UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



|x | ANNUAL
                                                                      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                                                                      EXCHANGE ACT OF 1934.
        
        For the fiscal year ending June 30, 2012
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 number 000-53401



Bohai Pharmaceuticals
Group, Inc.

(Exact name of registrant as specified
in its charter)



|Nevada                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 98-0697405                                                                                                                              | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------- | 
|(State
                                                                                           or other jurisdiction
        of incorporation or organization)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | (IRS
                                                                                           Employer
        Identification number) | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                         | 
|c/o Yantai
                                                                                                                           Bohai
                                                                                                                           Pharmaceuticals
                                                                                                                           Group
                                                                                                                           Co.
                                                                                                                           Ltd.
        No. 9 Daxin Road, Zhifu District
        Yantai, Shandong Province, China |  | 264000                                                                                                                                  | 
|(Address
    of Principal Executive Offices)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | (Zip
    Code)                                                                                                                          | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                         | 

+86(535)-685-7928

(Registrant’s Telephone Number, Including
Area Code)



Securities registered pursuant to Section 12(b)
of the Act:



None

(Title of Class)



Name of each exchange on which registered



None



Securities registered pursuant to Section 12(g)
of the Act:

Common Stock, $0.001 par value per share



Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  
 ̈     Nox



Indicate by
check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act.   Yes  ̈     Nox

.

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.    YesxNo   ̈ .



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 x    No   ̈ .



Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.  ̈



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 definition of
“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.



|Large accelerated filer  ̈ | Accelerated filer   ̈       | 
|------------------------- | -------------------------- | 
|Non-accelerated filer   ̈  | Smaller reporting companyx | 



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



The aggregate market value of the voting
and non-voting common stock, other than shares held by persons who may be deemed affiliates of the registrant, computed by reference
to the closing sales price for the registrant’s Common Stock on December 31, 2011, as reported on the OTC Bulletin Board,
was approximately $5,269,020.



As of September 28, 2012, there were 17,861,085
outstanding shares of common stock of the registrant, par value $.001 per share.



DOCUMENTS INCORPORATED BY REFERENCE



None













Bohai Pharmaceuticals Group, Inc.



Annual Report on Form 10-K for the

Fiscal Year Ended June 30, 2012



TABLE OF CONTENTS



|                                                     |                                                                                                                         | Page
|---------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ----
|                                                     |                                                                                                                         |     
|Cautionary Note Regarding Forward Looking Statements | -i-                                                                                                                    
|                                                     |                                                                                                                         |     
|PART I                                               |                                                                                                                         | 1   
|                                                     |                                                                                                                         |     
|Item 1.                                              | Business.                                                                                                               | 1   
|Item 1A.                                             | Risk Factors.                                                                                                           | 18  
|Item 1B.                                             | Unresolved Staff Comments.                                                                                              | 36  
|Item 2.                                              | Description of Properties.                                                                                              | 36  
|Item 3.                                              | Legal Proceedings.                                                                                                      | 36  
|                                                     |                                                                                                                         |     
|PART II                                              |                                                                                                                         | 37  
|                                                     |                                                                                                                         |     
|Item 5.                                              | Market for Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
    Market Information. | 37  
|Item 6.                                              | Selected Financial Data.                                                                                                | 37  
|Item 7.                                              | Management’s Discussion and Analysis or Plan of Operation.                                                              | 37  
|Item 7A.                                             | Quantitative and Qualitative Disclosures about Market Risk.                                                             | 48  
|Item 8.                                              | Financial Statements and Supplementary Data.                                                                            | 48  
|Item 9.                                              | Changes In and Disagreements with Accountants On Accounting and Financial Disclosure.                                   | 48  
|Item 9A.                                             | Controls and Procedures.                                                                                                | 48  
|Item 9B.                                             | Other Information.                                                                                                      | 49  
|                                                     |                                                                                                                         |     
|PART III                                             |                                                                                                                         | 50  
|                                                     |                                                                                                                         |     
|Item 10.                                             | Directors, Executive Officers, Promoters and Control Persons; Compliance With  Section
    16(A) of the Exchange Act.   | 50  
|Item 11.                                             | Executive Compensation                                                                                                  | 52  
|Item 12.                                             | Security Ownership of Certain Beneficial Owners and Management                                                          | 54  
|Item 13.                                             | Certain Relationships and Related Transactions and Director Independence.                                               | 54  
|Item 14.                                             | Principal Accountant Fees and Services.                                                                                 | 55  
|                                                     |                                                                                                                         |     
|Part IV                                              |                                                                                                                         | 56  
|                                                     |                                                                                                                         |     
|Item 15.                                             | Exhibits                                                                                                                | 56  
|                                                     |                                                                                                                         |     
|FINANCIAL STATEMENTS                                 | F-1                                                                                                                    











CAUTIONARY NOTE REGARDING FORWARD LOOKING
STATEMENTS



In addition to historical information,
this Annual Report on Form 10-K contains forward looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995.  The forward-looking statements are subject to certain risks and uncertainties that could cause actual results
to differ materially from those reflected in such forward-looking statements.  Factors that might cause such a difference
include, but are not limited to those discussed in the sections entitled “Business”, “Risk Factors”, and
“Management’s Discussion and Analysis or Plan of Operation.”  Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management’s opinions only as of the date thereof.  We
undertake no obligation to revise or publicly release the results of any revision of these forward-looking statements.  Readers
should carefully review the risk factors described in this Annual Report and in other documents that we file from time to time
with the Securities and Exchange Commission.



In some cases, you can identify forward-looking
statements by terminology such as “may,” “will,” “should,” “expects,” “plans,”
“anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential,”
“proposed,” “intended,” or “continue” or the negative of these terms or other comparable terminology.
You should read statements that contain these words carefully, because they discuss our expectations about our future operating
results or our future financial condition or state other “forward-looking” information. There may be events in the
future that we are not able to accurately predict or control. You should be aware that the occurrence of any of the events described
in our risk factors and other disclosures included in this Annual Report could substantially harm our business, results of operations
and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline. 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future
results, growth rates, and levels of activity, performance or achievements.  Factors that may cause actual results, our performance
or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include,
without limitation:



| |  ̈ | our ability to generate or obtain through financing sufficient working capital to (i) fund the acquisition
    of Yantai Tianzheng (a total of $25.3million is due); (ii) satisfy our obligations under our convertible notes due October
    5, 2012 (currently $9,405,000 due) or (iii) otherwise to support our business plans;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  ̈ | our ability to integrate the business of Yantai Tianzheng and any future acquisitions into our business;
| | - | --------------------------------------------------------------------------------------------------------



| |  ̈ | our ability to expand our product offerings and maintain the quality of our products;
| | - | -------------------------------------------------------------------------------------



| |  ̈ | the availability of government granted rights to exclusively manufacture or co-manufacture our products;
| | - | --------------------------------------------------------------------------------------------------------



| |  ̈ | the availability of national healthcare reimbursement of our products;
| | - | ----------------------------------------------------------------------



| |  ̈ | our ability to manage our expanding operations and continue to fill customers’ orders on time;
| | - | ----------------------------------------------------------------------------------------------



| |  ̈ | our ability to maintain adequate control of our expenses allowing us to realize anticipated revenue
    growth;
| | - | ---------------------------------------------------------------------------------------------------------------



| |  ̈ | our ability to maintain or protect our intellectual property;
| | - | -------------------------------------------------------------



| |  ̈ | our ability to maintain our proprietary technology;
| | - | ---------------------------------------------------



| |  ̈ | the impact of government regulation in China and elsewhere, including the support provided by the Chinese
    government to the Traditional Chinese Medicine and healthcare sectors in China;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  ̈ | our ability to implement product development, marketing, sales and acquisition strategies and adapt
    and modify them as needed;
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| |  ̈ | our implementation of required financial, accounting and disclosure controls and procedures and related
    corporate governance policies; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  ̈ | our ability to anticipate and adapt to changing conditions in the Traditional Chinese Medicine and
    healthcare industries resulting from changes in government regulations, mergers and acquisitions involving our competitors,
    technological developments and other significant competitive and market dynamics.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Except as required by applicable law,
including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform
these statements to actual results. The following discussion should be read in conjunction with our financial statements and the
related notes that appear elsewhere in this report.



We cannot give any guarantee that these
plans, intentions or expectations will be achieved.  All forward-looking statements involve significant risks and uncertainties,
and actual results may differ materially from those discussed in the forward-looking statements as a result of various factors,
including those factors listed above and described in the “Risk Factors” section of this Annual Report.



-i-







PART I



As used throughout this Annual Report,
the terms “BOPH,” “Company,” “we,” “us,” or “our” refer to Bohai Pharmaceuticals
Group, Inc., a Nevada corporation, together with:



(i)           its
wholly owned subsidiary, Chance High International Limited, a British Virgin Islands company (“Chance High”);



(ii)         Chance
High’s wholly owned subsidiary, Yantai Shencaojishi Pharmaceuticals Co., Ltd., a PRC company (“WFOE”);



(iii)        Chance
High’s wholly owned subsidiary, Yantai Nirui Pharmaceutical Co., Ltd., a PRC company (“WFOE II”);



(iv)         the
WFOE’s variable interest entity, Yantai Bohai Pharmaceuticals Group Co., Ltd., a PRC company (“Bohai”), which
is our initial operating subsidiary; and



(v)          WFOE
II’s wholly owned subsidiary, Yantai Tianzheng Pharmaceutical Co., Ltd., a PRC company (“Yantai Tianzheng”),
which we acquired in August 2011 and is our second operating subsidiary.



In this Annual Report, we sometimes
refer to BOPH, Chance High, WFOE, WFOE II, Bohai and Yantai Tianzheng collectively as the “Group.”  As used
in this Annual Report, “China” or “the PRC” refers to the People’s Republic of China.



Item 1.  Business.



Overview



We are engaged in the production, manufacturing
and distribution in China of herbal pharmaceuticals based on traditional Chinese medicine, which we refer to herein as Traditional
Chinese Medicine, or TCM.  We are based in the city of Yantai, Shandong Province, China and our operations are exclusively
in China.



Our medicines address rheumatoid arthritis,
viral infections, gynecological diseases, cardio vascular issues and respiratory diseases.  Our initial operating subsidiary
Bohai obtained Drug Approval Numbers (or DANs) for 29 varieties of traditional Chinese herbal medicines in 2004, and an additional
14 varieties in December 2010.  Through our acquisition of Yantai Tianzheng in August 2011, we obtained DANs for another
5 varieties in August 2011.  We currently produce 19 varieties of approved traditional Chinese herbal medicines in seven
delivery systems: tablets, granules, capsules, formulations, concentrated powder, tincture and medicinal wine.  Of these
19 products, 12 are prescription drugs and 7 are over the counter (or OTC) products.



Three of Bohai’s lead products,
Tongbi Capsules and Tablets and Lung Nourishing Syrup, are eligible for reimbursement under China’s National Medical Insurance
Program (or NRDL), which we believe significantly increases the marketability of these products.  In addition to these lead
products, three of our current products and five of our formulas we acquired in 2010 are eligible for NRDL reimbursement. 
In addition, one of our current products and four of our newly acquired formulas are currently included on the Chinese government's
Essential Drug List (or EDL).  Inclusion on either the EDL or NRDL allows for up to 100% insurance coverage by the Chinese
government.   Yantai Tianzheng owns five prescription products approved by the State Food and Drug Administration of China
(which we refer to herein as the SFDA) and currently manufactures four of such products.  Among Yantai Tianzheng’s
products, Fangfengtongsheng Granule has an exclusive status and is on the EDL and NDRL. Zhengxintai Capsule has renewed its protective
status to August 2017and is currently on NDRL.



1







The Chinese government has previously
awarded us exclusive rights to manufacture our Tongbi Capsules product.  We share manufacturing rights with one or more manufacturers
for our Anti-flu Granules product We held the Certificates of Protected Variety of Traditional Chinese Medicine (Grade Two) (which
we refer to herein as the Certificate of Protection) issued by the SFDA for Tongbi Capsules and Shangtongning Tablets, which give
us exclusive or near-exclusive rights to manufacture and distribute these two medicines.  The protection periods for both
Tongbi Capsules and Shangtongning Tablets expired in September 2009.  We submitted the application to extend such protection
period for Tongbi Capsules on March 12, 2009.  The SFDA approved our request and the protection period for Tongbi Capsules
has been extended to September 13, 2016.  We have decided to not submit an extension of protection application for Shangtongning
Tablets, but will continue to manufacture this product. The affection of no protected status is not going to affect our business
significantly. Any producers, who want to produce the drug, need to apply to SFDA and the approval process is very strict and
success rate is low.



Our strategy is to leverage the “protected”
status and national insurance coverage for certain of our pharmaceutical products to aggressively increase market penetration
throughout China, the world’s most populous nation.  By utilizing our distribution platform, in addition to utilizing
mass media and other marketing methods to build awareness of our brand, we have been able to and will continue to seek to significantly
grow our revenues and earnings.  In addition, as evidenced by our acquisition of Yantai Tianzheng, we may seek additional
acquisition candidates or undertake other strategic transactions to broaden our product offerings and sales, marketing and manufacturing
capabilities.



We are focusing a significant portion
of our marketing efforts on our Lung Nourishing Syrup and expect to continue this effort over the next several years. 
Lung Nourishing Syrup( which we formerly referred to as “Lung Nourishing Cream”), an ingestible liquid product, is
one of our most popular products, and its main ingredient, Laiyang Pear, to our knowledge, is not available in other similar pharmaceutical
products.  We applied for a patent for Lung Nourishing Syrup with its production method for the treatment of Lung Qi Deficiency
Cough and Chronic Bronchitis, which application was approved by the State Intellectual Property Office of the PRC on June 23,
2010.  The patent was awarded for a period of 20 years starting from the day of its application on September 12, 2007. Even
the patent is expired, any producers who want to produce the same product, need to get approval from us, as long as we do not
approve, no one can manufacture it. This means we are still the exclusive producer of Lung Nourishing Syrup. For these reasons,
we believe Lung Nourishing Syrup contains a novel formulation for the treatment of asthma and other common respiratory ailments
with an emphasis on the improvement of overall lung function and health.  We believe this represents an exceptional market
opportunity.



Our business strategy also seeks to capitalize
on new government programs established in early 2009 to extend health insurance coverage to previously uncovered Chinese citizens. 
The PRC government’s new health care policies are also designed to encourage the use of TCM and its approach to wellness
and treatment of disease.  As a result, the government continues to expand the number of TCMs eligible for reimbursement
under national medical insurance programs.  This has resulted in medical professionals working in the state-run medical facilities
to increasingly prescribe and recommend TCM products of the type we manufacture and market.  The state-run facilities provide
the majority of medical care in China.  Three of our lead products, Lung Nourishing Syrup and Tongbi Capsules and Tablets,
are eligible for insurance reimbursement coverage, with others expected to follow.  Currently public health officials in
China are developing general consumer awareness of increasing problems and concerns with respiratory and lung health caused by
pervasive national air pollution.  This nationwide epidemic is an unfortunate by-product of the robust development of China’s
expansive manufacturing and industrial activities.  Increased air pollution is a cause and contributory factor to a range
of acute respiratory illnesses including chronic conditions such as asthma.  As a result, we intend to significantly increase
promotions for our Lung Nourishing Syrup.



As of the date of this Annual Report,
we have approximately 805 employees operating from 21offices throughout China.  As we are committed to strong sales efforts,
approximately 336 of our employees are sales representatives.



As is not uncommon for Chinese companies
listed in the U.S., we control our Chinese operating subsidiary, Bohai, pursuant to a series of variable interest entity contractual
agreements (the “VIE Agreements”), under which we assume management of the business activities of Bohai and have the
right to appoint all executives and senior management and the members of the board of directors of Bohai.  Under these arrangements,
however, we do not, directly or indirectly, own any shares in Bohai, which are owned by Mr. Qu, our Chairman, President and Chief
Executive Officer and two unaffiliated parties.  Please see “Contractual Arrangements with Bohai and its Shareholders”
below.



We do, however, directly own our Yantai
Tianzheng operating subsidiary through WFOE II.



2







Background and Key Events



We were incorporated under the laws of
the State of Nevada under the name Link Resources Inc. on January 9, 2008.  Our principal office was in Calgary, Alberta,
Canada.  Prior to January 5, 2010, we were a public “shell” company in the exploration stage since our formation
and had not yet realized any revenues.  We entered into a Mineral Lease Agreement on April 1, 2008 for two mining claims
in Pershing County, Nevada, in an area known as the Goldbanks East Prospect.  We terminated the lease on July 7, 2009.



Share Exchange with Chance High



Pursuant to the Share Exchange Agreement
entered into on January 5, 2010 (the “Share Exchange Agreement”), and related share exchange (the “Share Exchange”)
by and among us, Chance High, and the shareholders of Chance High (the “Chance High Shareholders”), we acquired Chance
High and its indirect, controlled subsidiary Bohai, a Chinese company engaged the production, manufacturing and distribution in
China of herbal medicines, including capsules and other products, based on Traditional Chinese Medicine.  The closing of
the Share Exchange (the “Closing”) took place on January 5, 2010.  As of the Closing, pursuant to the terms of
the Share Exchange Agreement, we acquired all of the outstanding equity securities (the “Chance High Shares”) of Chance
High from the Chance High Shareholders, and the Chance High Shareholders transferred and contributed all of their Chance High
Shares to us.  In exchange, we issued to Chance High Shareholders an aggregate of 13,162,500 newly issued shares of our common
stock.



