UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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


For the
quarterly period ended June 30,
2009


or





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


For the
transition period from _______ to _________





Commission
File No. 000-51379





CHINA
MEDICINE CORPORATION


(Exact
name of registrant as specified in its charter)




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




Guangri
Mansion, Suite 702


No. 9
Siyou Nan Rd, Wuyang Xincheng


Guangzhou, China
510600


(Address
of principal executive offices)





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


(Registrant's
telephone number, including area code)





(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x
Yes   ̈
No





Indicate
by check mark whether the registrant 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   ̈ No





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





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





Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). ̈ Yes  xNo





The
number of shares of the Registrant's Common Stock, par value $0.0001 per share,
outstanding at August 12, 2009 was 15,266,742.





CHINA
MEDICINE CORPORATION





TABLE OF
CONTENTS





PagePART I
                    FINANCIAL INFORMATION
                    3Item
      1.
                    Financial
      Statements
                    3Item
      2.
                    Management’s
      Discussion and Analysis or Plan of Operation
                    29Item
      4T.
                    Controls
      and Procedures
                    47PART II
                    OTHER INFORMATION
                    48Item
      4.
                    Submission
      of Matters to a Vote of Security Holders
                    48Item
      6.
                    Exhibits
                    49Signatures
                    50Exhibits/Certifications




2


PART
I. FINANCIAL INFORMATION





Item
1. Financial Statements





CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 June
      30,
                                                
                                                
                                                December
      31,2009
                                                
                                                
                                                2008(Unaudited)ASSETSCURRENT
      ASSETSCash
                                                
                                                $
                                                1,814,200
                                                
                                                
                                                $
                                                2,791,814Notes
      receivables
                                                
                                                
                                                556,700
                                                
                                                
                                                
                                                600,911Accounts
      receivable, trade, net of allowance for doubtful accountsof
      $96,477 and $96,609 as of June 30, 2009 andDecember
      31, 2008, respectively
                                                
                                                
                                                15,354,966
                                                
                                                
                                                
                                                19,225,091Inventories
                                                
                                                
                                                8,006,235
                                                
                                                
                                                
                                                4,725,322Advances
      to suppliers
                                                
                                                
                                                7,651,459
                                                
                                                
                                                
                                                6,121,974Other
      current assets
                                                
                                                
                                                272,563
                                                
                                                
                                                
                                                192,080Total
      current assets
                                                
                                                
                                                33,656,123
                                                
                                                
                                                
                                                33,657,192EQUIPMENT,
      net
                                                
                                                
                                                3,632,511
                                                
                                                
                                                
                                                3,761,637OTHER
      ASSETSLong
      term prepayment
                                                
                                                
                                                7,940,563
                                                
                                                
                                                
                                                6,014,920Intangible
      assets, net
                                                
                                                
                                                1,480,224
                                                
                                                
                                                
                                                1,247,567Total
      other assets
                                                
                                                
                                                9,420,787
                                                
                                                
                                                
                                                7,262,487Total
      assets
                                                
                                                $
                                                46,709,421
                                                
                                                
                                                $
                                                44,681,316LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIESAccounts
      payable, trade
                                                
                                                $
                                                200,851
                                                
                                                
                                                $
                                                61,243Other
      payables and accrued liabilities
                                                
                                                
                                                25,368
                                                
                                                
                                                
                                                50,559Customer
      deposits
                                                
                                                
                                                308,748
                                                
                                                
                                                
                                                151,429Taxes
      payable
                                                
                                                
                                                54,020
                                                
                                                
                                                
                                                772,289Liquidated
      damages payable
                                                
                                                
                                                44,003
                                                
                                                
                                                
                                                44,003Total
      current liabilities
                                                
                                                
                                                632,990
                                                
                                                
                                                
                                                1,079,523Fair
      value of warrant liabilities
                                                
                                                
                                                2,481,112
                                                
                                                
                                                
                                                -Total
      liabilities
                                                
                                                
                                                3,114,102
                                                
                                                
                                                
                                                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,15,244,242
      shares issued and outstanding at June 30, 2009and
      December 31, 2008
                                                
                                                
                                                1,524
                                                
                                                
                                                
                                                1,522Paid-in
      capital
                                                
                                                
                                                12,500,972
                                                
                                                
                                                
                                                13,011,012Statutory
      reserves
                                                
                                                
                                                3,178,861
                                                
                                                
                                                
                                                3,178,861Retained
      earnings
                                                
                                                
                                                22,864,643
                                                
                                                
                                                
                                                22,146,572Accumulated
      other comprehensive income
                                                
                                                
                                                4,369,309
                                                
                                                
                                                
                                                4,428,294Total
      shareholders' equity
                                                
                                                
                                                42,915,309
                                                
                                                
                                                
                                                42,766,261NONCONTROLLING
      INTERESTS
                                                
                                                
                                                680,010
                                                
                                                
                                                
                                                835,532Total
      equity
                                                
                                                
                                                43,595,319
                                                
                                                
                                                
                                                43,601,793Total
      liabilities and equity
                                                
                                                $
                                                46,709,421
                                                
                                                
                                                $
                                                44,681,316
 
 See
accompaning notes to the Consolidated Financial Statements.
  3
 
 CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 (Unaudited)
 
 Three
      months ended
                        
                        
                        Six
      months endedJune 30,
                        
                        
                        June 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008REVENUES:Product
      sales
                        
                        $
                        15,055,093
                        
                        
                        $
                        11,067,074
                        
                        
                        $
                        25,153,483
                        
                        
                        $
                        17,918,458Medical
      formula sales
                        
                        
                        -
                        
                        
                        
                        570,465
                        
                        
                        
                        -
                        
                        
                        
                        780,120Total
      revenues
                        
                        
                        15,055,093
                        
                        
                        
                        11,637,539
                        
                        
                        
                        25,153,483
                        
                        
                        
                        18,698,578COST
      OF GOODS SOLD
                        
                        
                        11,525,866
                        
                        
                        
                        7,481,170
                        
                        
                        
                        18,844,628
                        
                        
                        
                        12,230,189GROSS
      PROFIT
                        
                        
                        3,529,227
                        
                        
                        
                        4,156,369
                        
                        
                        
                        6,308,855
                        
                        
                        
                        6,468,389OPERATING
      EXPENSES:Research
      and development
                        
                        
                        285,256
                        
                        
                        
                        107,824
                        
                        
                        
                        470,136
                        
                        
                        
                        196,216Selling,
      general and administrative
                        
                        
                        1,465,660
                        
                        
                        
                        1,060,082
                        
                        
                        
                        2,292,844
                        
                        
                        
                        1,872,590Total
      operating expenses
                        
                        
                        1,750,916
                        
                        
                        
                        1,167,906
                        
                        
                        
                        2,762,980
                        
                        
                        
                        2,068,806INCOME  FROM
      OPERATIONS
                        
                        
                        1,778,311
                        
                        
                        
                        2,988,463
                        
                        
                        
                        3,545,875
                        
                        
                        
                        4,399,583OTHER
      INCOME (EXPENSE):Other
      income (expense), net
                        
                        
                        (26,400
                        )
                        
                        
                        32,104
                        
                        
                        
                        (20,847
                        )
                        
                        
                        38,087Change
      in fair value of warrant liabilities
                        
                        
                        (1,213,218
                        )
                        
                        
                        -
                        
                        
                        
                        (1,971,907
                        )
                        
                        
                        -INCOME
      BEFORE INCOME TAXESAND
      NONCONTROLLING INTERESTS
                        
                        
                        538,693
                        
                        
                        
                        3,020,567
                        
                        
                        
                        1,553,121
                        
                        
                        
                        4,437,670PROVISION
      FOR INCOME TAXES
                        
                        
                        570,014
                        
                        
                        
                        572,176
                        
                        
                        
                        1,115,500
                        
                        
                        
                        840,943NET
      INCOME (CHINA MEDICINE CORPORATIONAND
      NONCONTROLLING INTERESTS)
                        
                        
                        (31,321
                        )
                        
                        
                        2,448,391
                        
                        
                        
                        437,621
                        
                        
                        
                        3,596,727Add:
      Net income attributable to noncontrolling interests
                        
                        
                        73,317
                        
                        
                        
                        17,833
                        
                        
                        
                        154,457
                        
                        
                        
                        45,310NET
      INCOME ATTRIBUTABLE TO CHINA MEDICINE CORPORATION
                        
                        
                        41,996
                        
                        
                        
                        2,466,224
                        
                        
                        
                        592,078
                        
                        
                        
                        3,642,037OTHER
      COMPREHENSIVE (LOSS) INCOME:Foreign
      currency translation adjustment
                        
                        
                        (277
                        )
                        
                        
                        781,204
                        
                        
                        
                        (58,985
                        )
                        
                        
                        2,071,824Foreign
      currency translation adjustment attributable to noncontrolling
      interests
                        
                        
                        68
                        
                        
                        
                        19,497
                        
                        
                        
                        (1,065
                        )
                        
                        
                        56,043COMPREHENSIVE
      INCOME
                        
                        $
                        41,787
                        
                        
                        $
                        3,266,925
                        
                        
                        $
                        532,028
                        
                        
                        $
                        5,769,904EARNINGS
      PER SHARE:Basic
                        
                        $
                        -
                        
                        
                        $
                        0.16
                        
                        
                        $
                        0.04
                        
                        
                        $
                        0.24Diluted
                        
                        $
                        -
                        
                        
                        $
                        0.16
                        
                        
                        $
                        0.04
                        
                        
                        $
                        0.23WEIGHTED
      AVERAGE SHARES OUTSTANDING:Basic
                        
                        
                        15,231,214
                        
                        
                        
