2) thereof. The transaction did not involve a public
offering, was made without general solicitation or advertising, and there were
no underwriting commissions or discounts.





Item
3.          Defaults Upon Senior
Securities





None.





Item
4. Submission of Matters to A
Vote of Security Holders





None.





Item
5          Other
Information





None.





Item
6.          Exhibits





The
exhibits required by this item are set forth on the Exhibit Index attached
hereto.


48









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 thereunto duly
authorized.




CHINA
      MEDICINE CORPORATIONDate:
      November 16, 2009
                  BY:
                  /s/Senshan YangSenshan
      YangPresident
      and Chief Executive Officer
                    (Principal
      Executive Officer)Date:
      November 16, 2009
                  BY:
                  /s/ Richard P. WuRichard
      P. WuChief
      Financial Officer
                    (Principal
      Financial Officer and
                    Accounting
      officer)


49











Exhibit
Index




Exhibit
                Number
              
              Exhibit Title31.1
      *
              
              Certification
      of our Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
      *
              
              Certification
      of our Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
      *
              
              Certification
      of our Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
      *
              
              Certification
      of our Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.






*           Filed
herewith


50