In addition, pursuant to the terms of
the Share Exchange Agreement, Anthony Zaradic, our former sole officer and director (“Zaradic”), cancelled a total
of 1,500,000 shares of common stock owned by him.  As a further condition of the Share Exchange, effective as of January
5, 2010, Zaradic resigned from all of his positions with our company and Hongwei Qu (“Qu”), the former principal shareholder
and Executive Director of Bohai, was appointed as our President, Chief Executive Officer, Interim Chief Financial Officer, Treasurer
and Secretary and also, effective January 16, 2010, as our sole director.  In June 2010, Mr. Qu relinquished the positions
of Interim Chief Financial Officer, Treasurer and Secretary and we appointed Gene Hsiao as our Chief Financial Officer. 
On July 12, 2010, we appointed three independent directors to our board of directors.



January 5, 2010 Private Placement and
Related Agreements



Securities Purchase Agreement. 
On January 5, 2010, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain
accredited investors (the “Investors”) and Euro Pacific Capital, Inc. (“Euro Pacific”), as representative
of the Investors, relating to a private placement by us of 6,000,000 units consisting of Notes and Warrants, which we refer to
herein as the private placement.  The consummation of the private placement resulted in gross proceeds to us of $12,000,000
and net proceeds of approximately $9,700,000.  Each unit consisted of a $2.00 principal amount, two year convertible Note
and a three year Warrant to purchase one share of our common stock at $2.40 per share, subject to certain conditions.  Euro
Pacific acted as the lead placement agent and Chardan Capital Markets, LLC acted as co-placement agent of the private placement.



The Notes have been amended several times
by agreement with Euro Pacific, as representative of the Investors.



On December 31, 2011, we entered into
an amendment to the Notes with Euro Pacific which: (i) extended the maturity date of the Notes from January 5, 2012 to April 5,
2012 (such extra three month period, the “Extended Period”); and (ii) increased the interest rate on the Notes to
an annual rate of 12% (or 3% for the Extended Period).



In order to demonstrate our efforts to
repay the Notes, we (through our Chinese subsidiary) and Euro Pacific established an RMB denominated escrow account in China with
the Rural Credit Cooperative of Laishan District, Yantai City (the “Escrow Account”) into which we have deposited
the remaining outstanding amount of the Notes ($9.4 million, denominated in RMB). We will have no right to dispose of or use the
funds held in the Escrow Account except for (i) conversion into US Dollars for the purpose of repayment of the Notes or (ii) releases
from such Escrow Account from time to time in amounts equal to the decreases in the outstanding amount of the Notes, either by
payments made by us or conversion of the Notes by Note holders.



On May 15, 2012, we and Euro Pacific entered
into a Second Amendment to the Notes (the “Second Amendment”) to extend the maturity date thereof from April 5, 2012
to October 5, 2012 (such extra six month period, the “Second Extended Period”); and (ii) maintain the interest rate
on the Notes at an annual rate of 12% (or 6% for the Second Extended Period).



On June 27, 2012, we and Euro Pacific entered
into a Third Amendment to the Notes (the “Third Amendment”) to remove the limitations on our ability to incur debt,
to incur liens or to make capital expenditures. The purpose of the Third Amendment is to provide us with enhanced flexibility
to seek potential sources of financing.





The Company is currently working with Euro Pacific as representative
of the Investors on a fourth amendment to the Notes which would further extend the maturity date of the Notes from October 5, 2012
to January 5, 2013. As of the date of this Annual Report, no written agreement has been entered into in this regard. The Company
is unable to predict whether an agreement will be reached. The non-payment of the loan in the absence of an extension of the maturity
date would constitute an event of default under the terms of loan agreement. The Company can not predict what the implications
of the non-payment of the loan would be other than the continued difficulty of repaying the loan from escrowed funds due to currency
conversion restriction.



3







Registration Rights Agreement. 
In connection with the private placement, we entered into Registration Rights Agreements (the “Registration Rights Agreement”)
with the Investors which sets forth the rights of the Investors to have the shares of common stock underlying the Notes and Warrants
issued in the private placement registered with the Securities and Exchange Commission (“SEC”) for public resale. 
We filed such registration statement with the SEC, and registration statement was declared effective by the SEC on August 12,
2010.



Securities Escrow Agreement. 
Also in connection with the private placement, we entered into a Securities Escrow Agreement (the “Securities Escrow Agreement”)
with Euro Pacific, as representative of the Investors, our principal shareholder, Glory Period Limited, a British Virgin Islands
company that we refer to herein as Glory Period and which was the majority shareholder of Chance High prior to the Share Exchange,
and Escrow, LLC, as escrow agent (the “Escrow Agent”).  Pursuant to the Securities Escrow Agreement, Glory Period
has pledged and deposited a stock certificate representing 1 million shares of our common stock (the “Escrow Shares”)
into escrow in order to provide security to the Investors in the event of an occurrence of an event of default under the Notes. 
Upon the earlier to occur of the full repayment of all amounts due to the Investors under the Notes or the conversion of fifty
percent of the principal face value of Notes into shares of common stock, the Investors’ rights in and to the Escrow Shares
shall terminate.  Glory Period is controlled by Qu through certain contractual relationships described elsewhere in this
Annual Report.



Closing Escrow Agreement. Pursuant
to a Closing Escrow Agreement (the “Closing Escrow Agreement”) that we entered into in connection with the private
placement on December 10, 2009, we placed a total of $240,000 of proceeds from the private placement (the “Holdback Amount”)
with the Escrow Agent.  The Holdback Amount represents an amount sufficient to satisfy the payment to the Investors of one
quarterly interest payment due on the aggregate principal amount of all Notes issued in the private placement.  If, subject
to certain conditions and after applicable notice and cure periods, an event of default is declared by Euro Pacific with respect
to our failure to make a quarterly interest payment to Investors, the Escrow Agent shall disburse such portion of the Holdback
Amount to the Investors, and we shall be obligated to deposit additional amounts equal to the Holdback Amount with Escrow Agent. 
At such time as seventy-five percent of the aggregate shares of common stock underlying the Notes have been issued upon conversion
of the Notes, all remaining funds of the Holdback Amount shall promptly be disbursed to us.



Corporate Name Change



On January 29, 2010, we entered into an
Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which we merged with a newly formed, wholly owned
subsidiary called Bohai Pharmaceuticals Group, Inc., a Nevada corporation (“Merger Sub” and such merger transaction,
the “Merger”).  Upon the consummation of the Merger, the separate existence of Merger Sub ceased and our shareholders
became shareholders of the surviving company named Bohai Pharmaceuticals Group, Inc.  As permitted by Chapter 92A.180 of
Nevada Revised Statutes, the sole purpose of the Merger was to effect a change of our corporate name.



Changes of Our Independent Registered
Accounting Firms



Effective January 29, 2010, upon the approval
of our board of directors, we dismissed John Kinross-Kennedy as our independent registered public accountant and appointed Parker
Randall CF (H.K.) CPA Limited (or Parker Randall) as our independent registered public accounting firm.



On June 24, 2011, the audit committee
of our board of directors approved the dismissal of Parker Randall as our independent registered public accounting firm, effective
as of June 28, 2011, and appointed Marcum Bernstein &Pinchuk LLP as our independent registered public accounting firm as of
June 24, 2011.



Intangible Assets Transfer



On December 9, 2010, we entered into an
Transfer Agreement of Intangible Assets (the “Transfer Agreement”) with Shandong Daxin Microbiology Pharmaceutical
Industry Co., Ltd., a company incorporated in the People’s Republic of China (“Daxin”), pursuant to which Daxin
agreed to transfer to us all rights and title in and to 14 Drug Approval Numbers (“DANs”) for 14 traditional Chinese
medicines, which DANs were previously issued to Daxin by the Shandong Branch of the SFDA.  The aggregate purchase price is
RMB 48 million (approximately US$7,200,000).  As of the date of the execution of the Transfer Agreement, the proposed transfer
of the aforementioned 14 DANs has been approved by Shandong SFDA.  Such purchase price has been paid in full.



Acquisition of Yantai Tianzheng



On August 8, 2011, WFOE II entered into
a Share Purchase Agreement (the “SPA”) pursuant to which we acquired, from the three individual holders thereof, one
hundred percent (100%) of the outstanding shares of Yantai Tianzheng.  Under the terms of the SPA, WFOE II will purchase
such shares from Mr. Jiangbo Chi, Ms. Shulian Wang and Mr. Bohai Yu.  The percentage interests owned by Mr. Chi, Ms. Wang
and Mr. Yu in Yantai Tianzheng, are 60%, 30% and 10%, respectively.  The SPA also contained customary representations, warranties
and covenants of the parties.  Mr. Chi (the majority shareholder of Yantai Tianzheng) also entered into an agreement related
to his employment by Yantai Tianzheng, ownership of his future work products and certain confidentiality and non-compete obligations.



4







The purchase price to be paid for
Yantai Tianzheng is $35,000,000 in the aggregate.  Pursuant to the SPA, the purchase price has been or will be made in the
following installments:



1.           The
first cash payment in the aggregate amount of $ 6,000,000 was paid within 10 calendar days after the execution of the SPA.



2.           The
second cash payment in the amount of $12,000,000 was payable within 6 months after the execution of the SPA, subject to certain
conditions (unless otherwise waived), such as the performance of all “transition period” obligations related to renewal
or extension of material operational agreements and employment agreements. As of the date of this Annual Report, we have paid
$3,700,000 of the second installment, with the remainder in the amount of 8,300,000 converted into a two-year term loan due on
February 8, 2014 pursuant to Section 3.5 of the SPA as described below.



3.           The third cash payment of $12,000,000 bewas payable within 1 year after
the execution of the SPA, subject to certain conditions (unless otherwise waived), such as amendment or obtainment of certain certificates
and license necessary for consummation of the transaction. This third installment was not paid and was converted into a two-year
term loan due on August 8, 2014 pursuant to Section 3.5 of the SPA as described below.



4.           The
fourth cash payment of $5,000,000 will be payable within 18 months after the execution of the SPA, subject to certain conditions.



In addition, each installment requires
satisfaction of conditions applicable to its prior payment(s), completion of assignment of certain licenses or certificates, and
absence of a material adverse change affecting Yantai Tianzheng during the respective installment periods. In the event that WFOE
II fails to pay any of the installments when due, such outstanding installment will be automatically converted into a two-year
term loan owed by WFOE II to the Shareholders of Yantai Tianzheng, with interest accruing on any unpaid portion of such loan from
its due date until such installment is paid in full at the rate of six percent (6%) per annum. As long as such interest payments
are made on a timely basis and the outstanding principal of such loan and interest are satisfied in full within 2 years after
the applicable installment election date, WFOE II will not be deemed in breach or default under the SPA and will continue to possess
full control and legal ownership over Yantai Tianzheng. Furthermore, even in the event of non-payment by WFOE II of any principal
or interest under the loans as described above, or in the event of any other breach or default by WFOE II of the SPA, the remedies
of the former Yantai Tianzheng Shareholders against WFOE II are limited solely to monetary damages, and in all instances such
Shareholders will have no right to reclaim ownership of YantaiTianzhengYantai Tianzheng or demand
that WFOE II in any way revert control or legal ownership over the shares of YantaiTianzhengYantaiTianzheng back to such shareholders.



The acquisition of Yantai Tianzheng marked
a major milestone for our Company.  The acquisition expanded our product lines and allows us to leverage our respective sales
and distribution channels. Yantai Tianzheng’s current sales network spans over 14 major provinces as well as over 14 Tier
2 and Tier 3 cities, with products sold in over thousands of hospitals across China. In addition, Yantai Tianzheng brings additional
manufacturing capacity which meets GMP standards and allows us to further expand our production.  We consolidated and integrated
the two companies’ operations, which provided substantial improvement in the operating efficiency of the combined companies.



Intangible Asset Impairment



During the fourth quarter of our 2011 fiscal year, we determined
that we will no longer manufacture or seek to develop a market for eight of our products due to a change of our business strategy
resulting from our acquisition of Yantai Tianzheng.  As a result of this decision, the total cost of these eight products,
in the amount of $635,442, was charged to non-cash impairment loss during the 4th quarter of the fiscal year ended June 30, 2011. 
Even though we incurred an impairment loss for these eight products, we continue to retain a full ownership of these products
and can still manufacture them at any time we deem desirable.



5







Corporate Structure and Related Agreements



Our organizational structure as of the
date of this Annual Report is summarized below:







Chance High owns 100% of the issued and
outstanding capital stock of the WFOE.  On December 7, 2009, the WFOE entered into a series of variable interest entity contractual
agreements (the “VIE Agreements”) with Bohai and its three shareholders, which include Qu (our Chairman, President
and Chief Executive Officer, who owns 90% of Bohai’s shares) and two unaffiliated parties.  Pursuant to the VIE Agreements,
WFOE does not directly own the equity of our operating subsidiary, but rather effectively assumed management of the business activities
of Bohai and has the right to appoint all executives and senior management and the members of the board of directors of Bohai. 
The VIE Agreements are comprised of a series of agreements, including a Consulting Services Agreement, Operating Agreement and
Proxy Agreement, through which WFOE has the right to advise, consult, manage and operate Bohai for an annual fee in the amount
of Bohai’s yearly net profits after tax.  Additionally, Bohai’s Shareholders have pledged their rights, titles
and equity interest in Bohai as security for WFOE to collect consulting and services fees provided to Bohai through an Equity
Pledge Agreement.  In order to further reinforce WFOE’s rights to control and operate Bohai, Bohai’s shareholders
granted WFOE an exclusive right and option to acquire all of their equity interests in Bohai through an Option Agreement.



In addition,
on December 7, 2009, Mr. Qu entered into a call option agreement (the “Call Option Agreement”) with Joshua Tan (“Tan”),
the sole shareholder of Glory Period, a British Virgin Islands company, which was the majority shareholder of Chance High prior
to the share exchange.  The Call Option Agreement became effective upon the closing of the Share Exchange.  Under the
Call Option Agreement, Tan shall transfer up to 100% shares of Glory Period within the next 3 years to Qu for nominal consideration,
which would give Qu indirect ownership of a significant percentage of our common stock.  The Call Option Agreement provides
that Tan shall not dispose any of the shares of Glory Period without Qu’s prior written consent.



Executive Offices



Our headquarters are located at No. 9
Daxin Road, Zhifu District, Yantai, Shandong Province, P.R. China 264000. Our telephone number is +86(535)-685-7928.



Overview of Traditional Chinese Medicine



In China, Traditional Chinese Medicine
is not an alternative form of therapy but is used in the state-run hospitals alongside modern medicine.  For its practitioners
and advocates, TCM is a complete medical system that is used to treat disease in all its forms.  TCM is also believed to
promote long term wellness and vigor. Many modern-day drugs have been developed from herbal sources.  These include drugs
designed to treat asthma and hay fever such as ephedrine; hepatitis remedies from fruits and licorice roots and a number of anticancer
agents from trees and shrubs.



For the Chinese, however, health is more
than just the absence of disease.  Chinese herbal medicine is not only intended to cure but to enhance the capacity for enjoyment,
fulfillment and happiness.  Accordingly, there are herbal drugs that are used to invigorate, nourish blood, calm tension
and regulate menstruation.



The roots of TCM date back thousands of
years and include a number of therapeutic approaches.  These include herbal medications, acupuncture, dietary manipulation,
massage and others.  Very early works of Chinese medical literature date back as much as 2,500 years while other classics
appeared approximately 2,000 years ago during the Han Dynasty.  Medicine in China continued to develop throughout the Middle
Ages when emperors commissioned the creation of various scholarly works that compiled and documented hundreds of medicines derived
from herbs, animal sources and minerals.  In addition, these works described their therapeutic uses.  In the 1950s,
TCM was further modernized and reformed by the PRC government.



6







The emphasis on wellness and the avoidance
of disease is considered by some to be a key distinction between TCM and western medical practice which has been seen as more
heavily oriented toward the treatment of disease and less toward prevention.  While TCM has remained a substantial part of
medical treatment in China and throughout East Asia, recent decades have seen increasing acceptance throughout the United States,
Europe and elsewhere.  This growth is, in part, driven by increasingly educated and empowered consumers of medical care who
seek organic, natural and alternative approaches to western medical treatments and prescription drugs.  Medical doctors are
also accelerating the process of acceptance, as doctors trained in the western tradition in Europe, the United States and elsewhere
are integrating TCM and alternative treatments in their everyday practice.  Additionally, a growing number of physicians
specifically trained in TCM, acupuncture and other modalities are opening offices in communities in the U.S. and around the world.



We believe that the sales of TCM in China
reflect the central and still growing role these therapies play in medical care in that nation.  According to Helmut Kaiser
Consultancy, in 2005, total sales revenue for Chinese herbal medicine manufactured in China was $13.6 billion which accounted
for 25.8% of all medicine manufactured in China.  This segment had total profit of $1.76 billion which accounted for 29%
of the total profit of the Chinese drug industry.  In 2006, there were approximately 1,400 Chinese herbal medicine manufacturers
with an annual growth rate of 15%, much higher than the comparable period GDP growth.  According to China News, as a result
of the increasing wealth of China and an aging population, it is estimated that by 2015, China will be the second largest market
in the world£the herbal medicine production value will exceed more than $887
billion.



According to a published report by PricewaterhouseCoopers,
in 2009 China had more than 7,000 distributors supplying pharmaceuticals to hospitals and pharmacies.  According to such
report, most Chinese seeking medical care go directly to the hospitals where more than 80% of the medicines used throughout China
are prescribed.  Only recently have chain drug stores begun to appear allowing drugs to be obtained in many areas without
a visit to a hospital.





Our Products



Overview



Through our operating subsidiary Bohai,
we obtained Drug Approval Numbers for 29 varieties of traditional Chinese herbal medicines in 2004 and an additional 14 varieties
in December 2010 through a product acquisition and currently produce 15 TCM pharmaceutical products.  Through our Yantai
Tianzheng operating subsidiary, we hold 5 additional varieties of traditional Chinese herbal medicines, of which we currently
produce four.  Of our 19 products in production, 12 are prescription drugs and 7 are OTC products.  All of our products
are derived from herbal and organic sources.