                        15,206,124
                        
                        
                        
                        15,228,966
                        
                        
                        
                        15,118,595Diluted
                        
                        
                        15,355,660
                        
                        
                        
                        15,634,713
                        
                        
                        
                        15,248,178
                        
                        
                        
                        15,547,183
 
 See
accompaning 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
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3,642,037
                        
                        
                        
                        
                        
                        
                        
                        (45,310
                        )
                        
                        
                        3,596,727Preferred
      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
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        52,314
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        52,314Foreign
      currency translation adjustments
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        2,071,824
                        
                        
                        
                        56,043
                        
                        
                        
                        2,127,867BALANCE,
      June 30, 2008 (UNAUDITED)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        15,226,742
                        
                        
                        
                        1,522
                        
                        
                        
                        12,974,863
                        
                        
                        
                        2,191,230
                        
                        
                        
                        17,650,624
                        
                        
                        
                        4,194,619
                        
                        
                        
                        904,070
                        
                        
                        
                        37,916,928Net
      income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        5,483,579
                        
                        
                        
                        
                        
                        
                        
                        (72,916
                        )
                        
                        
                        5,410,663Adjustment
      of statutory reserve
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        987,631
                        
                        
                        
                        (987,631
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Stock
      option and warrant compensation
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        36,149
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        36,149Foreign
      currency translation adjustments
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        233,675
                        
                        
                        
                        4,378
                        
                        
                        
                        238,053BALANCE,
      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
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        592,078
                        
                        
                        
                        
                        
                        
                        
                        (154,457
                        )
                        
                        
                        437,621Stock
      options exercised
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        17,500
                        
                        
                        
                        2
                        
                        
                        
                        21,873
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        21,875Stock
      option compensation
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        9,622
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        9,622Foreign
      currency translation adjustments
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (58,985
                        )
                        
                        
                        (1,065
                        )
                        
                        
                        (60,050
                        )BALANCE,
      June 30, 2009 (UNADUDITED)
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        15,244,242
                        
                        
                        $
                        1,524
                        
                        
                        $
                        12,500,972
                        
                        
                        $
                        3,178,861
                        
                        
                        $
                        22,864,643
                        
                        
                        $
                        4,369,309
                        
                        
                        $
                        680,010
                        
                        
                        $
                        43,595,319
 
 See
accompaning notes to the Consolidated Financial Statements.
  5
 
 CHINA MEDICINE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 Six
      months ended June 30,2009
                          
                          
                          2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income attributable to China Medicine Corporation
                          
                          $
                          592,078
                          
                          
                          $
                          3,642,037Net
      income attributable to noncontrolling interests
                          
                          
                          (154,457
                          )
                          
                          
                          (45,310
                          )Net
      income
                          
                          
                          437,621
                          
                          
                          
                          3,596,727Adjustments
      to reconcile net income to cash provided by(used
      in) operating activities:Depreciation
      and amortization
                          
                          
                          433,934
                          
                          
                          
                          193,572Loss
      on sale of assets
                          
                          
                          27,816
                          
                          
                          
                          -Stock
      option and warrant compensation
                          
                          
                          48,050
                          
                          
                          
                          52,314Amortization
      of deferred expenses
                          
                          
                          -
                          
                          
                          
                          175,421Change
      in fair value of warrant liabilities
                          
                          
                          1,971,907
                          
                          
                          
                          -Change
      in operating assets and liabilitiesNotes
      receivables
                          
                          
                          43,413
                          
                          
                          
                          (1,670,875
                          )Accounts
      receivable, trade
                          
                          
                          3,845,752
                          
                          
                          
                          (657,089
                          )Inventories
                          
                          
                          (3,288,910
                          )
                          
                          
                          (804,759
                          )Advances
      to suppliers
                          
                          
                          (1,538,563
                          )
                          
                          
                          (3,473,818
                          )Other
      current assets
                          
                          
                          (3,707
                          )
                          
                          
                          420Change
      in operating liabilitiesAccounts
      payable, trade
                          
                          
                          139,758
                          
                          
                          
                          21,928Other
      payables and accrued liabilities
                          
                          
                          (25,157
                          )
                          
                          
                          (52,364
                          )Customer
      deposits
                          
                          
                          157,601
                          
                          
                          
                          4,931Taxes
      payable
                          
                          
                          (717,560
                          )
                          
                          
                          (371,810
                          )Net
      cash provided by (used in) operating activities
                          
                          
                          1,531,955
                          
                          
                          
                          (2,985,402
                          )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of equipment
                          
                          
                          (381,321
                          )
                          
                          
                          (17,226
                          )Purchase
      of intangible assets
                          
                          
                          (234,512
                          )
                          
                          
                          -Proceeds
      from sale of equipment
                          
                          
                          21,986
                          
                          
                          
                          -Long
      term prepayment
                          
                          
                          (1,934,767
                          )
                          
                          
                          (605,657
                          )Net
      cash used in investing activities
                          
                          
                          (2,528,614
                          )
                          
                          
                          (622,883
                          )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from exercise of options
                          
                          
                          21,875
                          
                          
                          
                          362,500Net
      cash provided by financing activities
                          
                          
                          21,875
                          
                          
                          
                          362,500EFFECT
      OF EXCHANGE RATE ON CASH
                          
                          
                          (2,830
                          )
                          
                          
                          249,470DECREASE
      IN CASH
                          
                          
                          (977,614
                          )
                          
                          
                          (2,996,315
                          )CASH,
      beginning of period
                          
                          
                          2,791,814
                          
                          
                          
                          5,767,774CASH,
      end of period
                          
                          $
                          1,814,200
                          
                          
                          $
                          2,771,459
 
 See
accompaning notes to the Consolidated Financial Statements.
  6




CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 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.
 
 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 June 30, 2009, Co-Win is still in
development and has 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 in Konzern
Bio-Tech. 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 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.  The Company has performed an evaluation of subsequent events
through the date the financial statements were issued.
  7
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 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 concentration of
risk
 
 For
purposes of the cash flow statements, the Company considers all highly liquid
investments with original maturities of three months or less at the time of
purchase to be cash equivalents. Cash includes cash on hand and demand deposits
in accounts maintained with the PRC state-owned banks and banks in the United
States.
 
 Financial
instruments, which subject the Company to concentration of credit risk, consist
of cash. The Company maintains balances at financial institutions which, from
time to time, may exceed Federal Deposit Insurance Corporation insured limits
for banks that are located in the Unites States. No deposits with the state
owned banks within the PRC are covered by insurance. As of June 30, 2009 and
December 31, 2008, the Company had deposits in excess of federally insured
limits total of $1,739,646 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.
 
 Five
suppliers accounted for approximately 54% and 55% of the Company’s purchases for
the six months ended June 30, 2009 and 2008 and approximately 68% and 52% for
the three months ended June 30, 2009 and 2008, respectively. Advances to these
five suppliers represent 16% and 32% of the Company’s total advances to
suppliers as of June 30, 2009 and 2008, respectively. As of June 30, 2009 and
2008, no accounts payables were due to these suppliers.
  8
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
 
 Five
customers accounted for approximately 48% and 40% of the Company's total sales
for the six months ended June 30, 2009 and 2008 and 52% and 46% for the three
months ended June 30, 2009 and 2008, respectively. The accounts receivable
balance of these five customers amounted $9,720,386, representing 63% of the
total accounts receivable as of June 30, 2009, and $8,269,469, representing 54%
of the total accounts receivable as of June 30, 2008,
respectively.
 
 The top
three products accounted for approximately 24% and 23% of the Company’s total
sales for the six months ended June 30, 2009 and 2008 and 21% and 28% for the
three months ended June 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.
 
 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.
  9
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  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
 
 Long term
prepayment
 
 Long term
prepayment represents partial payments or deposits on acquiring technology and
exclusive distribution rights.
 
 Intangibles
 
 Under the
Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other
Intangible Assets", all goodwill and certain intangible assets determined to
have indefinite lives will not be amortized but will be tested for impairment at
least annually. Intangible assets other than goodwill will be amortized over
their useful lives and reviewed for impairment at least annually or more often
whenever there is an indication that the carrying amount may not be
recovered.
 
 Beginning
in 2007, the Company acquired technology to manufacture aflatoxin-detoxifizyme
("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 June 30, 2009, the Company has started
trail 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 in
2009.  For the six and three months ended June 30, 2009, the Company
capitalized an additional $234,000 of expenses related to the
project.
 
 As of
June 30, 2009, the future amortization for the years ending December 31, are as
follows assuming the Company will begin amortizing the intangibles from
2009:
  10
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
 
 2009
                      
                      
                      2010
                      
                      
                      2011
                      
                      
                      2012
                      
                      
                      2013
                      
                      
                      ThereafterAmortization
      expense
                      
                      $
                      79,000
                      
                      
                      $
                      158,000
                      
                      
                      $
                      158,000
                      
                      
                      $
                      158,000
                      
                      
                      $
                      139,000
                      
                      
                      $
                      788,000
 
 Impairment of long-lived
assets
 
 Per SFAS
144, long-lived assets are analyzed for impairment. The Company tests for
impairment of long-lived assets at least annually or more often whenever there
is an indication that the carrying amount of the asset may not be recovered.
Recoverability of these assets is determined by comparing the forecasted
undiscounted cash flows generated by those assets to the assets' net carrying
value. The amount of impairment loss, if any, is measured as the difference
between the net book value of the assets and the estimated fair value of the
related assets.
 
 Management
evaluates the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such flows of certain long-lived assets are
not sufficient to recover the carrying value of such assets, the assets are
adjusted to their fair values. As of June 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 SFAS 160, “Noncontrolling Interests in Consolidated
Financial Statements - an amendment of Accounting Research Bulletin No. 51”
Certain provisions of this statement are required to be adopted retrospectively
for all periods presented. Such provisions include a requirement that the
carrying value of noncontrolling interests (previously referred to as minority
interests) be removed from the mezzanine section of the balance sheet and
reclassified as equity; and consolidated net income to be recast to include net
income attributable to the noncontrolling interest. As a result of this
adoption, we reclassified noncontrolling interests in the amounts of $680,010
and $835,532 from the mezzanine section to equity in the June 30, 2009 and
December 31, 2008 balance sheets, respectively.
  11
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 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 provisions of SAB 104 which sets forth guidelines in the timing of revenue
recognition based upon factors such as passage of title, installation, payments
and customer acceptance. Any amounts received prior to satisfying the Company's
revenue recognition criteria is recorded as deferred revenue. The Company
requires its customers to deposit monies with the Company when they place an
order. The Company does not pay interest on these amounts.
 
 Sales
revenue represents the invoiced value of goods, net of a value-added tax (VAT).
All of the Company's products that are sold in the PRC are subject to a Chinese
VAT at a rate of 17% of the gross sales price. This VAT may be offset by VAT
paid by the Company on raw materials and other materials included in the cost of
producing their finished product.
 
 VAT on
sales and VAT on purchases amounted to $4,269,713 and $3,756,118 for the six
months ended June 30, 2009 and $3,133,033and $2, 281,444 for the six months
ended June 30, 2008 and $2,553,286 and $1,975,868 for the three months ended
June 30, 2009 and $1,943,339 and $1,310,364 for the three months ended June 30,
2008, respectively. Sales and purchases are recorded net of VAT collected and
paid as the Company acts as an agent for the government. VAT taxes are not
impacted by the income tax holiday.
 
 Shipping and handling
costs
  Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative costs and totaled $312,052 and $247,454 for the six
months ended June 30, 2009 and 2008 and totaled $187,973 and $138,509 for the
three months ended June 30, 2009 and 2008.
  Advertising
costs
 
 The
Company expenses the cost of advertising as incurred in selling, general and
administrative costs. For the six months ended June 30, 2009 and 2008,
advertising expenses amounted to $312,459 and $180,981, respectively. For three
months ended June 30, 2009 and 2008, advertising expenses amounted to $282,288
and $180,003, 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.
  12
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  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 June 30, 2009 were translated at 6.83 RMB to $1.00 as
compared to 6.82 RMB at December 31, 2008. Equity accounts were stated at their
historical rate. The average translation rates applied to income and cash flow
statements for the six months ended June 30, 2009 and 2008 were 6.82 RMB and
7.05 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 six and three months ended June 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.
 
 Income
taxes
 
 The
Company records income taxes pursuant to SFAS 109, "Accounting for Income Taxes"
and FIN 48, “Accounting for Uncertainty in Income Taxes”.  The
provision consists of the recognition of deferred income tax liabilities and
assets for the expected future tax consequences of temporary differences between
income tax basis and financial reporting basis of assets and liabilities.
Provision for income taxes consist of taxes currently due plus deferred taxes.
There are no deferred tax amounts at June 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.
  13
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
 
 Under FIN
48, a tax position is recognized as a benefit only if it is “more likely than
not” that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is
recorded.
 
 Fair value of financial
instruments
 
 SFAS107,
“Disclosures About Fair Value of Financial Instruments,” defines financial
instruments and requires fair value disclosures of those financial instruments.
 SFAS 157, “Fair Value Measurements,” adopted January 1, 2008, defines fair
value, establishes a three-level valuation hierarchy for disclosures of fair
value measurement and enhances disclosures requirements for fair value measures.
Receivables, payables and warrant liabilities each qualify as financial
instruments.  Management believes the carrying amounts of receivables
and payables and are a reasonable estimate of fair value because of the short
period of time between the origination of such instruments and their expected
realization. The three levels are defined as follow:
  ·
              Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
  ·
              Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.
  ·
              Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.
 
 Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates the hierarchy disclosures each
quarter. Liabilities measured at fair value on a recurring basis are summarized
as follows (unaudited):
  14
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
 
 Carrying Value as
                          of June 30, 2009
                        
                        Fair Value Measurements at June 30,
      2009Level
      1
                        
                        Level
      2
                        
                        Level
      3Warrant
      liabilities
                        
                        $
                        2,481,112
                        
                        
                        
                        $
                        2,481,112
  A
discussion of the valuation techniques used to measure fair value for the
liabilities listed above and activity for these liabilities for the six months
ended June 30, 2009 is provided elsewhere in this footnote. There were no
assets or liabilities measured at fair value on a non-recurring basis
during the six months ended June 30, 2009.
 
 Stock-based
compensation
 
 The
Company records and reports employee stock-based compensation under FAS 123R,
“Share-Based Payments”. This Statement requires a public entity to measure the
cost of services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. That cost is recognized over the
period during which services are received. Stock compensation for stock granted
to non-employees is determined in accordance with FAS 123R and the EITF 96-18,
"Accounting for Equity Instruments that are issued to Other than Employees for
Acquiring, or in Conjunction with Selling Goods or Services", as the fair value
of the consideration received or the fair value of equity instruments issued,
whichever is more reliably measured.
 
 Earnings per
share
 
 The
Company reports earnings per share in accordance with the provisions of SFAS
128, "Earnings Per Share," which requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share are computed by
dividing income available to common stockholders by the weighted average common
shares outstanding during the period. Diluted earnings per share takes into
account the potential dilution that could occur if securities or other contracts
to issue common stock were exercised and converted into common
stock.
  The
following is a reconciliation of the basic and diluted earnings per share
computations for the six months and three months ended June 30:
 
 15
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  For
      the six months ended
                            
                            2009
                              (Unaudited)
                            
                            
                            2008
                              (Unaudited)Net
      income
                            
                            $
                            592,078
                            
                            
                            $
                            3,642,037Shares
      of common stock and common stock equivalents:Weighted
      average shares used in basic computation
                            
                            
                            15,228,966
                            
                            
                            
                            15,118,595Diluted
      effect of stock options, warrants, and preferred stock
                            
                            
                            19,212
                            
                            
                            
                            428,588Weighted
      average shares used in diluted computation
                            
                            
                            15,248,178
                            
                            
                            
                            15,547,183Earnings
      per share:Basic
                            
                            $
                            0.04
                            
                            
                            $
                            0.24Diluted
                            
                            $
                            0.04
                            
                            
                            $
                            0.23
  For the
six months ended June 30, 2009, 3,418,686 warrants whose exercise price is
between $1.70 to $2.43 and 15,000 options whose exercise price is $3.00 are
excluded from the calculation because of their anti-dilutive
nature.
  For
      the three months ended
                          
                          2009
                            (Unaudited)
                          
                          
                          2008
                            (Unaudited)Net
      income
                          
                          $
                          41,996
                          
                          
                          $
                          2,466,224Shares
      of common stock and common stock equivalents:Weighted
      average shares used in basic computation
                          
                          
                          15,231,214
                          
                          
                          
                          15,206,124Diluted
      effect of stock options, warrants, and preferred stock
                          
                          
                          124,446
                          
                          
                          
                          428,589Weighted
      average shares used in diluted computation
                          
                          
                          15,355,660
                          
                          
                          
                          15,634,713Earnings
      per share:Basic
                          
                          $
                          0.003
                          
                          
                          $
                          0.16Diluted
                          
                          $
                          0.003
                          
                          
                          $
                          0.16
  16
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
 
 For the
three months ended June 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 FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on “market
participant” estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on the
consolidated financial statements because all of the investments in debt
securities are classified as trading securities.
 
 In April
2009, the FASB issued three related FASB Staff Positions: (i) FSP FAS No. 115-2
and FAS No. 124-2, Recognition of Presentation of Other-Than-Temporary
Impairments (“FSP FAS 115-2 and FAS 124-2”), (ii) FSP FAS No. 107-1 and APB No.
28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS
107-1 and APB 28-1”), and (iii) FSP FAS No. 157-4, 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 (“FSP
FAS 157-4”), which are effective for interim and annual reporting periods ending
after June 15, 2009. FSP FAS 115-2 and FAS 124-2 modifies the requirement for
recognizing other-than-temporary impairments, changes the existing impairment
model, and modifies the presentation and frequency of related disclosures. FSP
FAS 107-1 and APB 28-1 require disclosures about fair value of financial
instruments for interim reporting periods as well as in annual financial
statements.  FSP 157-4 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 the Company’s consolidated financial statements.
  17
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
 
 In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
Accounting for Transfers of Financial Assets — an amendment of FASB Statement
No. 140 (“FAS 166”), which 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. FAS 166 eliminates the concept of a “qualifying
special-purpose entity,” changes the requirements for derecognizing financial
assets and requires additional disclosures. FAS 166 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 June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FASB Interpretation No. 46(R) (“FAS 167”), which modifies how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. FAS 167
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. FAS 167 requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. FAS 167 also requires additional disclosures about a company’s
involvement in variable interest entities and any significant changes in risk
exposure due to that involvement. FAS 167 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.
 