The following is a list of the approved
pharmaceutical products that we are producing with their intended uses:



Lung Nourishing Syrup.  Lung
Nourishing Syrup is designed to moisten the lung and relieve coughs and can be used to treat weak lung and chest tightness, poor
chronic cough, shortness of spontaneous breath and chronic bronchitis.



Tongbi Capsules.  This product
is designed to promote blood circulation and relieve swelling and pain, and can be used to treat cold resistance, liver and kidney
deficiency, arthralgia syndrome and rheumatoid arthritis.



Tongbi Tablets.  Tongbi Tablets
are designed to regulate and fortify the blood promote blood circulation and relieve swelling pain and can be used to treat alpine
resistance, liver and kidney deficiency, including rheumatoid arthritis.



Shangtongning Tablets.  This
product is designed to alleviate pain and can be used to treat bruises.



Zhuangyuanshenhailong Medicinal Wine. 
This liquid product is designed to promote kidney function and can be used to treat the weakness waist and knee fatigue, insomnia
and forgetfulness.



Danqi Tablet.  This product
is designed to improve blood circulation and can be used to treat blood stasis, cardio-thoracic pain, dizziness and headache,
and menstrual pain.



Fukangning Tablet. This product
is designed to improve blood circulation and can be used to treat blood stasis, cardio-thoracic pain, dizziness, headache and
menstrual pain.



BazhenYimu Cream.  This product
is designed for menstruation conditioning and can be used to treat dizziness, palpitation, fatigue, weakness and other menstrual
symptoms and can also be used to ease menstrual flow.



7







HuoxueShujin Ting.  This product
is designed to promote blood circulation and relieve blood congestion, and can be used to treat pain in the waist and leg, numbness
in the feet and hands and arthritis.



Anti-flu Granules.  This product
is designed to detoxify the body, and can be used to treat cold caused by exogenous wind-heat with symptoms such as fever, headache,
stuffy nose, sneezing, pharyngodynia, generalized weakness and soreness.



Compound Manshanhong Syrup. This
product is designed to relieve cough due to throat irritation and to prevent asthma symptoms.



Sanqi Shang Tablets. This
product is designed to promote blood circulation and relieve blood congestion, numbness, pain or bruises in the body due to arthritis,
acute or chronic sprain or neuralgia.



Stomach Nourishing Tablets. This
product is designed to relieve heartburn, sour stomach, acid indigestion and stomach upset caused by chronic superficial gastritis.



YangxueAnshen Tablets.This
product is designed to improve blood circulation and to treat dizziness, palpitation, fatigue, weakness and other menstrual symptoms.



ShujinHuoxue Tablets.This
product is designed to promote blood circulation and relieve blood congestion, and can be used to treat symptoms related to back
pain, muscle paralysis, muscle spasm and acute or chronic sprain.



Fangfengtongsheng Granule. This
product is used to treat fever, headache, constipation, measles and eczema.



Zhengxintai Capsule.  This
product is used to improve kidney function and treat coronary artery disease and angina.



Tongmai Granule.  This product
is used to treat ischemic heart and cerebrovascular diseases, arteriosclerosis and cerebral thrombosis



Bezoar Antipyrotic Tablet. 
This product is used to heat detoxification eliminate heat from the body, swelling and pain.



Of our 19 products currently in production,
12 (Tongbi Tablets, Tongbi Capsules, Shangtongning Tablets, Danqi Tablets, HuoxueShunjin Ting, Compound Manshanhong Syrup, Sanqi
Shang Tablets, ShujinHuoxue Tablets, Tongmai Granule, Fangfengtongsheng Granule and Zhengxintai Capsule) are available only through
prescription.



In addition to the 19 medicines currently
in production, we hold the rights to produce 29 other herb-based pharmaceutical formulations.  We anticipate that we will
commence the manufacturing and distribution for these additional products if and when appropriate business conditions develop.



Product Types



Bohai has five production lines for the
manufacturing of medicines in five forms, including tablets, granules, capsules, syrup, and medicinal wine.  Our current
production capacity is approximately:





| |  ̈ | 13.5 billion tablets and 3.7 billion capsules;
| | - | ----------------------------------------------



| |  ̈ | 30 million bags granules;
| | - | -------------------------



| |  ̈ | 20 million bottles/units of concentrated decoctions;
| | - | ----------------------------------------------------



| |  ̈ | 15 million bottles/units of syrup;
| | - | ----------------------------------



| |  ̈ | 1 million bottles/units of tinctures; and
| | - | -----------------------------------------



| |  ̈ | 1 million bottles/units medical wine.
| | - | -------------------------------------



8







We believe that during the fiscal year
ended June 30, 2012, on average, we operated at approximately 50 % of our production capacity and we believe we are currently
operating at approximately 60 % of capacity.  Yantai Tianzheng has annual production capacity of 4 billion tablets, 8 billion
capsules and 6.4 billion bags of granules respectively and operated on average at 35 % of its production capacity for the period
ended June 30, 2012.



One of our pharmaceutical products has
been granted “protected” status by the PRC government, a marketplace classification used by the government to regulate
both production and distribution of traditional and herbal medicines in addition to the product formula right itself.  These
“protected” medicines are not patented in the traditional commercial sense but are essentially proprietary. 
The protection refers, in part, to standardizations of formulae which require that medicines of the same name have the same type
and proportion of ingredients.  The “protected” designation grants us exclusive manufacturing and distribution
rights within China over certain protected products or with up to six manufacturers in other cases.



We have the exclusive rights to manufacture
Tongbi Capsules and we share manufacturing rights with one or more manufacturers for Shangtongning Tablets and Anti-flu Granules. 
The exclusive rights usually have a term of seven years and can be extended for another seven year period after the initial seven
year period elapses.  The protection periods for both Tongbi Capsules and Shangtongning Tablets expired in September 2009
and we have filed an application for extending the protection period on March 12, 2009 for Tongbi Capsules. SFDA approved our
request to extend the protection period for Tongbi Capsules to September 13, 2016. We have decided not to submit extension application
of Shangtongning Tablets, because the SFDA shall not approve Certificate of Protection for Shangtongning Tablets or any other
products that are currently produced by more than three manufacturers in China according to applicable Chinese SFDA regulations.



During fiscal 2013, we expect to increase
marketing and advertising of Tongbi Capsules and Tablets, which are formulated to treat various forms of arthritis.  Sales
of our Tongbi medicines are expected to grow in fiscal 2013 due to its protective status and strong demands of drug consumption
resulting from health insurance reform in China. In addition to the Tongbi medicines and the Lung Nourishing Syrup, other
substantial contributors to our revenues include its Shangtongning Tablets which are also expected to grow in fiscal 2013 due
to strong demands of drug consumption resulting from health insurance reform in China and our marketing efforts.  Sales of
our OTC product BazhenYimu Cream, used to strengthen the immune system, the enhancement of physical strength and conditioning,
are also projected to grow in fiscal 2013 due to strong demands of drug consumption resulting from health insurance reform in
China.  As our Tongbi Capsule has been included in the EDL for Shangdong Province, we will focus our marketing efforts in
the rural hospitals in other provinces such as Guangdong and Jiangsu during fiscal 2013.



We will continue to promote four products
being sold by Yantai Tianzheng under its current marketing strategy combined with our existing national sales efforts.  In
particular, we expect that sales from Yantai Tianzheng’s top two products (Fangfengtongsheng Granule and Zhengxintai Capsule)
will continue to grow in 2013 due to their exclusive status and/or NDRL status.



We price our medicines well under government-mandated
caps and at a premium to most competitors because we use high quality raw materials and rely on strict quality control and management
to produce high quality finished products.  We therefore believe, subject to applicable clinical analysis, that the purity,
potency and effectiveness of our ingredients are superior to similar products in the Chinese marketplace.  As Chinese pharmaceutical
regulatory authorities continue to tighten drug regulations to improve Chinese drug quality and safety standards, future entry
into the pharmaceutical industry has become an increasing challenge.



Overview of the Chinese Market



The People’s Republic of China is
undergoing the world’s most important and powerful economic transformation.  This transformation includes the confluence
of its ancient culture with modern trends in business, technology and finance.  As a result, Chinese operating companies
are capitalizing on unmatched growth opportunities in this evolving and growing marketplace.  Although average income is
approximately one-tenth that of developed western nations, business growth and market reform-driven policies have given the country’s
1.37 billion citizens more purchasing power than ever.



According to a report published in Newsweek,
total consumer spending in China reached $1.7 trillion in 2007, compared with $12 trillion in the U.S.  In its China Consumer
Survey published in January 2010, Credit Suisse found that household income in China of the bottom 20% of those surveyed rose
by 50% since 2004, while the top 10% had grown 255% to around RMB 34,000 per month.  Credit Suisse expects China’s
share of global consumption to increase from 5.2% at US$1.72 trillion in 2009 to 23.1% at US$15.94 trillion in 2020, overtaking
the U.S. as the largest consumer market in the world. Further, research on Chinese consumers by management consulting
firm McKinsey classifies two million households out of a population of 1.3 billion as “wealthy,” based on fairly modest
annual earnings of more than $30,000.  An enormous middle class is rising, however, numbering some 70 million urban households,
but these still earn $5,000-$10,000 a year.  China’s National Bureau of Statistics, based on a random survey of 65,000
urban households in China, found that the average (annual) disposable income of urban residents in the first half of 2009 was
U.S. $1,300, an increase of 9.8% compared to the same period last year.  When price factors are deducted, this is equivalent
to a real increase of 11.2%.  The average consumption expenditure amount of urban residents in the first half of 2009
was U.S. $876, an increase of 8.9% compared to the same period last year. When price factors are deducted, this is equal to a
real increase of 10.3%.



9







TCM Industry Drivers



We believe that demographic, governmental
and related factors in the China will be favorable to growth and expansion of our business.



Growing Prosperity of the Chinese People. 
The increased spending power of China’s population continues to be reflected in the increased consumption of health products
and medical services between 2007 and 2010.  According to Euromonitor data, spending by Chinese people on these goods and
services will increase from $100 billion in 2007 to $145 billion in 2010.  According to the Southern Medicine Economic Institute
of the SFDA, sales of TCM increased 20% in 2010 as compared to 2009 in selected hospitals in the cities of Beijing, Guangzhou,
Nanjing, Chongqing, Chengdu, Xi'an, Harbin, Shenyang, and Zhengzhou.  Overall sales of TCM in such hospitals increased at
an annual rate of more than 20% during the past three years.



Population and Aging



| |  ̈ | The total population of China was 1.37 billion at the end of 2011, according to official government
    estimates.
| | - | ------------------------------------------------------------------------------------------------------------------



| |  ̈ | Due to improved healthcare, the elderly population of China is growing.
| | - | -----------------------------------------------------------------------



| |  ̈ | The health/medical costs associated with care for elderly in China are approximately five (5x) times
    that of younger people.
| | - | --------------------------------------------------------------------------------------------------------------------------------



| |  ̈ | China had 170 million elderly people in 2007 but will have an expected 230 million elderly by 2015
    according to “Consumer Lifestyles in China: Consumer Trends, China’s Grey Population,” by Euromonitor, 2009.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  ̈ | The proportion of the China’s population aged 65 and over will rise from just 10% of the overall
    population in 1995 to 22% by 2030, according to the World Bank.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  ̈ | From 1995 to 2030 it is estimated that the ratio of working-age people to pensioners will decrease
    from 9.7:1 to 4.2:1.  China’s national estimates vary slightly from World Bank figures, but still show in increase
    in the proportion of the population over 65 years from 7% in 2000 to 9.4% in 2007, according to China Country Profile 2009,
    The Economist Intelligence Unit Ltd.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Government Policies in Health Care
and TCM.  In April of 2009 the PRC government implemented a new national medical and health plan.  Among other features,
this new plan extended national medical insurance coverage to China’s rural areas, where the bulk of the population resides. 
This expanded coverage will eventually encompass virtually all of China’s 1.37 billion citizens, greatly expanding the market
for TCM pharmaceuticals, as well as other health care products and services.   This has led to massive potential for
increased sales growth for Bohai and other providers of TCM pharmaceutical products.



According to
Reuters, by 2011, the PRC government’s health care investment will reach $1400 billion,
compared with $96 billion for 2008.



Government Support of Traditional Chinese
Medicine.  Among its public health initiatives, the Chinese government officially supports use of TCM to enhance wellness
and to treat chronic and acute diseases. The government has also commenced a program to evaluate TCM and herbal-based pharmaceuticals
for coverage and reimbursement under national medical insurance.  In 2002, TCM was declared a “national strategic industry”
in the government’s “Development Outline of Traditional Chinese Medicine Modernization (2002 – 2010).”



Decreased Competition. 
According to the Information Office of the State Council of the PRC, prior to 2009, there were approximately 6,000 Chinese pharmaceutical
manufacturers.  That number is being significantly reduced through both marketplace attrition and direct government involvement,
decreasing competition and increasing potential sales opportunities for the surviving companies.  Other companies are expected
to fail through lack of size and innovative and aggressive management.  According to a 2009 report published by KMPG, of
the approximately 4,500 pharmaceutical companies in China, the majority are small players with limited local market reach, and
rapid consolidation between medium and large players in the sector is anticipated since the Chinese government has been encouraging
industry consolidation with an effort to improve the Good Manufacturing Practice (GMP) standard, enforce GMP certification and
to better control the pricing of drugs.



10







Growth Strategy



Our strategic initiatives for the foreseeable
future are designed to aggressively capitalize on the health and wellness needs of increasingly wealthy and empowered consumer
class in China.  In particular, we are seeking to capitalize on the government policies that extended medical insurance in
2009 to hundreds of millions of Chinese citizens living in rural areas, representing a vast untapped market of potential consumers
who previously lacked access to national medical insurance.  As part of its reforms to expand and improve public health and
medical care, the PRC government is promoting the use of herbal-based TCM and expanding insurance coverage to 100% of an increasing
number of medicines.



Our strategic initiatives include the
following:



Grow Hospital Presence.  We
have targeted over 500 hospitals in 100 locations throughout China for direct marketing of Bohai products.  As part of this
initiative, our sales team will expand its marketing activities to educate hospital personnel about our product lines and train
hospital employees in the preventative and curative qualities of these products.  The initial focus will capitalize on the
best known and most popular of our products, such as Tongbi capsules and Shangtongning tablets, using these as door-openers for
our other medicines.



The average marketing cost to “open”
each hospital to our products is $1,500.  For our base Bohai business, we are currently targeting the following provinces
and the number of hospitals in such provinces indicted below:



|Cities    |  |  | Number of Hospitals | 
|--------- |  |  | ------------------- | 
|Zhejiang  |  |  | 50                  | 
|Jiangsu   |  |  | 30                  | 
|Anhui     |  |  | 30                  | 
|Shandong  |  |  | 50                  | 
|Sichuan   |  |  | 30                  | 
|Hunan     |  |  | 30                  | 
|Fujian    |  |  | 120                 | 
|Shanghai  |  |  | 40                  | 
|Hubei     |  |  | 20                  | 
|Guangdong |  |  | 80                  | 
|Chongqing |  |  | 20                  | 



Build Awareness of the Lung Nourishing
Syrup.  We allocated a significant portion of the proceeds from our January 2010 private placement for brand-building
and continue to dedicate resources to these efforts.  We will continue to primarily target consumers through television and
print advertising to expand awareness of the uses and effectiveness of our Lung Nourishing Syrup.  Our advertising targets
smokers and workers with occupational diseases as well as city dwellers exposed to smog.



There is no budgeted TV ad spending for
Lung Nourishing Syrup in our fiscal year 2013. By the end of our fiscal year 2012, we added more than 300 level 2 hospitals and
more than 20 new drug store chains to our national network of retail locations in China currently selling our Lung Nourishing
Syrup.  As a result, we now sell Lung Nourishing Syrup in more than 1,900 level 2 hospitals and more than 56 drug store chains
across China.



Expand to Rural Areas.  We
expect to execute a comprehensive marketing campaign targeting 160 rural counties as a result of the national government’s
emphasis on expansion of healthcare and health insurance into the country’s rural areas.  We plan on starting our rural
marketing in Guangdong, Jiangsu, shanghai and Hubei.  Our sales team will market its products to pharmacies, hospitals, physicians,
herbal medicine experts, media outlets and other opinion leaders in these rural areas.  The main purpose is to be listed
in the New Rural Cooperative Medical Directory which is farmer-friendly and assists these rural dwellers with reimbursement of
medical expenses.



Generally, the marketing cost of this
professional relationship-building with each rural county is $3,000. Total estimated marketing costs in the New Rural Cooperative
Medical Directory could be in excess of $1,000,000. We plan to continue our efforts in hiring additional sale people under our
current strategy as national health reform continue to focus in the rural areas.  All of these sales and marketing initiatives
will involve both OTC and prescribed products.



Develop Our Product Lines and Product
Awareness.  Brand awareness marketing will include the promotion and introduction to new markets of the current popular
Bohai products such as Tongbi Tablets, Lung Nourishing Syrup, Fangfengtongsheng Granule, and  Zhengxintai Capsule. 
As part of our increase in sales and marketing staff, we plan to have special trainers and presenters who can conduct promotional
events and seminars to increase awareness of our products.



11







Seek Acquisitions of Complimentary
Companies or Assets.  We believe that there may be TCM companies (such as Yantai Tianzheng) or assets in China that would
be complimentary with our current product offerings and which could fit well with our sales and marketing platform.  We may
seek to acquire such assets or other companies as a means to grow our revenue and profitability.