 Note
3 – Accounts receivable
 
 Accounts
receivable consisted of the following:
 
 June 30, 2009
                                  (Unaudited)
                                
                                
                                December 31,
                                  2008Trade
      accounts receivable
                                
                                $
                                15,451,443
                                
                                
                                $
                                19,321,700Allowance
      for doubtful accounts
                                
                                
                                (96,477
                                )
                                
                                
                                (96,609
                                )Trade
      accounts receivable, net
                                
                                $
                                15,354,966
                                
                                
                                $
                                19,225,091
  18
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
 
 June
      30, 2009
                              
                              
                              December
      31,(Unaudited)
                              
                              
                              2008Beginning
      allowance for doubtful accounts
                              
                              $
                              96,609
                              
                              
                              $
                              55,640Additions
      charged to bad debt expense
                              
                              
                              
                              
                              
                              
                              36,428Foreign
      currency translation adjustments
                              
                              
                              (132)
                              
                              
                              
                              4,541Ending
      allowance for doubtful accounts
                              
                              $
                              96,477
                              
                              
                              $
                              96,609
 
 Note
4 – Inventories
 
 Inventories
consisted of only finished goods, as follows:
 
 June 30, 2009
                                  (Unaudited)
                                
                                
                                December 31,
                                  2008Pharmaceutical
      Medicine
                                
                                $
                                8,006,235
                                
                                
                                $
                                4,725,322Totals
                                
                                $
                                8,006,235
                                
                                
                                $
                                4,725,322
 
 Note
5 - Equipment
 
 Equipment
consisted of the following:
 
 June 30, 2009
                                      (Unaudited)
                                    
                                    
                                    December 31, 2008Furniture
      and fixtures
                                    
                                    $
                                    193,979
                                    
                                    
                                    $
                                    169,305Equipment
                                    
                                    
                                    3,761,751
                                    
                                    
                                    
                                    3,761,419Motor
      vehicles
                                    
                                    
                                    379,705
                                    
                                    
                                    
                                    433,768Leasehold
      improvement
                                    
                                    
                                    514,215
                                    
                                    
                                    
                                    318,398Total
                                    
                                    
                                    4,849,650
                                    
                                    
                                    
                                    4,682,890Less
      accumulated depreciation
                                    
                                    
                                    (1,217,139
                                    )
                                    
                                    
                                    (921,253
                                    )Equipment,
      net
                                    
                                    $
                                    3,632,511
                                    
                                    
                                    $
                                    3,761,637
 
 Depreciation
expense amounted to $433,893, and $193,533 for the six months ended June 30,
2009 and 2008 and $217,718 and $96,807 for the three months ended June 30, 2009
and 2008, respectively.
  19
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
 
 Note 6 – Long term
prepayment
 
 Long term
prepayment consists of the following:
  June 30, 2009
                              (Unaudited)
                            
                            
                            December 31, 2008Prepayment
      for purchase of assets
                            
                            $
                            181,185
                            
                            
                            $
                            362,864Prepayment
      for agency fee
                            
                            
                            879,000
                            
                            
                            
                            880,200Long
      term deferred assets
                            
                            
                            106,579
                            
                            
                            
                            150,806Long
      term deposit
                            
                            
                            1,245,250
                            
                            
                            
                            1,687,050Deposit
      - technology know-how
                            
                            
                            5,528,549
                            
                            
                            
                            2,934,000Total
      long term prepayment
                            
                            $
                            7,940,563
                            
                            
                            $
                            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 June 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 June 30, 2009, the Company paid $2.6 million (RMB
17,700,000) with $336,950 (RMB 2,300,000) remained unpaid.
 
 Note
7 - Taxes
 
 The
Company is organized in the United States and no tax benefit is expected from
tax credits in the future.  Beginning January 1, 2008, the new
Enterprise Income Tax (“EIT”) law replaced the existing laws for Domestic
Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
 
 The key
changes are:
 
 a.
                The
      new standard EIT rate of 25% replaced the 33% rate currently applicable to
      both DES and FIEs, except for High Tech companies who pays a reduced rate
      of 15%;
  b.
                Companies
      established before March 16, 2007 will continue to enjoy tax holiday
      treatment approved by local government for a grace period of either for
      the next 5 years or until the tax holiday term is completed, whichever is
      sooner. These companies will pay the standard tax rate as defined in point
      “a” above when the grace period
expires.
  20
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
 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 six months and
three months ended June 30, 2008 amounted $840,943 and $572,176, 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 six months and from
$0.16 to $0.13 for three months ended June 30, 2008, respectively.
  The
provision for income taxes for the six months ended June 30, 2009 and 2008
consisted of the following:
  2009
                            
                            
                            2008Provision
      for China income tax
                            
                            $
                            1,115,500
                            
                            
                            $
                            764,494Provision
      for local tax
                            
                            
                            -
                            
                            
                            
                            76,449Total
                            
                            $
                            1,115,500
                            
                            
                            $
                            840,943
  21
 CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
 The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate for the six months and three months ended June 30:
 
 2009
                            
                            
                            2008U.S.
      statutory rates
                            
                            
                            34.0
                            %
                            
                            
                            34.0
                            %Foreign
      income not recognized in USA
                            
                            
                            (34.0
                            )
                            
                            
                            (34.0
                            )China
      income taxes
                            
                            
                            25.0
                            
                            
                            
                            25.0China
      income tax exemption
                            
                            
                            -
                            
                            
                            
                            (8.1
                            )Effective
      income tax rate in China
                            
                            
                            25.0
                            %
                            
                            
                            16.9
                            %
 
 For the
six months ended June 30, 2009 and 2008, the Company’s effective tax rate was
71.8%% and 19.0%.  For the three months ended June 30, 2009 and 2008,
the Company’s effective tax rate was 105.8% and 19.0%. Income before income
taxes and noncontrolling interest includes losses from non-Chinese entities,
which are not deductible.  After adjusting these losses, the Company’s
effective rate was equivalent to the effective rate in China for both
years.
 
 Taxes
payable consisted of the following:
 June 30, 2009
                                (Unaudited)
                              
                              
                              December 31,2008Income
      taxes payable
                              
                              $
                              34,245
                              
                              
                              $
                              12,042Value
      added tax
                              
                              
                              17,668
                              
                              
                              
                              758,168Other
      income tax
                              
                              
                              2,107
                              
                              
                              
                              2,079Total
                              
                              $
                              54,020
                              
                              
                              $
                              772,289
 
 The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $28,903,337 as of June 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.
 
 CMC was
incorporated in the United States and has incurred net operating losses for
income tax purposes for the six months ended June 30, 2009 and 2008,
respectively. The estimated net operating loss carry forwards for United States
income taxes amounted to $2,972,000 and $2,550,000 as of June 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 June 30, 2009 was $1,011,000. The
net change in the valuation allowance for the six months ended June 30, 2009 was
an increase of $144,000. Management will review this valuation allowance
periodically and make adjustments as warranted.
  22
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
 
 Note
8 - Commitments and contingencies
 
 The
Company entered into non-cancelable purchase commitment with two
vendors.  As of June 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 June 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 June 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.
  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
                                
                                
                                -
 
 Total
rent expense for the six months ended June 30, 2009 and 2008 amounted to $71,788
and $58,864, respectively. For the three months ended June 30, 2009 and 2008,
total rental expense amounted to $38,339 and $29,282, respectively.
 .
 Notes
9 - Supplemental disclosure of cash flows
 
 The
Company paid no cash interest for the six months ended June 31, 2009 and 2008,
respectively.
 
 Cash paid
for income taxes amounted to $1,092,747 and $891,358 for the six months ended
June 30, 2009 and 2008, respectively.
 
 For the
year ended December 31, 2008, holders of Series A convertible preferred stock
converted 111,649 shares of Series A preferred stock into 115,101 shares of
common stock, par value $0.0001 per share.  There was no conversion as
of June 30, 2009.
  23
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
 
 For the
six months ended June 30, 2009, the Company accrued receivables of approximately
$22,000 related to vehicles disposed.
  Note
10 - Statutory reserves
 
 The laws
and regulations of the People’s Republic of China require that before an
enterprise distributes profits to its partners, it must first satisfy all tax
liabilities, provide for losses in previous years, and make allocations, in
proportions determined at the discretion of the board of directors, after the
statutory reserve. The statutory reserves include surplus reserve fund and the
enterprise fund and represent restricted retained earnings.
 
 Surplus reserve
fund
 
 The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital, the Company has total registered capital approximately $6,205,694 (RMB
49,287,414).
 
 The
transfer to this reserve must be made before distribution of any dividend to
shareholders.  The surplus reserve fund is non-distributable other
than during liquidation and can be used to fund previous years’ losses, if any,
and may be utilized for business expansion or converted into share capital by
issuing new shares to existing shareholders in proportion to their shareholding
or by increasing the par value of the shares currently held by them, provided
that the remaining reserve balance after such issue is not less than 25% of the
registered capital.
 
 Konzern
has met the statutory surplus reserve requirement; no additional contribution is
needed from future earnings.  As of June 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 six months ended June 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 six months ended June 30, 2009 and 2008,
respectively.
  24
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  Note
11 - Retirement benefit plans
 Regulations
in the PRC require the Company to contribute to a defined contribution
retirement plan for all permanent employees. The contribution is based on a
percentage required by the local government and the employees' current
compensation. The Company contributed $38,636 and $30,015 for the six months
ended June 30, 2009 and 2008 and $19,887 and $15,742 for the three months ended
June 30, 2009 and 2008, respectively.
 
 Note
12 - Shareholders’ equity
 
 Common
stock
  During
the period ended December 31, 2008, holders of Series A convertible preferred
stock converted 111,649 shares into 115,101 shares of common stock, par value
$0.0001 per share. For the year ended December 31, 2007, holders converted
3,008,351 shares of Series A convertible preferred stock into 3,063,351 shares
of common stock, par value $0.0001 per share. As of December 31, 2008, all
convertible preferred stock had been converted into common stock.
 
 Stock
options
  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 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 yieldExpected
      life (years)
                          
                          
                          5.00
                          
                          
                          
                          4.98Risk-free
      interest rate
                          
                          
                          1.52
                          %
                          
                          
                          3.25
                          %Expected
      volatility
                          
                          
                          88
                          %
                          
                          
                          76
                          %
  25
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
 
 For the
period ended December 31, 2008, 290,000 options were exercised at $1.25 per
share.  The Company received a total of $362,500 cash from the
exercise of stock options.  The Company expensed $9,622 and $11,312
for the six months ended June 30, 2009 and 2008 and $8,373 and $5,656 for the
three months ended June 30, 2009 and 2008, respectively, for stock-based
compensation.
  Summary of option
activity:
  Options
                                  Outstanding
                                
                                
                                Weighted
                                  Average
                                  Exercise
                                  Price
                                
                                
                                Options
                                  Exercisable
                                
                                
                                Weighted
                                  Average
                                  Exercise
                                  Price
                                
                                
                                Average
                                  Remaining
                                  Contractual
                                  Term (Years)
                                
                                
                                Intrinsic
                                  Value12/31/2007
                                
                                
                                1,105,000
                                
                                
                                $
                                1.91
                                
                                
                                
                                671,500
                                
                                
                                $
                                1.91
                                
                                
                                
                                0.53
                                
                                
                                $
                                1,041,750Granted
                                
                                
                                15,000
                                
                                
                                $
                                2.01
                                
                                
                                
                                7,500
                                
                                
                                $
                                2.01
                                
                                
                                
                                4.83
                                
                                
                                
                                18,776Exercised
                                
                                
                                (290,000
                                )
                                
                                $
                                1.25
                                
                                
                                
                                (290,000
                                )
                                
                                $
                                1.25Forfeited
                                
                                
                                (450,000
                                )
                                
                                
                                
                                
                                
                                
                                (16,500
                                )12/31/2008
                                
                                
                                380,000
                                
                                
                                $
                                1.35
                                
                                
                                
                                372,500
                                
                                
                                $
                                1.34
                                
                                
                                
                                2.48
                                
                                
                                $
                                -Granted
                                
                                
                                15,000
                                
                                
                                $
                                2.05
                                
                                
                                
                                
                                
                                
                                
                                2.05
                                
                                
                                
                                
                                
                                
                                $Exercised
                                
                                
                                (17,500
                                )
                                
                                $
                                1.25
                                
                                
                                
                                (17,500)
                                
                                
                                
                                1.25
                                
                                
                                
                                
                                
                                
                                $Forfeited06/30/2009
                                
                                
                                377,500
                                
                                
                                $
                                1.35
                                
                                
                                
                                355,000
                                
                                
                                $
                                1.34
                                
                                
                                
                                2.28
                                
                                
                                $
                                -
 
 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.
 
 Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5,
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock”, which is effective for financial statements for fiscal
years beginning after December 15, 2008 and which replaced the previous guidance
on this topic in EITF 01-6.  Paragraph 11(a) of FAS 133 specifies that
a contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company’s own stock and (b) classified in stockholders’
equity in the statement of financial position would not be considered a
derivative financial instrument.  EITF 07-5 provides a new two-step
model to be applied in determining whether a financial instrument or an embedded
feature is indexed to an issuer’s own stock and thus able to qualify for the FAS
133 paragraph 11(a) scope exception.
  26
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
 
 As a
result of adopting EITF 07-5, 3,348,686 warrants previously treated as equity
pursuant to the derivative treatment exemption are no longer afforded equity
treatment because the strike price of the warrants is denominated in US dollar,
a currency other than the Company’s functional currency, the Chinese
Renminbi.  As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expire.
 
 As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in February 2006. On January 1,
2009, we reclassified from additional paid-in capital, as a cumulative effect
adjustment, $125,993 to beginning retained earnings and $415,542 to warrant
liabilities to recognize the fair value of such warrants.  The Company
recognized a $1,213,218 and 1,971,907 and $1,213,218 loss from the change in
fair value for the six and three months ended June 30, 2009.
 
 These
common stock purchase warrants do not trade in an active securities market, and
as such, we estimate the fair value of these warrants using the Black-Scholes
Option Pricing Model using the following assumptions:
 
 June 30, 2009
                              
                              
                              January 1, 2009(Unaudited)
                              
                              
                              (Unaudited)Annual
      dividend yield
                              
                              
                              -
                              
                              
                              
                              -Expected
      life (years)
                              
                              
                              1.61
                              
                              
                              
                              2.10Risk-free
      interest rate
                              
                              
                              1.11
                              %
                              
                              
                              0.76
                              %Expected
      volatility
                              
                              
                              95
                              %
                              
                              
                              84
                              %
 
 On May
27, 2009, the Company granted a total of 70,000 warrants to a third party for
investor relations services.  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.  The Company did not recognized
expenses from the change in fair value for the sixe and three months ended June
30, 2009 related to these warrants; as there was no change in the fair
value.  For the six and three ended June 30, 2009, the Company
recorded amortization expense of $38,000 related to these
warrants.
  27
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 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.
 
 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
                                          
                                          
                                          70,000ExercisedForfeited
                                          
                                          
                                          -June
      30, 2009
                                          
                                          
                                          3,488,686
                                          
                                          
                                          $
                                          2.32
                                          
                                          
                                          
                                          1.65
 
 Note
12 – Subsequent events
 
 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.
  28




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





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





Overview





China
Medicine Corporation (“we,” “us” or the “Company”), through Guangzhou Konzern
Medicine Co., Ltd. (“Konzern”), our wholly owned subsidiary organized under the
laws of the People’s Republic of China (the “PRC” or “China”), is a distributor
of approximately 2,400 pharmaceutical products in China. Also as a developer of
innovative pharmaceutical products, currently the Company has 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. On June 20, 2009, Co-Win received the Russian 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 and Russia.





Most of
our revenues have derived from three sources, the distribution of pharmaceutical
products from suppliers, the distribution of self-developed pharmaceutical
products (including Bumetanide injection, Ozagrel Dried powder injection,
Levocarnitine dried powder injection), as well as the development and transfer
of intellectual property, including drug formulas and production techniques. The
revenue from the distribution of pharmaceutical products from suppliers and the
revenue from sales of self-developed pharmaceutical products for six months
ended June 30, 2009 accounted for 96.21 % and 3.70% of the total revenue,
respectively.


29





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





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





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





We have
exclusive rights to nationwide distribution of seven products made by our
suppliers. The sales from national exclusive distribution products accounted for
$6,151,444, approximately 24.5% of our sales for six months ended June 30, 2009
and $6,414,922, approximately 34.3% of our sales for six months ended June 30,
2008.





Revenue
from sales generated from the distribution through the bidding system was
$7,809,157 or 31.1% of our total revenue during six months ended June 30, 2009,
and $6,613,451 or 35.4% of our total revenue during the comparable period of
2008.





Our five
largest suppliers accounted for 53.6% of our total purchases for six months
ended June 30, 2009, compared to 54.5% for the comparable period of 2008. Our
agreements with our suppliers generally have a term of one year and provide that
the suppliers will provide us with the products we order.





We are
frequently required to make a significant down payment when we place an order,
in order to secure the lowest possible purchase price and broadest possible
distribution area. These down payments are made pursuant to contracts with the
suppliers, and to the extent that we reduce the size of the order, we will
receive a credit from the supplier. For six months ended June 30, 2009 and the
fiscal year ended December 31, 2008, we had a total balance of such advances to
suppliers of $7,651,459 and $6,121,974
respectively.


30





Our five
largest customers accounted for 47.8% of total sales for six months ended June
30, 2009, compared to 40.5% for the corresponding period of 2008. Currently we
have approximately 800 customers.





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





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




Because a
substantial portion of our sales were made to a small number of customers, our
accounts receivable from a small number of customers represented a large
percentage of our accounts receivable and assets. Our largest account receivable
for six months ended June 30, 2009 was approximately $4,596,637, representing
approximately 29.8% of our total accounts receivable, or approximately 9.9% of
our total assets, and 13.9% of our working capital. The sales revenue from the
customer who had the largest account receivable for six months ended June 30,
2009 was $5,051,509, approximately 20.1% of our total revenue. Our three largest
accounts receivable were approximately $8,699,259, representing approximately
56.3% of our total accounts receivable, or approximately 18.6% of our total
assets, and 26.3% of our working capital. The sales revenue from the customers
who had our three largest accounts receivable for six months ended June 30, 2009
was $8,879,970, approximately 35.3% of our total revenue. This concentration of
accounts receivable represents a significant credit risk.





The
collection from our customers increased and our collection period of accounts
receivable was shortened. Our accounts receivable decreased 20.1% from December
31, 2008 to June 30, 2009.





Although
the distribution of our suppliers’ pharmaceutical products has been the major
source of revenues, amounting to 96.2% and 88.9% of our total revenues for six
months ended June 30, 2009 and 2008 respectively, management strongly believes
that it is our long term strategy to distribute our self-developed
pharmaceutical products, and to develop intellectual properties, including drug
formulas and production techniques.


31





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
Products





In the
second quarter of 2009, we obtained national exclusive distribution rights to
new products and the total number of such product increased to eight. On June 4,
we signed a six-year agreement with Beijing Yushengtang Pharmaceutical Company
Ltd. for national exclusive rights to distribute Qinpi Jiegu tablets in China.
Qinpi Jiegu tablets are used to promote blood circulation in order to dissipate
blood stasis and relieve pain. They are also widely used to treat sprains and
fractured bones and to relieve pain associated with these
conditions.





In the
second quarter of 2009, we obtained provincial distribution rights to a new
product, Alendronate Sodium Tablets. Pursuant to the related distribution
agreement, we agreed that the annual sales volume of this product should reach
at least 120,000 units. Additionally, we successfully completed negotiations of
provincial distribution rights with the manufacturers of two other new products,
Disodium Phosphate for Injection and Jianganling Tablets, which we expect to
formalize in respective distribution agreements scheduled to be signed in the
third quarter of 2009.