Competitive Advantages



We believe there are several key factors
that will continue to differentiate us from our competition in the PRC:





| |  ̈ | “Protected” Status of Key Bohai Product.  One of our lead products (Tongbi
    Capsules) currently enjoys exclusive protected status by the PRC government.  We have submitted an application for extending
    the protection period for this product.  This status regulates competition, granting us exclusive or near-exclusive rights
    to manufacture and sell the protected products. SFDA approved our request to extend the protection period for Tongbi Capsules
    to September 13, 2016. We submitted to the SFDA our request for renewal of the protected status for Zhengxintai Capsule on
    February 26, 2010, and such protection period has been extended to August 2017. We are in the process of applying for
    protected status for Fangfengtongsheng Granule, and such application was received by SFDA on June 30, 2010.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  ̈ | Patent Granted for Lead Product.  We have received a patent in the PRC for our Lung Nourishing
    Syrup with its production method for the treatment of Lung Qi Deficiency Cough and Chronic Bronchitis. The patent was
    awarded for a period of 20 years starting from the day of its application on September 12, 2007.  For these reasons,
    we believe Lung Nourishing Syrup contains a novel formulation for the treatment of asthma and other common respiratory ailments
    with an emphasis on the improvement of overall lung function and health.  We believe this represents an exceptional
    market opportunity.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  ̈ | Insurance Coverage for Lead Bohai Products.  Five  of our lead products, Lung
    Nourishing Syrup,  Tongbi Capsules and Tablets, Fangfengtongsheng Granule and Zhengxintai Capsule, are listed in
    the Catalogue Eligible for Medicine Reimbursement as of November 30, 2009.  This means that these medicines are eligible
    for reimbursement under the national health insurance.  We will seek to have additional (approximately 2-3) products
    listed in the catalogue.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  ̈ | Low Development Costs.  We enjoy relatively low research and development (including acquisition)
    costs for our TCM products compared with western pharmaceuticals as our products are derived from recognized formulas.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  ̈ | Effective Sales Force.  We maintain a highly trained sales force of approximately 354 people
    as of the date of this Annual Report.
| | - | --------------------------------------------------------------------------------------------------------------------------------------



The principal raw materials used for the
production of our distributed products are honey, laiyang pear paste, Sichuan fritillaria, pangolin, and Chinese angelica. Raw
materials, as well as packaging materials, are sourced from various independent suppliers in the PRC. We have no long term agreements
with our suppliers, and purchase raw materials on a purchase order basis. We try to maintain relationships with at least two vendors
for each major raw material in order to ensure a reliable supply of raw materials at reasonable prices. We believe there is ample
supply in the market for the foreseeable future of the ingredients for our products.



Our principal suppliers include Anhui
Dechang Pharmaceutical Tablet Co., Ltd., Shandong Yantai Medicine Purchasing and Supply Station, Anguo Jinkangdi Chinese Herbal
Medicine Co., Ltd., and Yantai Yingli Trading Co., Ltd.  In the fiscal year ended June 30, 2012, two suppliers each accounted
for 13.2% and 16.2% of our purchases of raw materials, and currently one supplier accounts for over 15 % of our purchases of raw
materials. Approximately 45% of the raw material is purchased from Anhui Dechang Pharmaceutical Tablet Co., Ltd., Shandong Yantai
Medicine Purchasing and Supply Station, Anguo Jinkangdi Chinese Herbal Medicine Co., Ltd and Yantai Yingli Trading Co., Ltd.



Yantai Tianzheng’s major suppliers are Anhui Dechange Pharmaceutical Tablet Co., Ltd., Shandong
Yantai Medical Materials Purchasing and Supply Station and Dalian Ronghua Color Print Packaging Co.,
Ltd. Approximately 50% of the raw material used by Yantai Tianzheng was purchased from Shandong Yantai Medicine Purchasing and
Supply Station and Anhui Dechang Pharmaceutical.



12







Research and Development



We currently have limited resources to
devote to and limited capabilities to conduct the development of new products and as such research and development activities
are not presently material to our business.  We have only one full-time employee who is engaged in research and development,
so we are mainly dependent on a third-party, Yantai Tianzheng Medicine Research and Development Co., Ltd., to perform research
and development for us.  We currently have two products, namely Forsythia Capsule and Fern Injection, under research and
development in association with Yantai Tianzheng Medicine Research and Development Co., Ltd.



We, like other TCM manufacturers, enjoy
relatively low research and development expenses as most TCM medicines are based on standardized formulas.  In 2008, SFDA
promulgated a notice of registration of Chinese traditional medicine providing that TCM composed of classic prescriptions will
be exempted from pharmacological and toxicological tests and studies.  The notice defined classic prescription and classic
TCM formulas as those herbal remedies recorded in ancient Chinese medicine books from Qing Dynasty or earlier which are currently
widely used.  According to such notice, the production and manufacturing of TCM products are subject to non-clinical safety
studies only and exempted from pharmacological and toxicological tests and studies.  Thus, TCM products are entitled to obtain
faster SFDA approval.  As such, we enjoy relatively low research and development expenses because most of our products are
based on classic TCM formulas that are covered by this notice.



The research and development process includes
qualitative research, preparation for production and other miscellaneous costs.  We intend to introduce one new product by
2014 which is currently identified as a Shujin Pain Relief soft capsule.  The total cost to develop this product is not expected
to exceed $1,500,000.  We may also seek to acquire new products through acquisitions of other TCM companies in the future.



Manufacturing



Although TCM is thousands of years old,
we believe that our product manufacturing and procedures are the most modern and up-to-date available.  We employ rigorous
standards for product quality control and safety.  The manufacturing facility owned by us is conducted in the city of Yantai
in Shandong Province in a state-of-the-art 18,000 square-meter facility that meets or exceeds the latest Good Manufacturing and
Quality Management Practice standards (referred to in China as “GMP”).



Yantai Tianzheng owns a manufacturing
facility with a total area of 10,908.83 square meters (approximately 117,000 square feet) that also meets or exceeds the latest
GMP.



GMP standards are the government’s
benchmark for pharmaceutical manufacturers in China and must be met for the manufacturer to be eligible to market domestically
or enter world markets.  On March 31, 2009, we completed a GMP review which included examination of 225 items including development
technology, production, quality assurance, quality control, material handling and engineering.  As a result of that review,
we were been re-certified for a new five-year period.



Through stringent application of GMP standards,
the PRC government has reduced the number of marginal medicine manufacturers by one-third, from 6,000 to 4,000.  The new
GMP standards established in 2011 could potentially eliminate additional 500 medicine manufacturers.  It is expected that
TCM and pharmaceutical companies such as ours that have received full GMP approval by the government will enjoy the competitive
benefits of their strict adherence to quality control, safety, health and manufacturing standards.



Our advanced and mechanized facilities
utilize controlled, clean-room procedures with sophisticated water filtration and materials processing systems.  The manufacturing
staff consists of approximately 405 production employees and approximately 19 quality control inspectors as of June 30, 2012. 
We believe that we operated at approximately 60% of our manufacturing capacity during as of June 30, 2012.



In February 2010, we acquired land use right for a parcel of
land totaling 333,335 square meters in YantaiCity which we may use to expand our manufacturing capability.



Marketing, Sales and Distribution



Bohai’s products are sold either
by prescription through hospitals or Over the Counter (OTC) through hospitals, local pharmacies and retail drug store chains.
Sales and distribution are managed and executed by approximately 336 sales representatives located in 21 offices throughout China
as of June 30, 2012. These employees are trained in all details of each product and are encouraged to develop strong ties
with physicians, hospitals and pharmacies in their local areas.



13







Our distribution and marketing initiatives
for the next several years will be focused on achieving the following goals:



Expand hospital presence. 
We intend to further develop business in over 500 hospitals in provinces we already serve including Shandong, Zhejiang, Jiangsu,
Anhui, Sichuan, Hubei and other provinces.  We believe that we will generate additional revenue from the newly developed
hospitals in those provinces.  During the fiscal year ended June 30, 2012, we added more than 300level 2 hospitals and more
than 20 new drug store chains to its national network of retail locations in China currently selling our Lung Nourishing Syrup.
As a result, we now sells Lung Nourishing Syrup in approximately 1,900 level 2 hospitals and 56 drug store chains across China.
 Currently, we sell our products to more than 16,000 hospitals, medical centers and 66 drug stores in more than 21
provinces and special districts in China.



Expand distribution to the rural market. 
We believe that the Chinese government’s expansion in 2009 of national medical insurance reimbursement coverage to the rural
population provides us with new and largely untapped markets.  Some of our products, namely Lung Nourishing Syrup, Tongbi
Capsules and Tongbi Tablets, have been listed in government’s New National Medical Insurance Catalogue in Shandong and Anhui
Province as of November 30, 2009, and we expect to gain a competitive advantage in these newly accessible rural markets. 
With the addition of more than 6,500 level 2 hospitals、
medical centers and 30 drug store chains to our national distribution network during the fiscal year ended June 30, 2012, we expect
considerable growth in our sales in the rural market.



Expand prescription medicine sales
organization.  A key element of our growth strategy is increased outreach to physicians.  These outreach programs
will focus on the eight current pharmaceutical products of ours that are available by prescription only and will typically take
place at state-run hospitals where virtually all Chinese citizens obtain their medical care.  Our educational training programs
will be designed to inform doctors of the range of our pharmaceutical products including diseases or health/wellness concerns
targeted and proper usage of the medicines.



Expand OTC team to drive market share. 
Our management intends to accelerate and expand sales of our OTC medicines through promotion and advertising targeting consumers. 
The marketing programs will principally utilize television, print advertising and news releases.



Acquisition of Yantai Tianzheng.
Part of our ongoing marketing strategy is to consolidate Yantai Tianzheng’s sales team and distribution network with our
own.  Together, we sell 19 products to more than 16,000 hospitals 、medical
centers and 66 drug stores in China by working with more than 100 distributors and 300 plus sale people.  The consolidation
process for the two companies has been completed by the end of this fiscal year.



Competition



China’s domestic pharmaceutical
industry is highly competitive, with hundreds of companies vying to reach consumers through more than 100,000 pharmacies.  In
some categories in which we compete there are many other companies offering the same competitive products.  The market continues
to attract new entrants because the per capita medicine consumption in China is still low, compared to developed countries, and
that shows promise for substantial growth.



Competitive factors primarily include
price and quality. We believe that we are able to effectively compete in our market segment in China based upon the quality of
our product, given our new GMP certified manufacturing facility and our reputation in the market place.



Many of our current and potential competitors have significantly
longer operating histories and significantly greater managerial, financial, marketing, technical and other competitive resources,
as well as greater name recognition, than we do. These competitors may be able to respond more quickly to new or changing opportunities
and customer requirements and may be able to undertake more extensive promotional activities, offer more attractive terms to customers
or adopt more aggressive pricing policies. We cannot assure you that we will be able to compete effectively with current or future
competitors or that the competitive pressures we face will not harm our business.



Intellectual Property



We market our products under the trademark
“Xian Ge” which is registered with the PRC Trademark Bureau under the State Administration for Industry and Commerce. 
Currently, another company is licensed to utilize our registered trademark “Xian Ge”.  We have also received
a patent in the PRC for our Lung Nourishing Syrup with its production method for the treatment of Lung Qi Deficiency Cough and
Chronic Bronchitis.



14







Government Regulation



We are subject to many general regulations
governing business entities and their behavior in China and in any other jurisdiction in which we have operations. In particular,
we are subject to laws and regulations covering food, dietary supplements and pharmaceutical products.  Such regulations
typically deal with licensing, approvals and permits.  Any change in product licensing may make our products more or less
available on the market.  Such changes may have a positive or negative impact on the sale of our products and may directly
impact the associated costs in compliance and our operational and financial viability.



Our only sales market is presently in
China.  We are subject to the Pharmaceutical Administrative Law, which governs the licensing, manufacturing, marketing and
distribution of pharmaceutical products in China and sets penalties for violations of the law.  We are also subject to the
Food Sanitation Law, which provides for the food sanitation standards to be followed.



Under SFDA guidelines for licensing of
pharmaceutical products, all pharmaceutical manufacturers must obtain and maintain GMP Certificate.  We hold a GMP Certificate
(No. Lu K0587), which was issued by Shandong Branch of SFDA on June 18, 2009 and a GMP Certificate (No. Lu L0763), which was issued
by Shandong Branch of SFDA on November 15, 2010 for Yantai Tianzheng.  Because our manufacturing facility has obtained the
National GMP Certificate, we are authorized to produce products in seven modes which are tablets, capsules, granules, syrup,
concentrated decoctions, tincture and medical wine.  Such certificate expires on June 14, 2014 for us and on November 14,
2014 for Yantai Tianzheng  and we will seek to renew the certificate before its expiration date.



We hold a Permit for the Production of
Medicine (Lu Zb20050330) issued by Shandong Branch of SFDA on January 1, 2006 which allows us to engage in the production of tablets,
capsules, granules, syrup, concentrated decoctions, tincture (for oral use) and medical wine.  Such permit expires on December
31, 2010 and was renewed through December 31, 2015.  Yantai Tianzheng  holds a Permit for the Production of Medicine
(Lu 20100140) issued by Shandong Branch of SFDA on January 1, 2011 which allows Tianzheng  to engage in the production
of tablets, capsules, and granules.  Such permit expires on December 31, 2015.



The Permit for the Production of Medicine
and GMP certificates are each valid for a term of five years and must be renewed before their expiration.



We obtained a Drug Approval Number for
each of our products in 2004. The valid terms of such Drug Approval Numbers have been extended through September 2015.



The governmental approval process in China’s
newly developed health product is as follows: a product sample is sent to a clinical testing agent designated by the Ministry
of Health, which conducts extensive clinical testing and examinations to verify if the product has the specified functions as
stated by the company producing the product.  A report will be issued by the clinical testing agent confirming or negating
such functions. It generally takes approximately six months to one year for the report to be issued.  This report then has
to be submitted to a provincial Health Management Commission for approval. A letter of approval issued by such commission will
then be submitted to the Ministry of Health for the issuance of a certificate that authorizes the sales and marketing of the product
in China. The whole process generally takes one and a half to two years.



Because our subsidiaries WFOE I  and
WFOE II are wholly foreign owned enterprises, we are subject to the law on foreign investment enterprises in China, and the foreign
company provisions of the Company Law of China, which governs the conduct of our operating subsidiary and its officers and directors.
Additionally, we are also subject to varying degrees of regulations and permit system by the Chinese government.



Currently we have not developed a market
in U.S. so we believe we are not subject to any of regulations by the U.S. Food and Drug Administration.



Environment Regulation



As of the date of this Annual Report,
we believe we are in compliance with the Environmental Protection Law of the PRC, as well as applicable local regulations (including
the City of Yantai, where both Bohai and Yantai Tianzheng are located).  In addition to compliance with PRC laws and local
regulations, we consistently undertake active efforts to ensure the environmental sustainability of our operations.  Because
the manufacturing of herb and plant-based products does not generally cause significant damage or pollution to the environment,
the cost of complying with applicable environmental laws is not material.  In the event we fail to comply with applicable
laws, we may be subject to penalties.



15







Properties



Our corporate headquarters is located
at No. 9 Daxin Road, Zhifu District, Yantai, Shandong Province, China. Under the current PRC laws, land is owned by the state,
and parcels of land in rural areas which is known as collective land is owned by the rural collective economic organization. “Land
use rights” are granted to an individual or entity after payment of a land use right fee is made to the applicable state
or rural collective economic organization. Land use rights allow the holder of the right to use the land for a specified long-term
period. We have a land use right, expiring in 2047, for a total of approximately 30,637 square meters of land, on which we maintain
our manufacturing facility. We currently have not obtained a land use right certificate for a piece of land located in Xingfu
Twelve Village of Zhifu District with the area of 11,222 square meters, on which we maintain our corporate headquarters. In the
process of the planning of Yantai City, the usage of the aforesaid land use right has been changed from “industrial use”
to “commercial use” and therefore, the approval process for the land use right certificates on five relevant parcels
of land including the land occupied by us is suspended until the completion of the planning. We cannot assure you that we will
eventually obtain the land use right certificate for this land. If we are asked by the local government to relocate our facility,
we believe costs associate with relocation and other related expenses will be reimbursed by the local government.



On February 22, 2010, we entered into
a land-use right purchase agreement with Shandong Yantai Bureau of Land and Resources, pursuant to which we acquired the land
use right for a parcel of land totaling 333,335 square meters for RMB 97,500,000 (approximately $14,480,284).  As of March
31, 2011, this purchase price was paid in full.



Yantai Tianzheng owns a land use right
for a total area of 32,884 square meters at its current headquarters located at 9 Tengen Road, Laishan District, Yantai, China
264003. Its manufacturing facility has a total area of 10,908.83 square meters (approximately 117,422 square feet) that also meets
or exceeds the latest GMP.



Employees



Substantially all of our employees are
located in China.  As of the date of this Annual Report, we have approximately 805 employees, including approximately 336
sales representatives, operating from 21 offices throughout China.  There are no collective bargaining contracts covering
any of our employees.  We believe our relationship with our employees is satisfactory.



We are required to contribute a
portion of our employees’ total salaries to the Chinese government’s social insurance funds, including medical insurance,
unemployment insurance and job injuries insurance, and a housing assistance fund, in accordance with relevant regulations. 
In the last three years, we contributed approximately $82,586, $113,575, and $$326,117 for the fiscal years ended June 30, 2010,
2011 and 2012, respectively.  We expect the amount of contribution to the government’s social insurance funds to increase
in the future as we expand our workforce and operations.



January 2010 Share Exchange and Private Placement Transaction



We were originally incorporated under
the laws of the State of Nevada under the name Link Resources Inc. on January 9, 2008.  Our principal office was in Calgary,
Alberta, Canada.  Prior to January 5, 2010, we were a public “shell” company in the exploration stage since our
formation and had not yet realized any revenues.  We entered into a Mineral Lease Agreement on April 1, 2008 for two mining
claims in Pershing County, Nevada, in an area known as the Goldbanks East Prospect.  We terminated the lease on July 7, 2009.