On May
10, 2009, we entered into a series of agreements with Guangxi Haoyisheng
Medicine Manufacture Co., Ltd. relating to Shiwuwei Qixue Shuangbu Oral Liquid,
a non prescription medicine that can enhance the respiratory system and increase
the amount of hemoglobin in the blood. Pursuant to the agreements, we purchased
the product’s know-how and were authorized to distribute it both domestically
and internationally.





rADTZ
Project





On April
15, 2009, Co-Win received a manufacturing license for premixed feed additive and
a manufacturing license for feed additive for its production facility in
Guangzhou. As a result, Co-Win may enter into a trial production and trial sales
phase for rADTZ. The Company owns 70% of Co-Win’s equity interests through the
Company’s 100% equity ownership of Guangzhou Konzern Medicine Co.,
Ltd.


32





In June
2009, Co-Win received a third party feasibility report on recombinant Aflatoxin
Detoxifizyme (rADTZ) from the Feed Research Institute (FRI) of the Chinese
Academy of Agricultural Sciences (CAAS). The report showed that experiments on
baby chickens and piglets were positive where usage of the rADTZ enzyme in
animal feed showed efficacy. Specifically, baby chickens and piglets experienced
healthy growth in body and organ weight with rADTZ treated feed. With this
feasibility report, we started trial production of rADTZ. Based on the
documented benefits of rADTZ, a separate study found that a breeder farm with
the capacity of breeding 50 million chickens is expected to save up to 35
million RMB ($5.1 million) in costs through using rADTZ. According to the
figures collected from the small scale trial sales, it generated approximately
RMB153,000 (approximately $22,400) and the gross margin was approximately
65.4%.





We
started the small scale trial production and sales of rADTZ project in June, and
it generated approximately RMB 153,000 (approximately $22,412). The gross profit
was RMB 100,000 (approximately $14,700). The percentage of cost for small scale
trial production in terms of the purchase of raw materials, salary and
manufacturing expenses was much higher than that of mass production, and
therefore the gross margin was approximately 65.4%. As we scale up the
production capacity and improvement of manufacturing techniques, we expect that
the gross margin will increase gradually.





New Provincial Program on
Financial Support of Small & Medium Enterprises





Early
this year, Guangdong Provincial Finance Bureau working in cooperation with
Guangdong Provincial Small & Medium Enterprises Bureau announced a new
policy to provide financial support to Small & Medium Enterprises (SMEs)
with market strength and innovation. On April 19, 2009, Konzern was chosen as
one of the ''Best 1000 Small & Medium Enterprises (SME)'' in Guangdong
province and listed as one of the selected beneficiary enterprises for Guangdong
Government and Commercial Bank Cooperation Fund (“Cooperation Fund”). In
accordance with the Implementation of Guangdong Government and Commercial Bank
Cooperation Fund, Konzern is eligible to apply for commercial loan under the
Cooperation Fund and enjoy the interest rate payment reimbursable by both the
municipal and provincial government in Guangdong province.





On July
1, 2009, Konzern entered into a RMB 20 million (approximately U.S. $2.9
million) loan agreement with the Bank of China, Guangdong branch. The term of
the loan is one year with an interest rate of approximately 5%. Based on the
current PRC standard interest rate, Konzern is eligible to receive the interest
reimbursement of 60% of the loan interest rate from both the municipal and
provincial government in Guangdong province. Konzern will use the loan to
increase its current funds. The management believes that such loan will
facilitate our business expansion and increase our working capital.





Our
Plan





For the
second half of 2009, we will focus on the following aspects:


33





ž
            Reorganization
      of the Company’s administrative framework and strategic focus to build a
      vertically integrated pharmaceutical company that includes manufacturing
      capability, in addition to the Company’s current research and development
      center, sales network and after sales
service;


ž
            Purchase
      of additional rADTZ equipment and expansion of rADTZ
      manufacturing capacity;


ž
            Search
      for a production base for the manufacturing of our own pharmaceutical
      products including those currently manufactured under our name pursuant to
      OEM arrangements; and


ž
            Completion
      of the selection process of an English speaking CFO familiar with the US
      GAAP.





Results
of Operations





The
following table sets forth our statements of operations for the three months and
six months ended June 30, 2009 and 2008, in U.S. dollars:





Three Months Ended
      June 30,
                
                
                Six Months Ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenue
                
                $
                15,055,093
                
                
                $
                11,637,539
                
                
                $
                25,153,483
                
                
                $
                18,698,578Product
      sales
                
                
                15,055,093
                
                
                
                11,067,074
                
                
                
                25,153,483
                
                
                
                17,918,458Medical
      formula sales
                
                
                -
                
                
                
                570,465
                
                
                
                -
                
                
                
                780,120Costs
      of goods sold
                
                
                11,525,866
                
                
                
                7,481,170
                
                
                
                18,844,628
                
                
                
                12,230,189Gross
      profit
                
                
                3,529,227
                
                
                
                4,156,369
                
                
                
                6,308,855
                
                
                
                6,468,389R&D
      expenses
                
                
                285,256
                
                
                
                107,824
                
                
                
                470,136
                
                
                
                196,216Selling,
      general and administrative costs
                
                
                1,465,660
                
                
                
                1,060,082
                
                
                
                2,292,844
                
                
                
                1,872,590Income
      from operations
                
                
                1,778,311
                
                
                
                2,988,463
                
                
                
                3,545,875
                
                
                
                4,399,583Other
      (expense) income, net
                
                
                (26,400
                )
                
                
                32,104
                
                
                
                (20,847
                )
                
                
                38,087Change
      in fair value of warrants
                
                
                (1,213,218
                )
                
                
                
                
                
                
                (1,971,907
                )
                
                
                -Income
      before income taxes and noncontrolling interest
                
                
                538,693
                
                
                
                3,020,567
                
                
                
                1,553,121
                
                
                
                4,437,670Provision
      for income taxes
                
                
                570,014
                
                
                
                572,176
                
                
                
                1,115,500
                
                
                
                840,943Net
      income before noncontrolling interest
                
                
                (31,321
                )
                
                
                2,448,391
                
                
                
                437,621
                
                
                
                3,596,727Add:
      net income attributable to noncontrolling interest
                
                
                73,317
                
                
                
                17,833
                
                
                
                154,457
                
                
                
                45,310Consolidated
      net income attributable to CHINA MEDICINE CORPORATION
                
                $
                41,996
                
                
                $
                2,466,224
                
                
                $
                592,078
                
                
                $
                3,642,037





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


34




Six Months Ended June 30,2009
                                            
                                            
                                            2008Drugs
                                            
                                            $
                                            24,563,768
                                            
                                            
                                            
                                            97.66
                                            %
                                            
                                            $
                                            17,528,450
                                            
                                            
                                            
                                            93.74
                                            %Dietary
      Supplements
                                            
                                            
                                            73,037
                                            
                                            
                                            
                                            0.29
                                            %
                                            
                                            
                                            113,802
                                            
                                            
                                            
                                            0.61
                                            %Medical
      Equipment
                                            
                                            
                                            473,164
                                            
                                            
                                            
                                            1.88
                                            %
                                            
                                            
                                            262,636
                                            
                                            
                                            
                                            1.41
                                            %Others
                                            
                                            
                                            21,102
                                            
                                            
                                            
                                            0.08
                                            %
                                            
                                            
                                            13,570
                                            
                                            
                                            
                                            0.07
                                            %Medical
      Formula
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0
                                            %
                                            
                                            
                                            780,120
                                            
                                            
                                            
                                            4.17
                                            %rADTZ
                                            
                                            
                                            22,412
                                            
                                            
                                            
                                            0.09
                                            %
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0
                                            %Total
                                            
                                            $
                                            25,153,483
                                            
                                            
                                            
                                            100
                                            %
                                            
                                            
                                            18,698,578
                                            
                                            
                                            
                                            100
                                            %




Six Months Ended June 30,2009
                
                
                2008Western
      Prescription Products
                
                $
                14,619,551
                
                
                
                58.12
                %
                
                $
                11,135,885
                
                
                
                59.55
                %Western
      Over-the-Counter Products
                
                
                2,180,711
                
                
                
                8.67
                %
                
                
                652,366
                
                
                
                3.49
                %TCM
      Prescription Products
                
                
                4,334,299
                
                
                
                17.23
                %
                
                
                3,509,692
                
                
                
                18.77
                %TCM
      Over-the-Counter Products
                
                
                3,429,207
                
                
                
                13.63
                %
                
                
                2,230,507
                
                
                
                11.93
                %Drugs/Dietary
      Supplements Total
                
                $
                24,563,768
                
                
                
                97.66
                %
                
                $
                17,528,450
                
                
                
                93.74
                %




35





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





Sales





Total
revenue for the three months ended June 30, 2009 was $15,055,093, an increase of
$3,417,554, or 29.4%, from the total revenue of $11,637,539 for the comparable
period in 2008. This increase was mainly due to the increase in our sales on
regional and provincial levels, which resulted from the implementation of the
health care reform announced by the government in the first quarter of
2009.





Revenue
from Product Sales for the three months ended June 30, 2009 was $15,055,093, an
increase of $3,988,019, or 36.03%, from $11,067,074 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.





Revenue
from sales of products we distribute for the three months ended June 30, 2009
was $14,553,441, accounting for 96.7% of the total revenue for the period, which
was an increase of $4,133,961, or 39.7%, from $10,419,480 for the comparable
period in 2008. Specifically, revenue from sales of products we distribute
nationwide was $2,772,474, which accounted for 18.4% of the total revenue for
the three months ended June 30, 2009. Revenue from sales of products we
distribute regionally was $7,203,346, which accounts for 47.9% of the total
revenue for the three months ended June 30, 2009. Revenue from sales of products
we distribute provincially was $4,577,621, which accounts for 30.4% of the total
revenue for the three months ended June 30, 2009.





Sales
revenue from products for which we won distribution rights through the online
bidding system of Guangdong Province for the three months ended June 30, 2009
were $4,480,117, an increase of $462,073 or 11.5% from $4,018,044 in the
comparable period in 2008.





Revenue
from sales of products for which we hold a manufacturing license for the three
months ended June 30, 2009 was $479,241, the decrease of $168,353 from $647,594
for the comparable period in 2008.


36





Revenue
from Medical Formula Sales for the three months ended June 30, 2009 was $0, a
decrease of $570,465, or 100%, from $570,465 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 stage and 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 relating to the licensing of patents and
technologies relating to rADTZ, which is where we currently concentrate our
R&D efforts.





Revenue
from the sales of rADTZ for the three months ended June 30, 2009 was $22,412,
which was a new category of sales revenue commencing in June 2009.





Cost of
Sales





Cost of
sales for the three months ended June 30, 2009 was $11,525,866, an increase of
$4,044,696, or 54.1%, from $7,481,170 for the comparable period in 2008. Gross
profit for the three months ended June 30, 2009 was $3,529,227, a decrease of
$627,142, or 15.1 %, from $4,156,369 for the comparable period of 2008. Our
gross margin for the three months ended June 30, 2009 was 23.4% as compared with
35.7% for the three months ended June 30, 2008, a decrease of 12.3%. The
development of the medical reform in rural areas presented new opportunities for
expansion of our business. As a result, we increased our regional distribution
sales to rural areas almost two-fold during the three months ended June 30,
2009. However, because the regional distribution products are of lower gross
margin, our total cost of sales increased. Additionally, to respond to the
general trend of decreasing consumer spending due to the macroeconomic
contraction of the markets which affected our industry as well, we conducted
several promotion campaigns for our distribution products offering discounts to
our customers, which affected our gross profit for the three months ended June
30, 2009.





Research and
Development





Research
and development expenses were $285,256 or 1.89% of the total revenue for the
three months ended June 30, 2009, which included expenses relating to the
purchase of medical formula technology , which is still under
development and research and development fees, including those paid to Qing Dao
Bao Mai De and the Guangzhou Microbe Research Center, which were incurred in
connection with development of the rADTZ project. Research and development
expenses for the same period of 2008 were $107,824, or approximately 0.93% of
total revenue.


37





Selling, General and
Administrative Expenses





Selling,
general and administrative expenses were $1,465,660 for the three months ended
June 30, 2009, an increase of $405,578, or 38.3%, from $1,060,082 for the
comparable period in 2008. Selling, general and administrative expenses included
depreciation expenses, advertising expenses and transportation fees. The
depreciation expenses increased to $217,718 for the three months ended June 30,
2009, an increase of $120,911 or 124.9% as compared to $96,807 for the same
period in 2008. We added new fixed asset amounted $2,662,960 in the fiscal year
of 2008, which started to depreciate this year. The advertising, trade show and
promotional campaigns expenses for three months ended June 30, 2009 increased to
$282,288, an increase of $102,285 or 56.8% as compared to $180,003 for the same
period in 2008. We expect to launch a series of new products and add several new
distribution products in our current product mix. Therefore, we needed to
increase advertising expenses at the initial period. Due to the increase of
product sales, the transportation fees for three months ended June 30, 2009
increased to $187,973 as compared to $138,509 for the same period in
2008.





Net
Income





As a
result of the adoption of EITF 07-5, consolidated net income for the second
quarter of 2009 was approximately $0.04 million, or $0.003 per diluted share,
which included a $1.2 million non cash expense related to change in fair value
of warrants, compared to approximately $2.47 million, or $0.16 per diluted
share, in the second quarter of 2008.





The
management of CMC uses non-GAAP adjusted net earnings to measure the performance
of the Company’s business internally by excluding non-cash charges related to
the warrants.  The Company’s management believes that the non-GAAP
adjusted financial measure allow the management to focus on managing business
operating performance because the measure reflects the essential operating
activities of CMC and provides a consistent method of comparison to historical
periods. The Company believes that providing the non-GAAP measures that
management uses 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 CMC's 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 the Company's performance using the
same methodology and information as that used by the 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, the management of CMC compensates for these limitations by providing
the relevant disclosure of the items excluded.


38




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




Three Months EndedJune 302009
                          
                          
                          2008Net
      Income (Loss)
                          
                          $
                          41,996
                          
                          
                          $
                          2,466,224Add
      back (Deduct):Change
      in fair value of warrant
                          
                          
                          1,213,218
                          
                          
                          
                          -Adjusted
      Net Income
                          
                          $
                          1,255,214
                          
                          
                          $
                          2,466,224Diluted
      EPS
                          
                          $
                          0.003
                          
                          
                          $
                          0.16Add
      back (Deduct):Change
      in fair value of warrant
                          
                          
                          0.08
                          
                          
                          
                          0.00Adjusted
      EPS
                          
                          $
                          0.08
                          
                          
                          $
                          0.16





Excluding
this expense, adjusted net income for the second quarter of 2009 was
approximately $1.25 million, or $0.08 per fully diluted share, which translates
to a 49.10% decrease in net income for the second quarter 2009 compared to the
same period last year. Earnings per share were calculated using a diluted
weighted share count of 15.36 million shares for the second quarter of 2009 and
15.63 million shares for the second quarter of 2008.




Income
Taxes





Provision
for income taxes was $570,014 for the three months ended June 30, 2009 as
compared with $572,176 for the comparable period in 2008. The decrease was due
to the decrease of operating income. The favorable tax rate that we enjoyed
before had expired, and therefore we have adopted the new tax rate of 25% since
2009.





For the
three months ended June 30, 2009 and 2008, the Company’s effective tax rate was
105.8% and 19.0%. Income before income taxes and non-controlling 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 of 25% in China for both
years.





THE
SIX MONTHS ENDED JUNE 30, 2009 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2008





Sales





Total
revenue for the six months ended June 30, 2009 was $25,153,483, an increase of
$6,454,905, or 34.52%, from total revenue of $18,698,578 for the comparable
period in 2008. This increase was mainly due to the increase in our sales on
regional and provincial levels, which resulted from the implementation of the
health care reform announced by the government in the first quarter of
2009.


39





Revenue
from Product Sales for the six months ended June 30, 2009 was $25,153,483, an
increase of $7,235,025, or 40.38%, from $17,918,458 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.





Revenue
from sales of products we distribute for the six months ended June 30, 2009 was
$24,199,863, accounting for 96.21% of the total revenue for the period, which
was an increase of $7,569,827, or 45.52%, from $16,630,036 for the comparable
period in 2008. Revenue from sales of products we distribute is consisted of
revenue from the sales of provincial distribution products, regional
distribution products and national distribution products. Revenue from the sales
of provincial distribution products was $9,073,135, which accounted for 36.07%
of the total revenues for the six months ended June 30, 2009. Revenue from the
sales of regional distribution products was $9,899,283, which accounted for
39.36% of the total revenues for the six month ended June 30, 2009. Revenue from
the sales of national distribution products was $5,227,445, which accounted for
20.78% of the total revenues for the six months ended June 30,
2009.





Revenue
from sales of products for which we hold a manufacturing license for the six
months ended June 30, 2009 was $931,208, a decrease of $357,214 from $1,288,422
for the comparable period in 2008.




Revenues
from Medical Formula Sales for the six months ended June 30, 2009 were $0, a
decrease of $780,120, or 100%, from $780,120 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 stage and 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 relating to the licensing of patents and
technologies relating to rADTZ, which is where we currently concentrate our
R&D efforts.





Revenue
from the sales of rADTZ for the six months ended June 30, 2009 was $22,412,
which was a new category of sales revenue commencing in June
2009.


40




Cost of
Sales





Cost of
sales for the six months ended June 30, 2009 was $18,844,628, an increase of
$6,614,439, or 54.1%, from $12,230,189 for the first six months of 2008. Gross
profit for the six months ended June 30, 2009 was $6,308,855, a decrease of
$159,534, or 2.5 %, from $6,468,389 for the comparable period of 2008. Our gross
margin for the six months ended June 30, 2009 was 25.1% as compared with 34.6%
for the six months ended June 30, 2008, a decrease of 9.5%. The development of
the medical reform in rural areas presented new opportunities for expansion of
our business. As a result, we increased our regional distribution sales to rural
areas almost two-fold during the six months ended June 30, 2009. However,
because the regional distribution products are of lower gross margin, our total
cost of sales increased. Additionally, to respond to the general trend of
decreasing consumer spending due to the macroeconomic contraction of the markets
which affected our industry as well, we ramped up our advertising efforts
including conducting several promotion campaigns for our distribution products,
which affected our gross profit for the six months ended June 30,
2009.





Research and
Development





Research
and development expense was $470,136, which accounted for 1.87% of total revenue
for the six months ended June 30, 2009. It included expenses relating to the
purchase of medical formula technology, which is still under
development and development fees, including those paid to Qing Dao Bao Mai De
and the Guangzhou Microbe Research Center, which were incurred in connection
with the development of the rADTZ project. Research and development expense for
the same period of 2008 was $196,216, or 1.05% of total revenue.