Share Exchange with Chance High



Pursuant to the Share Exchange Agreement
entered into on January 5, 2010, we acquired Chance High and its indirect controlled subsidiary, Bohai, a Chinese company engaged
the production, manufacturing and distribution in China of herbal medicines, including capsules and other products, based on Traditional
Chinese Medicine.  On January 5, 2010, pursuant to the terms of the Share Exchange Agreement, we acquired all of the Chance
High Shares of Chance High from the Chance High Shareholders, and the Chance High Shareholders transferred and contributed all
of their Chance High Shares to us.  In exchange, we issued to Chance High Shareholders an aggregate of 13,162,500 newly issued
shares of our common stock.



In addition, pursuant to the terms of
the Share Exchange Agreement, Zaradic, our former sole officer and director, cancelled a total of 1,500,000 shares of common stock
owned by him.  As a further condition of the Share Exchange, effective as of January 5, 2010, Zaradic resigned from all of
his positions with our company and Qu, the former principal shareholder and Executive Director of Bohai, was appointed as our
President, Chief Executive Officer, Interim Chief Financial Officer, Treasurer and Secretary and also, effective January 16, 2010,
as our sole director.  In June 2010, Mr. Qu relinquished the positions of Interim Chief Financial Officer, Treasurer and
Secretary and we appointed Gene Hsiao as our Chief Financial Officer.  On July 12, 2010, we appointed three independent directors
to our board of directors.



Private Placement and Related Agreements



Securities Purchase Agreement. 
On January 5, 2010, we entered into the Securities Purchase with the Investors and Euro Pacific, as representative of the Investors,
relating to a private placement by us of 6,000,000 units consisting of Notes and Warrants.  The consummation of the private
placement resulted in gross proceeds to us of $12,000,000 and net proceeds of approximately $9,700,000.  Each unit consisted
of a $2.00 principal amount, two year convertible Note and a three year Warrant to purchase one share of our common stock at $2.40
per share, subject to certain conditions.  Euro Pacific acted as the lead placement agent and Chardan Capital Markets, LLC
acted as co-placement agent of the private placement.



16







Pursuant to the Securities Purchase Agreement, we have agreed
that we shall:



(a)           Within
six (6) months of the closing of the private placement, appoint individuals constituting a majority of “independent”
directors (as defined under the Nasdaq Marketplace rules) to the our board of directors, with one such director being designated
by Euro Pacific, and with at least two of such directors being fluent in English.



(b)           Within
six (6) months of the closing of the private placement, enter into a 24 month agreement with a new Chief Financial Officer who
is reasonably satisfactory to Euro Pacific and who is proficient in: (i) U.S. generally accepted accounting principals; (ii) transactions
similar to the ones contemplated by Securities Purchase Agreement; and (iii) U.S. public company listings and the related filing
and compliance requirements.  As of the date of this Annual Report, we have fulfilled this agreement.



(c)           Within
three (3) months of the closing of the private placement, enter into a 12 month agreement with an investor and public relations
firm, the Trilogy Capital Group, and that is reasonably satisfactory to Euro Pacific.  We have fulfilled this agreement when
we entered into a one year agreement with Triolgy Capital Partner (which agreement expired at the end of 2010).



Registration Rights Agreement. 
In connection with the private placement, we entered into the Registration Rights Agreement with the Investors which set forth
the rights of the Investors to have the shares of common stock underlying the Notes and Warrants issued in the private placement
registered with the SEC for public resale.  We filed such registration statement with the SEC, and such registration statement
was declared effective by the SEC on August 12, 2010.



Pursuant to the Registration Rights Agreement,
we agreed to file a registration statement on Form S-1 (“Registration Statement”) by March 5, 2010 (which agreement
was fulfilled) and use our commercially reasonable best efforts to have the Registration Statement declared effective by the SEC
within 160 days after the required filing deadline to register 100% of the common stock underlying: (i) the Notes, (ii) the Warrants
and the Private Placement Warrants, and (iii) any capital stock of the Company issued or issuable, with respect to the registered
shares of common stock as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise,
without regard to any limitations on exercises of the Warrants.



The Registration Rights Agreement provides
that if we fail to file, obtain and maintain effectiveness of Registration Statement due to “filing failure” or “maintenance
failure” (each as defined in the Registration Rights Agreement), we shall pay to Investors, distributed pro rata, equal
to one percent (1%) of the aggregate purchase price paid for the Notes and Warrants (the “Registration Delay Payments”),
provided that in no event shall the aggregate amount of Registration Delay Payments exceed, in the aggregate, six percent (6%)
of such aggregate purchase price, or $720,000.



Securities Escrow Agreement. 
Also in connection with the private placement, we entered into the Securities Escrow Agreement with Euro Pacific, as representative
of the Investors, our principal shareholder, Glory Period, and the Escrow Agent.  Pursuant to the Securities Escrow Agreement,
Glory Period has pledged and deposited a stock certificate representing 1 million shares of our common stock (the “Escrow
Shares”) into escrow in order to provide security to the Investors in the event of an occurrence of an event of default
under the Notes.  Upon the earlier to occur of the full repayment of all amounts due to the Investors under the Notes or
the conversion of fifty percent of the principal face value of Notes into shares of common stock, the Investors’ rights
in and to the Escrow Shares shall terminate.  Glory Period is controlled by Qu through certain contractual relationships
described elsewhere in this Annual Report.



Closing Escrow Agreement. Pursuant to the Closing Escrow
Agreement that we entered into in connection with the private placement on December 10, 2009, we placed a total of $240,000 of
proceeds from the private placement (the “Holdback Amount”) with the Escrow Agent.  The Holdback Amount represents
an amount sufficient to satisfy the payment to the Investors of one quarterly interest payment due on the aggregate principal
amount of all Notes issued in the private placement.  If, subject to certain conditions and after applicable notice and cure
periods, an event of default is declared by Euro Pacific with respect to our failure to make a quarterly interest payment to Investors,
the Escrow Agent shall disburse such portion of the Holdback Amount to the Investors, and we shall be obligated to deposit additional
amounts equal to the Holdback Amount with Escrow Agent.  At such time as seventy-five percent of the aggregate shares of
common stock underlying the Notes have been issued upon conversion of the Notes, all remaining funds of the Holdback Amount shall
promptly be disbursed to us.



Certain Rights of Euro Pacific. 
From and after the closing of the private placement, we have agreed with Euro Pacific that if we decide to engage any placement
agent, underwriter or investment bank on a fee basis in connection with any private placement of our securities or our affiliates
and executive officers (a “Subsequent Offering”) for a period of twelve (12) months from the date of the closing of
the private placement, we shall give prompt written notice of such an event to Euro Pacific, and Euro Pacific shall be entitled
to a 5 day right of first refusal, beginning on the day Euro Pacific receives such written notice from us of such Subsequent Offering,
to act as agent or manager for such private placement.  In addition, Euro Pacific shall be entitled 10.0% of the gross proceeds
received by us with respect to any equity or equity-linked financing transactions consummated within twelve (12) months from the
closing of the private placement with any investor introduced to is by Euro Pacific.



17







Contractual Arrangements with Bohai and its Shareholders



On January 9, 2008, our Company was incorporated
under the laws of the State of Nevada under the name Link Resources Inc. On July 2, 2009, we established our wholly owned subsidiary,
Chance High International Limited., in Hong Kong. Other than the Company equity interest in Chance High, the Company does not
own any assets or conduct any operations. On November 23, 2009, Chance High established one wholly owned subsidiary, YantaiShencaojishi
Pharmaceuticals Co., Ltd. (“WFOE” or “Shencaojishi”) in Yantai, Shandong Province of PRC. Other than Shencaojishi,
Chance High does not own any assets or conduct any operations. Shencaojishi was formed to operate YantaiBohai Pharmaceuticals
Group, Inc. (the “Domestic Company” or “YantaiBohai”) by contract.



On December 7, 2009, the WFOE entered
into a series of variable interest entity contractual agreements (the “VIE Agreements”) with Bohai and its three shareholders,
including Mr. HongweiQu, Jianwei Wang and Lu Liang (the “Bohai Shareholders”).  Pursuant to the VIE Agreements,
WFOE effectively assumed management of the business activities of Bohai and has the right to appoint all executives and senior
management and the members of the board of directors of Bohai.  The VIE Agreements are comprised of a series of agreements,
including a Consulting Services Agreement, Operating Agreement and Proxy Agreement, through which WFOE has the right to advise,
consult, manage and operate Bohai for an annual fee in the amount of Bohai’s yearly net profits after tax.  Additionally,
Bohai’s Shareholders have pledged their rights, titles and equity interest in Bohai as security for WFOE to collect consulting
and services fees provided to Bohai through an Equity Pledge Agreement.  In order to further reinforce WFOE’s rights
to control and operate Bohai, Bohai’s Shareholders granted WFOE an exclusive right and option to acquire all of their equity
interests in Bohai through an Option Agreement.  Accordingly, we have consolidated Bohai’s historical financial results
in our financial statements as a variable interest entity pursuant to U.S. GAAP following the date of the agreements and combined
such results prior to the date of the agreements.



We have been advised by PRC legal counsel
AllBright Law Offices, in an opinion dated December 31, 2009, that: (1) our inner-PRC shareholding structure complies with
PRC laws and regulations; (2) the contractual arrangements between the WFOE, Chance High, Bohai and Bohai’s Shareholders
are valid and binding on all parties to these arrangements and do not violate relevant PRC laws or regulations; (3) the each
of the WFOE and Bohai has the requisite corporate power to own, lease and operate its properties, to enter into contracts and
to conduct its business and (4) each of the WFOE and Bohai is qualified to do business in the respective jurisdiction of its establishment.



Equity Interest Pledge Agreement.
The WFOE and Bohai Shareholders have entered into Equity Interest Pledge Agreements, pursuant to which each Bohai Shareholder
has pledged all of his shares of Bohai to the WFOE in order to guarantee cash-flow payments under the applicable Consulting Services
Agreement. The Equity Pledge Agreement further entitles the WFOE to collect dividends from Bohai during the term of the pledge.



Consulting Service Agreement.Bohai
and the WFOE has entered into a Consulting Services Agreement, which provides that the WFOE will be the exclusive provider of
technology services to Bohai and Bohai will pay all of its net income based on the quarterly financial statements to the WFOE
for such services.  Any such payment from the WFOE to the Company would need to comply with applicable Chinese laws affecting
payments from Chinese companies to non-Chinese companies.  See “Risk Factors – Risks Associated With Doing Business
in China.”



Operating Agreement. Pursuant to
the operating agreement among the WFOE, Bohai and each of Bohai Shareholder, the WFOE provides guidance and instructions on Bohai’s
daily operations and financial affairs. The Bohai Shareholders must designate the candidates recommended by the WFOE as their
representatives on their respective boards of directors. The WFOE has the right to appoint senior executives of Bohai. In addition,
the WFOE agrees to guarantee Bohai’s performance under any agreements or arrangements relating to Bohai’s business
arrangements with any third party. Bohai, in return, agrees to pledge its accounts receivable and all of its assets to the WFOE.
Moreover, Bohai agrees that without the prior consent of the WFOE, Bohai will not engage in any transactions that could materially
affect its assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness,
sale or purchase of any assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in
favor of a third party or transfer of any agreements relating to its business operation to any third party.



Item 1A. Risk Factors.



RISK FACTORS



You should carefully consider the risks
described below as well as other information provided to you in this Annual Report, including information in the section of this
document entitled “Cautionary Note Regarding Forward Looking Statements.”  Our business, operations and
financial condition are subject to various significant risks.  Some of these risks are described below and you should take
these risks into account in making a decision to invest in our securities.  If any of the following risks actually occurs,
we may not be able to conduct our business as currently planned and our business, financial condition or results of operations
could be seriously harmed.  In that case, the market price of our common stock could decline and you could lose all or part
of your investment in our securities.



18







Risks Related to Our Business



Our limited operating history may
not serve as an adequate basis to judge our future prospects and results of operations.



Our limited operating history in the traditional
Chinese herbal medicines industry may not provide a meaningful basis for evaluating our business.  Bohai entered into its
current line of business in September 2004. Although Bohai’s revenues have grown rapidly since its inception,
we cannot guarantee that we will maintain revenue growth or profitability or that we will not incur net losses in the future. 
We will continue to encounter risks and difficulties that companies at a similar stage of development frequently experience, including
the potential failure to:



| |  ̈ | obtain sufficient working capital to support our expansion;
| | - | -----------------------------------------------------------



| |  ̈ | maintain or protect our intellectual property;
| | - | ----------------------------------------------



| |  ̈ | maintain our proprietary technology;
| | - | ------------------------------------



| |  ̈ | expand our product offerings and maintain the quality of our products;
| | - | ----------------------------------------------------------------------



| |  ̈ | manage our expanding operations and continue to fill customers’ orders on time;
| | - | -------------------------------------------------------------------------------



| |  ̈ | maintain adequate control of our expenses allowing us to realize anticipated revenue growth;
| | - | --------------------------------------------------------------------------------------------



| |  ̈ | implement our product development, marketing, sales and acquisition strategies and adapt and modify them
    as needed;
| | - | -----------------------------------------------------------------------------------------------------------------------



| |  ̈ | integrate any future acquisitions; and
| | - | --------------------------------------



| |  ̈ | anticipate and adapt to changing conditions in the Chinese herbal medicines industry resulting from
    changes in government regulations, mergers and acquisitions involving our competitors, technological developments and other
    significant competitive and market dynamics.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If we are unable to address any or all
of the foregoing risks, our business may be materially and adversely affected.



We will likely need to raise additional
funds in the future to pay or debts and grow our business, which funds may not be available on acceptable terms or at all.



We believe that our cash on hand, together
with cash generated from our operations, will be sufficient to fund our projected operations for at least the next 12 months. 
It is likely however that in the future we will require substantial funds in order to:



| |  ̈ | pay down the principal and interest on our convertible notes, as amended, which are due October 5,
    2012, the principal amount of which is $9,405,000 as of the date of this Annual Report;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  ̈ | fund our remaining obligations under our Yantai Tianzheng acquisition, which amounts to $25,300,000as
    of the date of this Annual Report;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



19







| |  ̈ | fund ongoing operating expenses;
| | - | --------------------------------



| |  ̈ | fund our plans to continue the development of our  manufacturing, marketing and sales capabilities;
    and
| | - | -----------------------------------------------------------------------------------------------------------



| |  ̈ | consider and fund strategic acquisitions in the fragmented TCM market in China; and
| | - | -----------------------------------------------------------------------------------



| |  ̈ | cover public company costs.
| | - | ---------------------------



Without enough funds, we may not be able
to meet these goals.  We may seek additional funding through public or private financing or through collaborative arrangements
with strategic partners. However, as with many Chinese companies and given difficult market conditions generally, we have found
it difficult to raise outside funding.



You should also be aware that in the future:



| |  ̈ | We cannot be certain that additional capital will be available on favorable terms, if at all;
| | - | ---------------------------------------------------------------------------------------------



| |  ̈ | Any available additional financing may not be adequate to meet our goals; and
| | - | -----------------------------------------------------------------------------



| |  ̈ | Any equity financing would result in dilution to our shareholders.
| | - | ------------------------------------------------------------------



If we cannot raise additional funds when
needed, or on acceptable terms, we may not be able to effectively execute our growth strategy, take advantage of future opportunities,
or respond to competitive pressures or unanticipated requirements.  In addition, we may be required to scale back or discontinue
our production and development program, or obtain funds through strategic alliances that may require us to relinquish certain
rights.



We have significant payments that
we are required to make in connection with our acquisition of Yantai Tianzheng.



On August 8, 2011, through WFOE II, our
wholly owned subsidiary and a company formed under the laws of China, we entered into a Share Purchase Agreement (the “SPA”)
pursuant to which WFOE II acquired, from the three individual holders thereof, one hundred percent (100%) of the outstanding equity
interests (the “Shares”) in Yantai Tianzheng.



Pursuant to the SPA, the purchase price
to be paid by WFOE II for the Shares is $35,000,000 in the aggregate.  Pursuant to the SPA, the purchase price is payable
in cash in four installments within 18 months after the execution of the SPA.  As of the date of this Annual Report, we have
paid the initial installment of $6,000,000.  The remaining three installments will be due within 6 months, 12 months, and
18 months after the execution of the SPA in the amount of $12 million, $12 million, and $5 million, respectively. In the event
that YantanNirui fails to pay any of the installments when due (such date, the “Conversion Date”), such outstanding
installment will be automatically converted into a two-year term loan owed by WFOE II to the Shareholders (a “Conversion
Loan”), with interest accruing on any unpaid portion of such Conversion Loan from its due date until such installment is
paid in full at the rate of six percent (6%) per annum.  As long as such interest payments are made on a timely basis and
the outstanding principal of such Conversion Loan and interest are satisfied in full within 2 years after the Conversion Date,
WFOE II will not be deemed in breach or default under the SPA and will continue to possess full control and legal ownership over
the Shares.  Furthermore, in the event of non-payment by WFOE II of any principal or interest under the loans as described
above, or in the event of any other breach or default by WFOE II of the SPA, the Tianzheng Shareholders remedies against Yantai
Nirui are limited solely to monetary damages, and in all instances the Shareholders will have no right to reclaim ownership of
the Shares or demand that WFOE II in any way revert control or legal ownership over the Shares back to the Shareholders. As of
the date of this Annual Report, we have paid $9,700,000 of the purchase price, and portion of the second installment and the third
installment in the aggregate amount of $20,300,000 was converted into Conversion Loans due on February 8, 2014 and August 8, 2014,
respectively. The last installment of $5 million is currently outstanding and due on February 8, 2013.