Selling, General and
Administrative Expenses




Selling,
general and administrative expenses were $2,292,844 for the six months ended
June 30, 2009, an increase of $420,254, or 22.4%, from $1,872,590 for the
comparable period in 2008. Selling, general and administrative expenses included
depreciation expenses, advertising expenses and transportation fees. The
depreciation and amortization expenses were $433,934 for the six months ended
June 30, 2009, an increase of $240,362 or 124.20% as compared to $193,572 during
the same period in 2008. We added new fixed asset amounted $2,662,960 in the
fiscal year of 2008, which started to depreciate in 2009. The advertising, trade
show and promotional campaigns expenses for the six months ended June 30, 2009
increased to $312,459, an increase of 72.65% as compared to $180,981 during the
same period in 2008. We expect to launch a series of new products and add
several new distribution products in our current product mix. Therefore, we
needed to increase advertising expenses at the initial period. Due to the
increase in product sales, the transportation fees for the six months ended June
30, 2009 increased to $312,052, an increase of 26.1% as compared to $247,454
during the same period in 2008.


41





Net
Income





As a
result of the adoption of EITF 07-5, consolidated net income for the first half
of 2009 was approximately $0.6 million, or $0.04 per diluted share, which
included a $2.0 million non cash expense related to change in fair value of
warrants, compared to approximately $3.6 million, or $0.23 per diluted share, in
the first half of 2008.





The
management of CMC uses non-GAAP adjusted net earnings to measure the performance
of the Company’s business internally by excluding non-cash charges related to
the warrants.  The Company’s management believes that the non-GAAP
adjusted financial measure allow the management to focus on managing business
operating performance because the measure reflects the essential operating
activities of CMC and provides a consistent method of comparison to historical
periods. The Company believes that providing the non-GAAP measures that
management uses 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 CMC's 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 the Company's performance using the
same methodology and information as that used by the 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, the management of CMC compensates for these limitations by providing
the relevant disclosure of the items excluded.




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





SixMonths
      EndedJune 302009
                        
                        
                        2008Net
      Income (Loss)
                        
                        $
                        592,078
                        
                        
                        $
                        3,642,037Add
      back (Deduct):Change
      in fair value of warrant
                        
                        
                        1,971,907
                        
                        
                        
                        -Adjusted
      Net Income
                        
                        $
                        2,563,985
                        
                        
                        $
                        3,642,037Diluted
      EPS
                        
                        $
                        0.04
                        
                        
                        $
                        0.23Add
      back (Deduct):Change
      in fair value of warrant
                        
                        
                        0.13
                        
                        
                        
                        0.00Adjusted
      EPS
                        
                        $
                        0.17
                        
                        
                        $
                        0.23




42





Excluding
this expense, adjusted net income for the first half of 2009 was approximately
$2.6 million, or $0.17 per fully diluted share, which translates to a 29.6%
decrease in net income for the first half of 2009 compared to the same period
last year. Earnings per share were calculated using a diluted weighted share
count of 15.25 million shares for the first half of 2009 and 15.55 million
shares for the first half of 2008.





Income
Taxes





Provision
for income taxes was $1,115,500 for the six months ended June 30, 2009 as
compared to $840,943 for the comparable period in 2008. The increase was due to
the increase of product sales and operating income. The favorable tax rate that
we enjoyed before had expired, and therefore we have adopted the new tax rate of
25% since 2009.





For the
six months ended June 30, 2009 and 2008, the Company’s effective tax rate was
71.8% and 19.0%.  Income before income taxes and non-controlling 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 of 25% in China for both
years.





Liquidity and Capital
Resources





As of
June 30, 2009, we had working capital of $33,023,133, a decrease of $445,464
from $32,577,669 as of December 31, 2008.





We
received cash of $1,531,955 in our operations for the six months ended June 30,
2009. We used cash of $2,985,402 in our operations for the comparable period of
2008.





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





Balance Sheet Caption
                  
                  Change in dollars
                    12/31/08 to 06/30/09
                  
                  
                  Percentage Change
                    12/31/08 to 06/30/09Accounts
      receivable
                  
                  $
                  (3,870,125
                  )
                  
                  
                  (20.13
                  )%Notes
      receivables
                  
                  
                  (44,211
                  )
                  
                  
                  (7.36
                  )%Inventories
                  
                  
                  3,280,913
                  
                  
                  
                  69.43
                  %Advances
      to suppliers
                  
                  
                  1,529,485
                  
                  
                  
                  24.98
                  %Accounts
      payable
                  
                  
                  139,608
                  
                  
                  
                  227.96
                  %Customer
      deposits
                  
                  
                  157,319
                  
                  
                  
                  103,89
                  %





The
change in these balance sheet captions reflects the nature of the cash
requirements of our business. Our account receivable decreased $3,870,125 or
20.1% from December 31, 2008 to June 30, 2009, reflecting the increase in
collection from our customers. During the period ended June 30, 2009, we
received approximately $556,700 in notes receivable from our customers, a
decrease of approximately $44,211 from approximately $ 600,911 for the year
ended December 31, 2008. Notes receivable are guarantees of payment from the
customers’ banks. In the six months ended June 30, 2009, our receivables
collection cycle was shortened to 124 days, compared to 111 days for in the
fiscal year ended December 31, 2008.


43





Our
advances to suppliers increased 24.98% in the first six 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 June 30, 2009, our inventories increased 69.43% for we
anticipate the significant increase in goods order for the upcoming
quarter.




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





Recently
Issued and Adopted Accounting Pronouncements




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





As a
result of adopting EITF 07-5, 3,348,686 warrants previously treated as equity
pursuant to the derivative treatment exemption are no longer afforded equity
treatment because the strike price of the warrants is denominated in US dollar,
a currency other than the Company’s functional currency, the Chinese
Renminbi.  As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expire.


44





As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in February 2006. On January 1,
2009, we reclassified from additional paid-in capital, as a cumulative effect
adjustment, $125,993 to beginning retained earnings and $415,542 to warrant
liabilities to recognize the fair value of such warrants. The fair value of the
warrants was $2,481,112 as of June 30, 2009.  Therefore, the Company
recognized a $1,213,218 and $1,971,907 loss from the change in fair value of the
warrants for the three and six months ended June 30, 2009.





Effective
January 1, 2009, the Company adopted SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51”. Certain provisions of this statement are required to be adopted
retrospectively for all periods presented. Such provisions include a requirement
that the carrying value of noncontrolling interests (previously referred to as
minority interests) be removed from the mezzanine section of the balance sheet
and reclassified as equity; and consolidated net income to be recast to include
net income attributable to the noncontrolling interest. As a result of this
adoption, we reclassified noncontrolling interests in the amounts of $680,000
and $836,000 from the mezzanine section to equity in the June 30, 2009 and
December 31, 2008 balance sheets, respectively.




In April
2009, the FASB issued three related FASB Staff Positions: (i) FSP FAS No. 115-2
and FAS No. 124-2, Recognition of Presentation of Other-Than-Temporary
Impairments (“FSP FAS 115-2 and FAS 124-2”), (ii) FSP FAS No. 107-1 and APB No.
28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS
107-1 and APB 28-1”), and (iii) FSP FAS No. 157-4, 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 (“FSP
FAS 157-4”), which are effective for interim and annual reporting periods ending
after June 15, 2009. FSP FAS 115-2 and FAS 124-2 modifies the requirement for
recognizing other-than-temporary impairments, changes the existing impairment
model, and modifies the presentation and frequency of related disclosures. FSP
FAS 107-1 and APB 28-1 require disclosures about fair value of financial
instruments for interim reporting periods as well as in annual financial
statements.  FSP 157-4 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 the Company’s
consolidated financial statements.





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
Accounting for Transfers of Financial Assets — an amendment of FASB Statement
No. 140 (“FAS 166”), which 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. FAS 166 eliminates the concept of a “qualifying
special-purpose entity,” changes the requirements for derecognizing financial
assets and requires additional disclosures. FAS 166 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.


45





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FASB Interpretation No. 46(R) (“FAS 167”), which modifies how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. FAS 167
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. FAS 167 requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. FAS 167 also requires additional disclosures about a company’s
involvement in variable interest entities and any significant changes in risk
exposure due to that involvement. FAS 167 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.





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.


46





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





Research and development
costs


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





Use of
estimates


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





Inventories


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





Item
4T. Controls and Procedures




Disclosure
Controls and Procedures





As
required by Rule 13a-15 under the Exchange Act, our management, including our
Chief Executive Officer and our Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2009.


47





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 June 30, 2009.





Changes
in Internal Controls over Financial Reporting





There
were no changes in our internal controls over financial reporting during the
second quarter of the 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
4. Submission of Matters to a Vote of Security Holders





The
Annual Meeting of Shareholders of the Company was held on May 19, 2009.  At
the meeting, the following matters were submitted to a vote of the stockholders
of the Company:




The
election of five directors to serve for one year beginning at the 2009 annual
shareholders' meeting and expiring at the 2010 annual shareholders' meeting.
 A summary of votes by directors is shown below:




Director
                            
                            For
                            
                            
                            WithheldSenshan
      Yang
                            
                            
                            7,952,591
                            
                            
                            
                            69,910Minhua
      Liu
                            
                            
                            7,957,601
                            
                            
                            
                            64,900Robert
      Adler
                            
                            
                            7,958,591
                            
                            
                            
                            63,910Rachel
      Gong
                            
                            
                            7,963,591
                            
                            
                            
                            58,910Yanfang
      Chen
                            
                            
                            7,963,601
                            
                            
                            
                            58,900





The
approval of the reincorporation of the Company from Delaware to
Nevada.  A summary of votes is shown below:





For
                    
                    Against
                    
                    Abstain7,648,366
                    
                    368,085
                    
                    6,050




48





Item
6. Exhibits





31.1
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002.


49


SIGNATURES





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





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




50