We currently believe that we will generate
sufficient cash flow from operations and have access to the capital funding (either through debt or equity issuances) necessary
to meet our payment requirements under the SPA and the Conversion Loan.  However, there is a significant risk that we may
not generate sufficient cash flow from operations or otherwise have access to financing on favorable terms, or at all. Failure
to make the last installment payment and the Conversion Loan payments when due would result in an event of default with respect
to such obligations and could result in substantial monetary damages and would likely materially disrupt our Yantai Tianzheng
business, which could cause a material deterioration in our financial condition or operating results.





We have significant payment obligations under the Notes
due October 5, 2012, and we continue to face difficulties in converting our cash on hand from RMB to US Dollars in order to make
payment under the Notes. Any non-payment of the Notes when due in the absence of an extension of the maturity date would constitute
event of default under the Notes, and our financial condition may be adversely affected.



As of the date of this Report, we
have outstanding Notes in the aggregate amount of approximately $9,405,000, all of which are due October 5, 2012.  We had
previously established an RMB denominated escrow account in China and deposited into such escrow account the remaining outstanding
amount of the Notes.As of the date of this Report, the escrow account remains in place and we continue to work on converting
RMB to Dollars in order to make payments under the Notes.  However, we expect that we will not be able to accomplish this
by October 5, 2012, the conclusion date of the Second Extended Period, and we expect to enter into an amendment to the Note to
further extend its maturity date. We will continue to work with Euro Pacific on this matter and will continue our efforts in order
to meet our obligations to the Note holders. However, there is no assurance that an amendment will be entered into before the due
date, and any non-payment of the Notes when due would constitute an event of default under the Notes. In such event, we might be
subject to, among other things, non-payment claims of the Noteholders, and our financial condition may be adversely affected.





20







We have not yet developed comprehensive
independent corporate governance.



Although we have formed audit, compensation,
or nominating committees of our board of directors, we are inexperienced in formal U.S. corporate governance procedures. 
A lack of functioning independent controls over our corporate affairs may result in potential or actual conflicts of interest
between Mr. Qu and our shareholders.  We presently have no policy to resolve such conflicts.  The absence of customary
standards of corporate governance may leave our shareholders without protections against interested director transactions, conflicts
of interest, if any, and similar matters and any potential investors may be reluctant to provide us with funds necessary to expand
our operations.



We have been heavily dependent on
sales of certain key products.



Five of the
Company’s products, namely Tongbi Capsules, Tongbi Tablets, Lung Nourishing Syrup, Zhengxintai Capsules and Fangfengtongsheng
Tablets represented approximately22.8%, 9.1%, 16.6%, 10.6% and 18.3%,respectively, of total
sales as of June 30, 2012. We expect that a significant portion of our future revenue will continue to be derived from sales of
these four products.  If one or more of these products were to become subject to a problem such as loss of Certificates of
Protected Variety of Traditional Chinese Medicine, unexpected side effects, regulatory proceedings, publicity adversely affecting
user confidence or pressure from competing products, or if a new, more effective treatment should be introduced, the negative
impact on our revenues could be significant.  We held the Certificates of Protected Variety of Traditional Chinese Medicine
(Grade Two) issued by State Food and Drug Administration of China (“SFDA”) for Tongbi Capsules and Shangtongning Tablets
which gave exclusive or near-exclusive rights to manufacture and distribute these two medicines.  These certificates expired
in September 2009, and the SFDA approved our request to extend the protection period for Tongbi Capsules to September 13, 2016.
Fangfengtongsheng granule is in the process of applying for protection status and its application for protected status was received
by SFDA on June 30, 2010. Zhengxintai renewed its protected status in January 2012 and will expire on August 9, 2017. We
cannot assure you that we will be granted or will be able to renew the Certificate of Protected Variety of Traditional Chinese
Medicine in the future and our failure to obtain such protection, or the loss of such protection, will have a material adverse
effect on our revenues.  If we are unable to obtain or maintain such approvals, these products can be manufactured and sold
by other pharmaceutical manufacturers in China once the relevant protection periods lapse, which would increase our competition
and potentially have an adverse effect on our sales.



We may not be able to adequately
protect our intellectual property, which could cause us to be less competitive and negatively impact our business.



We regard our trademarks, trade secrets,
patents and similar intellectual property as critical to our success.  We hold the trademark “Xian Ge” registered
with the PRC Trademark Bureau under the State Administration for Industry and Commerce with a valid term effective through February
23, 2013.  We have received a patent in the PRC for Lung Nourishing Syrup with its production method for the treatment of
Lung-qi Deficiency Cough and Chronic Bronchitis.  If we are unable to obtain or maintain registered intellectual property
protections for our proprietary products or methods, these products or methods could be infringed upon, which could materially
adversely affect our business.



We rely on trademark, patent and trade
secret law, as well as confidentiality agreement with certain of our employees to protect our proprietary rights.  For senior
managers, we include a standard confidentiality clause into the employment agreement to prevent them from disclosing the formula
or processing procedure to outside parties. No assurance can be given that our intellectual property will not be challenged, invalidated,
infringed or circumvented, or that our intellectual property rights will provide competitive advantages to us.  Any material
impairment of our intellectual property rights could have a material adverse effect on our business.



The availability of counterfeit
versions of our products could adversely affect our sales volume, revenue and profitability and brand value.



The availability of sales of counterfeits
of our products in China could adversely impact our sales and potentially damage the value and reputation of our brands. 
For example, we discovered evidence of a counterfeit Tongbi Capsule sold in China which we believe infringes on our intellectual
property rights in 2010. We have addressed this situation with applicable PRC authorities and do not believe it will adversely
affect our company, but similar situations may arise in the future which could adversely impact our sales, profitability and brand
value.  We are in the process of applying a patent for Tongbi Capsule, but no assurances can be given that such patent will
be granted.  Additionally, consumers who mistake counterfeit Tongbi Capsules or counterfeits of our other products for our
products may attribute quality and efficacy deficiencies in the counterfeit product to our brands and discontinue purchasing our
brands, which would have an adverse effect on our sales and profitability.



21







We face competition in the pharmaceutical
market in the PRC and such competition could cause our sales revenue and profits to decline.



According to SFDA in China, there were
approximately 5,071 pharmaceutical manufacturing companies in the PRC as of the end of June 2004, of which approximately 3,237
manufacturers obtained certificates of Good Manufacturing Practices Certification (“GMP”).  After GMP certification
became a mandatory requirement on July 1, 2004, approximately 1,834 pharmaceutical manufacturers were forced to cease production. 
Only the 3,237 pharmaceutical manufacturers with GMP certifications may continue their manufacturing operations.  As of the
end of 2010, there were 19,000 enterprises manufacturing medicines and formulation in China.  The certificates, permits,
and licenses required for pharmaceutical operation in the PRC create a potentially significant barrier for new competitors seeking
entrance into the market.  Despite these obstacles, we face competitors that will attempt to create, or are already marketing,
products in the PRC that are similar to ours.  Many of our current and potential competitors have significantly longer operating
histories and significantly greater managerial, financial, marketing, technical and other competitive resources, as well as greater
name recognition, than we do.  These competitors may be able to respond more quickly to new or changing opportunities and
customer requirements and may be able to undertake more extensive promotional activities, offer more attractive terms to customers
or adopt more aggressive pricing policies.  We cannot assure you that we will be able to compete effectively with current
or future competitors or that the competitive pressures we face will not harm our business.



Our business depends and will depend
substantially on the continuing efforts of our present and future executive officers, and our business may be severely disrupted
if we lose, are unable to obtain or unable to replace their services.



Our future prospects depend substantially
on the continued services of our President, Chief Executive Officer, and Chairman of the Board, Mr. Qu.  We have no employment
agreement with Mr. Qu and do not maintain key man life insurance on Mr. Qu’s life.  We also have other corporate officers
and key employees, and if Mr. Qu or one or more of our future executive officers or key employees are unable or unwilling to continue
in their positions, we may not be able to replace them readily, if at all.  Therefore, our business may be severely disrupted,
and we may incur additional expenses to recruit and retain new officers.  In addition, if any of our executives joins a competitor
or forms a competing company, we may lose some of our customers.



Our business and growth will suffer
if we are unable to hire and retain key personnel that are in high demand.



Our future performance depends on our
ability to attract and retain highly skilled chemists, pharmaceutical engineers, technical, marketing and sales personnel, especially
qualified personnel for our operations in China.  Qualified individuals are in high demand in China, and there are insufficient
experienced personnel to fill the demand.  Therefore, we may not be able to attract or retain the personnel we need to succeed. 
Our business development would be hindered if we lost the services of some key personnel.



Our business is highly dependent
on continually developing or acquiring new and advanced products, technologies, and processes and failure to do so may cause us
to lose our competitiveness in the pharmaceutical industry and may cause our profits to decline.



To remain competitive in the pharmaceutical
industry, it is important to continually develop new and advanced products, technologies and processes.  There is no assurance
that our competitors’ new products, technologies and processes will not render our company’s existing products obsolete
or non-competitive.  Our company’s competitiveness in the pharmaceutical market therefore relies upon our ability to
enhance our current products, introduce new products, and develop and implement new technologies and processes.  Our company’s
failure to technologically evolve and/or develop new or enhanced products may cause us to lose our competitiveness in the pharmaceutical
industry and may cause our profits to decline.  It is likely that our efforts to grow our products lines will be focused
on acquisitions of such products from third parties.  There are many risks attendant to the acquisition of assets or companies,
including availability, pricing, competition and, if acquisitions are consummate, integration.  If we are unable to so acquire
and integrate new products, our revenue and profitability may suffer.



Our research and development may
be costly and/or untimely, and there are no assurances that our research and development will either be successful or completed
within the anticipated timeframe, if ever at all.



We do not presently
rely on research and development activities as our business is focused on expanding sales of our existing products.  However,
in the future, the research and development of new products may play an important role for our company.  Development of new
products requires significant research, development and clinical testing efforts, and we currently have limited resources to devote
to and limited capabilities to conduct the development of new products.  We have only one full-time employee who is engaged
in research and development, so we mainly dependent on a third-party, Yantai Tianzheng Medicine Research and Development Co.,
Ltd., to perform the limited amount of research and development that we undertake.  If research and development activities
become more important for us, and if we or third parties that we retain are unable to perform research and development successfully,
our business and results of operations could be negatively impacted. There was no research and development expenses occurred
for the year ended of June 30, 2012.



22







The commercial performance of our
products depends upon the degree of market acceptance among the medical community and failure to attain market acceptance among
the medical community may have an adverse impact on our operations and profitability.



The commercial performance of our products
depends upon the degree of market acceptance among the medical community, such as hospitals and physicians.  Even if our
products are approved by SFDA, and even if our products are eligible for reimbursement under Chinese national medical insurance
programs, there is no assurance that physicians will prescribe or recommend our products to patients.  Furthermore, a product’s
prevalence and use at hospitals may be contingent upon our relationship with the medical community.  The acceptance of our
products among the medical community may depend upon several factors, including but not limited to, the product’s acceptance
by physicians and patients as a safe and effective treatment, cost effectiveness, potential advantages over alternative treatments,
and the prevalence and severity of side effects.  Failure to attain market acceptance among the medical community may have
an adverse impact on our operations and profitability.



We may not be able to obtain the
regulatory approvals or clearances that are necessary to commercialize our products.



The PRC and other countries impose significant
statutory and regulatory obligations upon the manufacture and sale of pharmaceutical products.  Each regulatory authority
typically has a lengthy approval process in which it examines pre-clinical and clinical data and the facilities in which the product
is manufactured.  Regulatory submissions must meet complex criteria to demonstrate the safety and efficacy of the ultimate
products. Addressing these criteria requires considerable data collection, verification and analysis. We may spend time and money
preparing regulatory submissions or applications without assurances as to whether they will be approved on a timely basis or at
all.



Our product candidates, some of which
are currently in the early stages of development, will require significant additional development and pre-clinical and clinical
testing prior to their commercialization. These steps and the process of obtaining required approvals and clearances can be costly
and time-consuming. If our potential products are not successfully developed, cannot be proven to be safe and effective through
clinical trials, or do not receive applicable regulatory approvals and clearances, or if there are delays in the process:



| |  ̈ | the commercialization of our products could be adversely affected;
| | - | ------------------------------------------------------------------



| |  ̈ | any competitive advantages of the products could be diminished; and
| | - | -------------------------------------------------------------------



| |  ̈ | revenue or collaborative milestones from the products could be reduced or delayed.
| | - | ----------------------------------------------------------------------------------



Governmental and regulatory authorities
may approve a product candidate for fewer indications or narrower circumstances than requested or may condition approval on the
performance of post-marketing studies for a product candidate. Even if a product receives regulatory approval and clearance, it
may later exhibit adverse side effects that limit or prevent its widespread use or that would force us to withdraw the product
from the market.



Any marketed product and its manufacturer
will continue to be subject to strict regulation after approval. Results of post-marketing programs may limit or expand the further
marketing of products. Unforeseen problems with an approved product or any violation of regulations could result in restrictions
on the product, including its withdrawal from the market and possible civil actions.



In manufacturing our products we will
be required to comply with applicable good manufacturing practices regulations, which include requirements relating to quality
control and quality assurance, as well as the maintenance of records and documentation. If we cannot comply with regulatory requirements,
including applicable good manufacturing practice requirements, we may not be allowed to develop or market the product candidates.
If we or our manufacturers fail to comply with applicable regulatory requirements at any stage during the regulatory process,
we may be subject to sanctions, including fines, product recalls or seizures, injunctions, refusal of regulatory agencies to review
pending market approval applications or supplements to approve applications, total or partial suspension of production, civil
penalties, withdrawals of previously approved marketing applications and criminal prosecution.



Our current and future products
may have inadvertent and/or harmful side effects which would expose us to the risks of litigation and a loss of revenue.



All medicines have certain side effects. 
Although all of our medicines sold on market have passed proper testing and are approved by SFDA, the products may still inadvertently
adverse effects on the health of the consumers. If such side effect is identified after marketing and sale of the products, the
products may be required to be withdrawn from the market, or have a change in labeling. If a product liability claim is brought
against us, it may, regardless of merit or eventual outcome, result in damage to our reputation, breach of contracts with consumers,
decreased demand for our products, costly litigation and loss of revenue.



23







Natural disasters, weather conditions
and other environmental factors affect our raw material supply, and a reduction in the quality or quantity of our herb supplies
may have material adverse consequences on our financial results.



Our business may be adversely affected
by weather and environmental factors beyond our control, such as natural disasters and adverse weather conditions.  The production
of our products depends on the availability of raw materials, a significant portion of which are herbs.  These herbs tend
to be very sensitive crops, which can be readily damaged by harsh weather, by disease, and by pests.  If our suppliers’
crops are destroyed by drought, flood, storm, blight, or the other woes of farming, we will not be able to meet the demands of
our customers, which will have a material adverse effect on our business and financial condition and results.



Our certificates, permits, and license
are subject to governmental control and renewal, and the failure to obtain renewal would cause all or part of our operation to
be suspended and have a material adverse effect on our financial condition.



We are subject to various PRC laws and
regulations pertaining to the pharmaceutical industry.  We have obtained certain certificates, permits, and licenses required
for the operation of a pharmaceutical enterprise and the manufacturing and distribution of pharmaceutical products in the PRC. 
Some of the permits and license have expired or are about to expire.  We hold a Permit for the Production of Medicine (Lu
Zb20050330) issued by Shandong Branch of SFDA on January 1, 2006 which allows us to engage in the production of tablets, capsules,
granules, syrup, concentrated decoctions, tincture (for oral use) and medical wine.  Such permit, as renewed, expires on
December 31, 2015.  We also hold a GMP Certificate (No. Lu K0587) issued by Shandong Branch of SFDA on June 18, 2009, the
scope of inspection of which is tablets, capsules, granules, syrup, concentrated decoctions, tincture and medical wine. 
Such certificate expires on June, 17, 2014.  The Permit for the Production of Medicine and GMP certificates are each valid
for a term of five years and must be renewed before their expiration.  We hold a Drug Approval Number (“DAN”)
for each of our products.  Our license to produce medical wine, as renewed, has a term valid through December 31, 2015.



During the application or renewal process
for our licenses and permits, we will be evaluated and re-evaluated by the appropriate governmental authorities and must comply
with the prevailing standards and regulations, which may change from time to time.  In the event that we are not able to
obtain or renew the certificates, permits and licenses, all or part of our operations may be suspended by the government, which
would have a material adverse effect on our business and financial condition.  Furthermore, if escalating compliance costs
associated with governmental standards and regulations restrict or prohibit any part of our operations, it may adversely affect
our results of operations and profitability.



We held the Certificates of Protected
Variety of Traditional Chinese Medicine (Grade Two) (the “Certificate of Protection”) issued by SFDA for two of our
products, Tongbi Capsules and Shangtongning Tablets. The protection periods for both Tongbi Capsules and Shangtongning Tablets
expired in September 2009.  We submitted application to extend the protection period for Tongbi Capsules to extend such protection
period on March 12, 2009 and such protection period was extended till September 13, 2016.  We have decided not to submit
extension application of Shangtongning Tablets, because the SFDA will not approve a Certificate of Protection for Shangtongning
Tablets or any other products that are currently produced by more than three manufacturers in China according to applicable Chinese
SFDA regulations.  Fangfengtongsheng granule is in the process of applying for protection status and its application for
protected status was received by SFDA on June 30, 2010. Zhengxintai capsule renewed its protected status in January 2012 and will
expire on August 9, 2017. The loss of the Certificate of Protection for our product Shangtongning Tablets, may grant other manufactures
the right to produce similar products, which would result in the loss of competitive advantage and could adversely impact our
sales results.



Our failure to fully comply with
PRC labor laws, including laws relating to social insurance, may expose us to potential liability and increased costs.



Companies operating in China must comply
with a variety of labor laws, including certain pension, health insurance, unemployment insurance and other welfare-oriented payment
obligations.  Our failure to comply with these laws could have a material adverse effect on our business.  For example,
we are currently paying social insurance for our 289 full-time employees.  We also currently have approximately 336 sales
representatives that we believe we are not required to pay social insurance for as these sales representatives are not legally
employees of ours, but are rather independent contractors. We have not paid social insurance for 516 of our full-time employees
whose personal identification files cannot be transferred to us since they are not registered residents in Yantai, Shandong Province,
and as an alternative we have paid these employees compensation included in their monthly salary with an amount equals to the
amount of monthly social insurance that we are required to pay and the employees could pay the social insurance by themselves. 
We believe these employees have been covered by social insurance and we are not required to make any contributions to the government
in addition to the amount we have paid to these employees.  However, our interpretation of these requirements may be wrong,
and the PRC regulatory authorities may not take the same view as we do on this subject.  If the PRC regulatory authorities
take the view that we are required to pay social insurance for our independent contractors or other employees, our failure to
make previous payments may be in violation of applicable PRC labor laws and we cannot assure you that PRC governmental authorities
will not impose penalties on us for failure to comply.  In addition, in the event that any current or former employee files
a complaint with the PRC government, we may be subject to making up the social insurance payment obligations as well as paying
administrative fines.  The total cost of these payments and any related fines or penalties could be very significant and
could have a material adverse effect on our working capital.



24







In addition, the new PRC Labor Contract
Law took effect January 1, 2008 and governs standard terms and conditions for employment, including termination and lay-off rights,
contract requirements, compensation levels and consultation with labor unions, among other topics.  In addition, the law
limits non-competition agreements with senior management and other employees who have access to confidential information to two
years and imposes restrictions or geographical limits.  This new labor contract law will increase our labor costs, which
could adversely impact our results of operations.



We are subject to PRC government
price control of drugs which may limit our profitability and even cause us to stop manufacturing certain products.



The State Development and Reform Commission
of the PRC (“SDRC”) and the price administration bureaus of the relevant provinces of the PRC in which the pharmaceutical
products are manufactured are responsible for the retail price control over our pharmaceutical products.  The SDRC sets the
price ceilings for certain pharmaceutical products in the PRC. All of our products except those under the protection periods are
subject to such price controls as of the date of this Annual Report and we prices our medicines well under government-mandated
caps. There is no assurance that whether our other products will remain unaffected by the price control.  Where our products
are subject to a price ceiling, we will need to adjust the product price to meet the requirement and to accommodate for the pricing
of competitors in the competition for market shares.  The price ceilings set by the SDRC may limit our profitability, and
in some instances, such as where the price ceiling is below production costs, may cause us to stop manufacturing certain products
which may adversely affect our results of operations.



Because we may not be able to obtain
business insurance in the PRC, we may not be protected from risks that are customarily covered by insurance in the United States.



Business insurance is not readily available
in the PRC.  To the extent that we suffer a loss of a type which would normally be covered by insurance in the United States,
such as product liability and general liability insurance, we would incur significant expenses in both defending any action and
in paying any claims that result from a settlement or judgment.  We have not obtained fire, casualty and theft insurance,
and there is no insurance coverage for our raw materials, goods and merchandise, furniture and buildings in China.  Any losses
incurred by us will have to be borne by us without any assistance, and we may not have sufficient capital to cover material damage
to, or the loss of, our production facility due to fire, severe weather, flood or other cause, and such damage or loss would have
a material adverse effect on our financial condition, business and prospects.



We may be subject to product liability
claims, for which we have no insurance.



We may produce products which inadvertently
have an adverse pharmaceutical effect on the health of individuals.  Existing laws and regulations in China do not require
us to maintain third party liability insurance to cover product liability claims.  However, if a product liability claim
is brought against us, it may, regardless of merit or eventual outcome, result in damage to our reputation, breach of contracts
with our customers, decreased demand for our products, costly litigations, product recalls, loss of revenue, and our inability
to commercialize some products.



Our indemnification obligations
could adversely affect our business, financial condition and results of operations.



Our governing documents require us to
indemnify our current and former directors, officers, employees and agents against most actions of a civil, criminal, administrative
or investigative nature.  Generally, we are required to advance indemnification expenses prior to any final adjudication
of an individual’s culpability.  The expense of indemnifying our current and former directors, officers and employees
and agents in their defense or related expenses as a result of any actions related to the internal investigation and financial
restatement may be significant and in excess of any insurance coverage we may have.  As such, there is a risk that our indemnification
obligations could divert needed financial resources and may adversely affect our business, financial condition and results of
operations.



Potential environmental liability
could have a material adverse effect on our operations and financial condition.



As a manufacturer, we are subject to various
Chinese environmental laws and regulations on air emission, waste water discharge, solid wastes and noise.  We are in the
process of applying for Pollution Discharge Permit, other than that we believe that our operations are in substantial compliance
with current environmental laws and regulations. We cannot assure you that we may not be able to comply with these regulations
at all times as the Chinese environmental legal regime is evolving and becoming more stringent.  Therefore, if the Chinese
government imposes more stringent regulations in future, we may have to incur additional and potentially substantial costs and
expenses in order to comply with new regulations, which may negatively affect our results of operations.  Furthermore, no
assurance can be given that all potential environmental liabilities have been identified or properly quantified or that any prior
owner, operator, or tenant has not created an environmental condition unknown to us.  If we fail to comply with any of the
present or future environmental regulations in any material aspects, we may suffer from negative publicity and be subject to claims
for damages that may require us to pay substantial fines or have our operations suspended or even be forced to cease operations.



25







Risks Relating to the Our Corporate
Structure



Our corporate structure, in particular
the VIE Agreements, are subject to significant risks, as set forth in the following risk factors.



The PRC government may determine
that the VIE Agreements which we utilize to control our operating subsidiary Bohai are not in compliance with applicable PRC laws,
rules and regulations and that they are therefore unenforceable.



In the PRC it is widely understood that
foreign invested enterprises are forbidden or restricted to engage in certain businesses or industries which are sensitive to
the economy.  As we intend to centralize our management and operation in the PRC without being restricted to conduct certain
business activities which are important for our current or future business but are restricted or might be restricted in the future,
we believe our VIE Agreements will be essential for our business operation.  In order for WFOE to manage and operate our
business through Bohai in the PRC, the VIE Agreements were entered into under which almost all the business activities of Bohai
are managed and operated by WFOE and almost all economic benefits and risks arising from the business of Bohai are transferred
to WFOE.



There are risks involved with the operation
of Bohai under the VIE Agreements.  We have been advised by PRC legal counsel that if the PRC government determines the VIE
Agreement used to control the operating company to be unenforceable as they circumvent the PRC restrictions relating to foreign
investment restrictions, the relevant regulatory authorities would have broad discretion in dealing with such breach, including:



| |  ̈ | imposing economic penalties;
| | - | ----------------------------



| |  ̈ | discontinuing or restricting the operations of WFOE or Bohai;
| | - | -------------------------------------------------------------



| |  ̈ | imposing conditions or requirements in respect of the VIE Agreements with which WFOE may not be able
    to comply;
| | - | -------------------------------------------------------------------------------------------------------------------



| |  ̈ | requiring us to restructure the relevant ownership structure or operations;
| | - | ---------------------------------------------------------------------------



| |  ̈ | taking other regulatory or enforcement actions that could adversely affect our business; and
| | - | --------------------------------------------------------------------------------------------



| |  ̈ | revoking the business license and/or the licenses or certificates of WFOE, and/or voiding the VIE Agreements.
| | - | -------------------------------------------------------------------------------------------------------------



Any of these actions could have a material
adverse impact on our business, financial condition and results of operations.



We depend upon the VIE Agreements
in conducting our production, manufacturing and distribution of traditional Chinese herbal medicines in the PRC, which may not
be as effective as direct ownership.



We conduct our production, manufacturing
and distribution of traditional Chinese herbal medicines in the PRC and generate the revenues from our Bohai business through
the VIE Agreements.  The VIE Agreements may not be as effective in providing us with control over Bohai as direct ownership. 
The VIE Agreements are governed by PRC laws and provide for the resolution of disputes through arbitration proceedings pursuant
to PRC laws.  Accordingly, the VIE Agreements will be interpreted in accordance with PRC laws.  If Bohai or its Shareholders
fail to perform the obligations under the VIE Agreements, we may have to rely on legal remedies under PRC laws, including seeking
specific performance or injunctive relief, and claiming damages, and there is a risk that we may be unable to obtain these remedies. 
The legal environment in China is not as developed as in other jurisdictions.  As a result, uncertainties in the PRC legal
system could limit our ability to enforce the VIE Agreements.



The pricing arrangement under
the VIE Agreements may be challenged by the PRC tax authorities.



We could face adverse tax consequences
if the PRC tax authorities determine that the VIE Agreements were not entered into based on arm’s length negotiations. 
If the PRC tax authorities determine that the VIE Agreements were not entered into on an arm’s length basis, they may adjust
the income and expenses of our company for PRC tax purposes which could result in higher tax liability.



26







We rely on the approval certificates
and business license held by Bohai and any deterioration of the relationship between WFOE and Bohai could materially and adversely
affect the overall business operation of our company.



Pursuant to the VIE Agreements, our production,
manufacturing and distribution of traditional Chinese herbal medicines in China is undertaken on the basis of the approvals, certificates
and business license as well as other requisite licenses held by Bohai.  There is no assurance that Bohai will be able to
renew its licenses or certificates when their terms expire with substantially similar terms as the ones they currently hold.



Further, our relationship with Bohai is
governed by the VIE Agreements, which are intended to provide us, through our indirect ownership of WFOE, with effective control
over the business operations of Bohai.  However, the VIE Agreements may not be effective in providing control over the applications
for and maintenance of the licenses required for our business operations.  Bohai could violate the VIE Agreements, go bankrupt,
suffer from difficulties in its business or otherwise become unable to perform its obligations under the VIE Agreements and, as
a result, our operations, reputation, business and stock price could be severely harmed.



If WFOE exercises the purchase options
over Bohai’s equity pursuant to the VIE Agreements, the payment of purchase prices could materially and adversely affect
the financial position of our company.



Under the VIE Agreements, WFOE holds an
option to purchase all or a portion of the equity of Bohai at a price, pro rata in case of not all, based on the capital paid
in by the Bohai Shareholders (namely, $2.94 million or RMB 20 million ).  In the case that applicable PRC laws and regulations
require an appraisal of the equity interest or provide other restriction on the purchase price, the purchase price shall be the
lowest price permitted under the applicable PRC laws and regulations. As Bohai is already a contractually controlled affiliate
to our company, WFOE’s purchase of Bohai’s equity would not bring immediate benefits to our company and the exercise
of the option and payment of the purchase prices could adversely affect the financial position of our company.



Risks Associated With Doing Business
in China



There are substantial risks associated
with doing business in China, some of which are addressed in the following risk factors.



The Chinese government exerts substantial
influence over the manner in which we must conduct our business activities.



We are dependent on our relationship with
the local government in the province in which we operate our business.  The Chinese government has exercised and continues
to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. 
Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to the “protected”
status of our products, the coverage of national health insurance for our products, taxation, environmental regulations, land
use rights, property and other matters.  The central or local governments of in the PRC jurisdictions may impose new, stricter
regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure
our compliance with such regulations or interpretations.  Accordingly, government actions in the future, including any decision
not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations
in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions
thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.



Future inflation in China may inhibit
our ability to conduct business in China. In recent years, the Chinese economy has experienced periods of rapid expansion and
high rates of inflation.  Rapid economic growth can lead to growth in the money supply and rising inflation.  If prices
for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse
effect on profitability.  These factors have led to the adoption by Chinese government, from time to time, of various corrective
measures designed to restrict the availability of credit or regulate growth and contain inflation.  High inflation may in
the future cause Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic
activity in China, and thereby harm the market for our products.



Our operations and assets in China
are subject to significant political and economic uncertainties and we may lose all of our assets and operations if the Chinese
government alters its policies to further restrict foreign participation in business operating in the PRC.



Changes in PRC laws and regulations, or
their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of
supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse
effect on our business, results of operations and financial condition.  Under its current leadership, the Chinese government
has been pursuing economic reform policies that encourage private economic activities and greater economic decentralization. 
There is no assurance, however, that the Chinese government will continue to pursue these policies, or that it will not significantly
alter these policies from time to time without notice.  We may lose all of our assets and operations if the Chinese government
alters its policies to further restrict foreign participation in business operating in the PRC.



27







We derive all of our sales in China
and a slowdown or other adverse developments in the PRC economy may materially and adversely affect our customers, demand for
our products and our business.



All of our sales are generated in China. 
We anticipate that sales of our products in China will continue to represent all of our total sales in the near future. 
Although the PRC economy has grown significantly in recent years, we cannot assure you that such growth will continue.  The
industry which we are involved in the PRC is relatively new and growing, but we do not know how sensitive we are to a slowdown
in economic growth or other adverse changes in the PRC economy which may affect demand for our products.  In addition, the
Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling
payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular
industries or companies.  Efforts by the Chinese government to slow the pace of growth of the Chinese economy could result
in reduced demand for our products.  A slowdown in overall economic growth, an economic downturn or recession or other adverse
economic developments in the PRC may materially reduce the demand for our products and materially and adversely affect our business.



Currency fluctuations and restrictions
on currency exchange may adversely affect our business, including limiting our ability to convert Chinese Renminbi into foreign
currencies and, if Chinese Renminbi were to decline in value, reducing our revenue in U.S. dollar terms.



Our reporting currency is the U.S. dollar and our operations
in China use their local currency as their functional currencies.  Substantially all of our revenue and expenses are in the
Chinese currency, the Renminbi.  We are subject to the effects of exchange rate fluctuations with respect to any of these
currencies.  For example, the value of the Renminbi depends to a large extent on Chinese government policies and China’s
domestic and international economic and political developments, as well as supply and demand in the local market.  Since
1994, the official exchange rate for the conversion of the Renminbi to the U.S. dollar had generally been stable and the Renminbi
had appreciated slightly against the U.S. dollar.  In July 2005, the Chinese government changed its policy of pegging
the value of the Renminbi to the U.S. dollar.  Under this policy, which was halted in 2008 due to the worldwide financial
crisis, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies.  In
June 2010, the Chinese government announced its intention to again allow the Renminbi to fluctuate within the 2005 parameters.  It
is possible that the Chinese government could adopt an even more flexible currency policy, which could result in more significant
fluctuation of Renminbi against the U.S. dollar, or it could adopt a more restrictive policy.  We can offer no assurance
that the Renminbi will be stable against the U.S. dollar or any other foreign currency.



Our financial statements are translated
into U.S. dollars at the average exchange rates in each applicable period.  To the extent the U.S. dollar strengthens
against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating
expenses and net income for our international operations.  Similarly, to the extent the U.S. dollar weakens against
foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue, operating
expenses and net income for our international operations.  We are also exposed to foreign exchange rate fluctuations
as we convert the financial statements of our foreign consolidated subsidiaries into U.S. dollars in consolidation.  If
there is a change in foreign currency exchange rates, the conversion of the foreign consolidated subsidiaries’ financial
statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income.  In
addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional
currency.  Changes in the functional currency value of these assets and liabilities create fluctuations that will lead
to a transaction gain or loss.  We have not entered into agreements or purchased instruments to hedge our exchange rate
risks, although we may do so in the future.  The availability and effectiveness of any hedging transaction may be limited
and we may not be able to hedge our exchange rate risks.



The State Administration of Foreign
Exchange (“SAFE”) restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively
and to pay dividends, and the restrictions may cause a delay in payment of interest or principal on the Notes.



On August 29, 2008, SAFE promulgated
Circular 142, a notice regulating the conversion by a foreign-invested company of foreign currency denominated capital into
Renminbi and restricting the use of such converted Renminbi. SAFE promulgated Circular 45 on November 16, 2011 in order to
clarify the application of Circular 142. Under Circular 142 and Circular 45, a foreign-invested company can only
use Renminbi converted from foreign currency denominated capital for purposes within its business scope, as approved by the applicable
governmental authorities. In addition, Circular 142 and Circular 45 provide that a foreign-invested company may not use such
converted Renminbi for equity investments in the PRC unless its business license specifically includes equity investments within
its business scope.



All of our sales revenue and expenses are
denominated in the Chinese currency, Renminbi.  Under PRC law, the Renminbi is currently convertible under the “current
account,” which includes dividends and trade and service-related foreign exchange transactions, but not under the “capital
account,” which includes foreign direct investment and loans. Currently, our PRC operating subsidiary, Bohai, may purchase
foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval
of SAFE, by complying with certain procedural requirements.  However, the relevant PRC government authorities may limit
or eliminate our ability to purchase foreign currencies in the future.  Since a significant amount of our future revenue
will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue
generated in Renminbi to fund our business activities outside China that are denominated in foreign currencies.



28







All of our income is derived from the
consulting fees we receive from Bohai through the VIE Agreements.  SAFE restrictions may delay the payment of dividends,
since we have to comply with certain procedural requirement and we may experience difficulties in completing the administrative
procedures necessary to obtain and remit foreign currency for the payment of dividends from the profits of WFOE, and it thus may
delay our payment of interest to the Notes holders.



Foreign exchange
transactions by PRC operating subsidiaries under the capital account continue to be subject to significant foreign exchange controls
and require the approval of or need to register with PRC government authorities, including SAFE.  If we borrow foreign
currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance our company
by means of additional capital contributions, these capital contributions must be approved by certain government authorities,
including the Ministry of Commerce, or their respective local counterparts.  These limitations could affect our ability
to obtain foreign exchange through debt or equity financing. In particular, on April 3, 2012,we entered into an amendment
to the Notes to extend the maturity date of the Notes from April 5 to October 5, 2012, because we faced (and continue to face)
difficulties in converting our cash on hand from RMB to US Dollars and in turn remitting such amount outside China for purpose
of the Note payments. We cannot assure you that this issue will not continue in the future.



The PRC government also may at its discretion
restrict access in the future to foreign currencies for current account transactions.  If the foreign exchange control
system prevents us from obtaining foreign currency, we may be unable to pay the interest and principal on the Notes, pay dividends
or meet obligations that may be incurred in the future that require payment in foreign currency.



The PRC State Administration of
Foreign Exchange restrictions on the use of offshore holding companies in mergers and acquisitions in China may create regulatory
uncertainties that could restrict or limit our ability to operate.



In November 2005, SAFE issued a public
notice, known as Circular 75, concerning foreign exchange registrations that are required in order to use of offshore holding
companies in mergers and acquisitions in China.  The public notice provides that if an offshore company controlled by
PRC residents intends to acquire a PRC company, such acquisition will be subject to registration with the relevant foreign exchange
authorities.  The public notice also suggested that registration with the relevant foreign exchange authorities is required
for any sale or transfer by the PRC residents of shares in an offshore holding company that owns an onshore company.  PRC
residents must each submit a registration form to the local SAFE branch with respect to their ownership interests in the offshore
company, and must also file an amendment to such registration if the offshore company experiences material events, such as changes
in the share capital, share transfer, mergers and acquisitions, spin-off transactions or use of assets in China to guarantee offshore
obligations.



Internal implementing guidelines issued
by SAFE, which became public in June 2007 (known as Notice 106), expanded the reach of Circular 75 by: (i) purporting to cover
the establishment or acquisition of control by PRC residents of offshore entities which merely acquire “control” over
domestic companies or assets, even in the absence of legal ownership; (ii) adding requirements relating to the source of the PRC
resident’s funds used to establish or acquire the offshore entity; (iii) covering the use of existing offshore entities
for offshore financings; (iv) purporting to cover situations in which an offshore special purpose vehicle, or SPV, establishes
a new subsidiary in China or acquires an unrelated company or unrelated assets in China; and (v) making the domestic affiliate
of the SPV responsible for the accuracy of certain documents which must be filed in connection with any such registration, notably,
the business plan which describes the overseas financing and the use of proceeds.  Amendments to registrations made
under Circular 75 are required in connection with any increase or decrease of capital, transfer of shares, mergers and acquisitions,
equity investment or creation of any security interest in any assets located in China to guarantee offshore obligations, and Notice
106 makes the offshore SPV jointly responsible for these filings.  In the case of an SPV which was established, and
which acquired a related domestic company or assets, before the implementation date of Circular 75, as applied by SAFE in accordance
with Notice 106, may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions.  Any
such failure could also result in the SPV’s affiliates being impeded or prevented from distributing their profits and the
proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers of funds
into or out of China.



The PRC regulatory authorities may take
the view that our acquisition of indirect ownership and controlling interest in Bohai through VIE arrangements shall be subject
to SAFE approval and registration. Any adverse action taken against us by PRC regulatory authorities could significantly and negatively
impact our operations and the trading market for our common stock.



29







PRC regulations and potential registration
requirements relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict
or limit our ability to operate.  Similarly, our failure to obtain the prior approval of PRC authorities for our January
2010 private placement and the listing and trading of our common stock could have a material adverse effect on our business, operating
results, reputation and trading price of our common stock.



On August 8, 2006, the PRC Ministry of
Commerce (“MOC”), joined by the State-owned Assets Supervision and Administration Commission of the State Council,
the State Administration of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission
(“CSRC”) and SAFE, released a substantially amended version of the Provisions for Foreign Investors to Merge with
or Acquire Domestic Enterprises (the “Revised M&A Regulations”), which took effect September 8, 2006.  These
new rules significantly revised China’s regulatory framework governing onshore-to-offshore restructurings and foreign acquisitions
of domestic enterprises.  These new rules signify greater PRC government attention to cross-border merger, acquisition
and other investment activities, by confirming MOC as a key regulator for issues related to mergers and acquisitions in China
and requiring MOC approval of a broad range of merger, acquisition and investment transactions.  Further, the new rules
establish reporting requirements for acquisition of control by foreigners of companies in key industries, and reinforce the ability
of the Chinese government to monitor and prohibit foreign control transactions in key industries.



Among other things, the revised M&A
Regulations include new provisions that purport to require that an offshore SPV, formed for listing purposes and controlled directly
or indirectly by PRC companies or individuals must obtain the approval of the CSRC prior to the listing and trading of such SPV’s
securities on an overseas stock exchange.  On September 21, 2006, the CSRC published on its official website procedures
specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings.  However,
the application of this PRC regulation remains unclear with no consensus currently existing among the leading PRC law firms regarding
the scope and applicability of the CSRC approval requirement.



Our principal shareholder, Glory Period,
is 100% owned by Joshua Tan, a Singapore citizen.  As of the date of this Annual Report, Glory Period holds approximately
50% of our outstanding common stock.  Mr. Tan and Mr. Qu (the principal founder of Bohai and our Chairman, President
and Chief Executive Officer) entered into the Call Option Agreement on December 7, 2009 by which Mr. Qu has an option to acquire
all the issued and outstanding shares of Glory Period within three years for nominal consideration.  Chance High, as
the wholly owned subsidiary of our company, formed WFOE on November 23, 2009 and WFOE obtained effective and substantial control
over Bohai further through executing the VIE Agreements on December 7, 2009 by and among WFOE, Bohai and the three Shareholders
of Bohai (including Mr. Qu).  The PRC regulatory authorities may take the view that entry into the VIE Agreements by
WFOE and Bohai resulting in Mr. Qu, a PRC resident becoming the majority owner and effective controlling party of our company
which acquired 100% indirect ownership of Bohai.  The PRC regulatory authorities may also take the view that the relevant
parties should fully disclose to SAFE or MOC of the overall restructuring arrangements, the existence of the Share Exchange and
related VIE Agreements.  If the PRC regulatory authorities take the view that the Share Exchange and VIE arrangement
constitutes a reverse ,merger or round-trip investment under the M&A Regulations, we cannot assure you we may be able to obtain
the approval required from the national offices of MOC.



If the PRC regulatory authorities take
the view that the Share Exchange and the VIE Agreements constitutes a reverse merger acquisition or round-trip investment without
the approval of the national offices of MOC, they could invalidate the Share Exchange and VIE Agreements.  Additionally,
the PRC regulatory authorities may take the view that any public offering plan of us will require the prior approval of CSRC.  If
we cannot obtain MOC or CSRC approval in case we are required to do so, our business and financial performance will be materially
adversely affected.  We may also face regulatory actions or other sanctions from the MOC or other PRC regulatory agencies.  These
regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay
or restrict the repatriation of the proceeds from the Private Placement into the PRC, or take other actions that could have a
material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the
trading price of our common stock.



Also, if later the CSRC requires that
we obtain its approval, we may be unable to obtain a waiver of the CSRC approval requirements, if and when procedures are established
to obtain such a waiver. Any uncertainties and/or negative publicity regarding this CSRC approval requirement could have a material
adverse effect on the trading price of our common stock.  Furthermore, published news reports in China recently indicated
that the CSRC may have curtailed or suspended overseas listings for Chinese private companies. These news reports have created
further uncertainty regarding the approach that the CSRC and other PRC regulators may take with respect to transactions that we
have engaged in our may in the future engage in.  Any adverse action taken against us by PRC regulatory authorities
could significantly and negatively impact our operations and the trading market for our common stock.



Because our assets are located outside
of the United States and half of our directors, including our Chairman, and the majority of our officers reside outside of the
United States, it may be difficult for you to enforce your rights based on the United States federal securities laws against us
and these persons in the United States or to enforce judgments of United States courts against us or him in the PRC.



Our Chairman of the Board and principal
executive officer, Mr. Qu, resides outside of the United States in China.  In addition, another of our directors and
a majority of our officers are also located in China.  Furthermore, our operating subsidiary is located in the PRC and
all of its assets are located outside of the United States.  China does not have a treaty with United States providing
for the reciprocal recognition and enforcement of judgments of courts.  It may therefore be difficult for investors
in the United States to enforce their legal rights based on the civil liability provisions of the United States federal securities
laws against us in the courts of either the United States or the PRC and, even if civil judgments are obtained in courts of the
United States, to enforce such judgments in the PRC courts.  Further, it is unclear if extradition treaties now in effect
between the United States and the PRC would permit effective enforcement against us or our officers and directors of criminal
penalties, under the United States federal securities laws or otherwise.



30







We may have limited legal recourse
under PRC laws if disputes arise under our contracts with third parties.



The Chinese government has enacted some
laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation
and trade.  However, their experience in implementing, interpreting and enforcing these laws and regulations is limited,
and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable.  If our new business
ventures are unsuccessful, or other adverse circumstances arise from these transactions, we face the risk that the parties to
these ventures may seek ways to terminate the transactions, or, may hinder or prevent us from accessing important information
regarding the financial and business operations of these acquired companies.  The resolution of these matters may be
subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits
of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek
an injunction under PRC laws, in either of these cases, are severely limited, and without a means of recourse by virtue of the
Chinese legal system, we may be unable to prevent these situations from occurring.  The occurrence of any such events
could have a material adverse effect on our business, financial condition and results of operations.  Although legislation
in China over the past 30 years has significantly improved the protection afforded to various forms of foreign investment and
contractual arrangements in China, these laws, regulations and legal requirements are relatively new and their interpretation
and enforcement involve uncertainties, which could limit the legal protection available to us, and foreign investors, including
you.  The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss
of business, business opportunities or capital and could have a material adverse impact on our operations.



We must comply with the Foreign
Corrupt Practices Act.



We are required to comply with the United
States Foreign Corrupt Practices Act, which prohibits U.S. companies from engaging in bribery or other prohibited payments to
foreign officials for the purpose of obtaining or retaining business.  Foreign companies, including some of our competitors,
are not subject to these prohibitions.  Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices
occur from time-to-time in mainland China.  If our competitors engage in these practices, they may receive preferential
treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials
who might give them priority in obtaining new licenses, which would put us at a disadvantage.  We have not established
formal policies or procedures for prohibiting or monitoring this conduct, and we can not assure you that our employees or other
agents will not engage in such conduct for which we might be held responsible.  If our employees or other agents are
found to have engaged in such practices, we could suffer severe penalties.



If we make equity compensation grants
to persons who are PRC citizens, they may be required to register with SAFE.  We may also face regulatory uncertainties
that could restrict our ability to adopt equity compensation plans for our directors and employees and other parties under PRC
laws.



On April 6, 2007, SAFE issued the “Operating
Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan
of An Overseas Listed Company, also known as “Circular 78.”  It is not clear whether Circular 78 covers
all forms of equity compensation plans or only those which provide for the granting of stock options. For any plans which are
so covered and are adopted by a non-PRC listed company, such as our company, after April 6, 2007, Circular 78 requires all participants
who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan.  In addition,
Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participated
in an overseas listed company’s covered equity compensation plan prior to April 6, 2007.  We believe that the
registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming.



In the future, we may adopt an equity
incentive plan and make numerous stock option grants under the plan to our officers, directors and employees, some of whom are
PRC citizens and may be required to register with SAFE.  If it is determined that any of our equity compensation plans
are subject to Circular 78, failure to comply with such provisions may subject us and participants of our equity incentive plan
who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC employees.
In that case, our ability to compensate our employees and directors through equity compensation would be hindered and our business
operations may be adversely affected.



31







Due to various restrictions under
PRC laws on the distribution of dividends by our PRC operating companies, we may not be able to pay dividends to our shareholders.



The Wholly-Foreign Owned Enterprise Law
(1986), as amended and the Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law of the
PRC (2006) contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these
regulations, wholly foreign owned enterprises, such as WFOE, may pay dividends only out of their accumulated profits, if any,
determined in accordance with PRC accounting standards and regulations. Additionally, WFOE is required to set aside a certain
amount of their accumulated profits each year, if any, to fund certain reserve funds.  These reserves are not distributable
as cash dividends except in the event of liquidation and cannot be used for working capital purposes.



Furthermore, if our consolidated subsidiaries
in China incur debt on their own in the future, the instruments governing the debt may restrict its ability to pay dividends or
make other payments. If we or our consolidated subsidiaries are unable to receive all of the revenues from our operations due
to these contractual or dividend arrangements, we may be unable to pay dividends on our common stock.



We may have difficulty establishing
adequate management, governance, legal and financial controls in the PRC.



The PRC historically has been deficient
in western style management, governance and financial reporting concepts and practices, as well as in modern banking, and other
control systems.  Our current management has little experience with western style management, governance and financial
reporting concepts and practices, and we may have difficulty in hiring and retaining a sufficient number of qualified employees
to work in the PRC.  As a result of these factors, and especially given that we expect to be a publicly listed company
in U.S. and subject to regulation as such, we may experience difficulty in establishing management, governance legal and financial
controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting
business practices that meet western standards.  We may have difficulty establishing adequate management, governance,
legal and financial controls in the PRC.  Therefore, we may, in turn, experience difficulties in implementing and maintaining
adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002 and other applicable laws, rules and
regulations.  This may result in significant deficiencies or material weaknesses in our internal controls which could
impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements
of the Sarbanes-Oxley Act of 2002.  Any such deficiencies, weaknesses or lack of compliance could have a materially
adverse effect on our business and the public announcement of such deficiencies could adversely impact our stock price.



It may be difficult to protect and
enforce our intellectual property rights under PRC laws.



Intellectual property rights in China
are still developing, and there are uncertainties involved in the protection and the enforcement of such rights.  We
will need to pay special attention to protecting our intellectual property and trade secrets.  Failure to do so could
lead to the loss of a competitive advantage that could not be compensated by our damages award.





If our land use rights are revoked,
we would have no operational capabilities.



Under Chinese law land is owned by the
state or rural collective economic organizations. The state issues to tenants the rights to use property.  Use rights
can be revoked and the tenants forced to vacate at any time when redevelopment of the land is in the public interest.  The
public interest rationale is interpreted quite broadly and the process of land appropriation may be less than transparent.  Through
our operating subsidiary Bohai, we rely on these land use rights as the cornerstone of our operations for both our manufacturing
facility and our corporate headquarters.  The loss of such rights would have a material adverse effect on our company
as we would be required to relocate our facilities and obtain new land use rights, and there is a risk that we would not be able
to accomplish such a relocation with reasonable cost or at all.



In addition, we currently do not maintain
a land use right certificate for a piece of land located in Xingfu Twelve Village of Zhifu District with the area of 11,222 square
meters, on which we have built our corporate headquarters.  In the process of the planning of Yantai City, the usage
of this land use right has been changed from “industrial use” to “commercial use” and therefore, the process
for the land use right certificate on five relevant parcels of land including the land occupied by Bohai is suspended until the
completion of the planning. We can not assure you that we will eventually obtain the land use right certificate for this land
with reasonable cost.



The disclosures in our reports and
other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies
in the PRC.



We are regulated by the SEC and our reports
and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under
the Securities Act and the Exchange Act. Our SEC reports and other disclosure and public pronouncements are not subject to the
review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are
not subject to the review by China Securities Regulatory Commission, a PRC regulator that is tasked with oversight of the capital
markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding
that no local regulator has done any review of our company, our SEC reports, other filings or any of our other public pronouncements.



32







Risks Related to Our Common Stock



If we become directly subject to
the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant
resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could
result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.



Recently, U.S. public companies that have
substantially all of their operations in China, particularly companies like ours which have completed so-called reverse merger
transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators
and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial
and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate
governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism
and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in
some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement
actions and are conducting internal and external investigations into the allegations.



It is not clear what effect this sector-wide
scrutiny, criticism and negative publicity will have on our company, our business and our stock price, although we believe our
stock price and investor following have suffered and may continue to suffer as a result of the scrutiny of Chinese companies like
ours. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will
have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly
and time consuming and distract our management from growing our company. If such allegations are not proven to be groundless,
our company and business operations will be severely and your investment in our stock could be rendered worthless.



The registration statement covering
the shares of common stock underlying the Notes and Warrants may not remain effective, which could impact the liquidity of our
common stock.



Under the terms of our January 2010 Registration
Rights Agreement, we are obligated to include the shares of common stock underlying the Notes and Warrants in an effective registration
statement.  From time to time, including following the filing of this Annual Report, it will be necessary for us to
file post-effective amendments to the registration statement when subsequent events so require.  We intend to use our
best efforts to keep the registration statement current, but we may not be able to do so.  If the registration statement
is not current in the future, we will incur penalties and investors’ ability to sell the shares of common stock underlying
the Notes and Warrants will be limited, which would have a material adverse effect on the liquidity of our common stock.



There is currently an extremely
limited trading market for our common stock, and the limited public trading market that may develop in the future may cause extreme
volatility in our stock price.



Although our common stock is listed for
quotation on the OTCQB, operated by OTC Markets Group, Inc., there has been only limited trading in our stock.  Trading
in our common stock may not fully evolve for a variety of reasons, and even if a market for our stock develops, it may continue
to be limited.  Even if a market for our common stock does develop, there is a risk that a meaningful, consistent and
liquid trading market may not develop.  Moreover, stocks with limited trading markets have historically experienced
extreme price and volume fluctuations and have particularly affected the market prices of many smaller companies like us.  Our
common stock is thus expected to be subject to significant volatility when and if meaningful trading commences.  In
addition, sales of substantial amounts of our common stock, or the perception that such sales might occur, could adversely affect
prevailing market prices of our common stock.



All of the foregoing risks are particularly
true of our company as we are based in China and recently US-listed Chinese companies (especially those that obtained a US listing
via a “reverse merger” transaction as we did) have come under significant scrutiny by US regulators and investors.  This
scrutiny and related disfavor for companies like ours has had and may in the future a negative impact on our public stock price



An active and visible trading market
for our common stock may not develop.



We cannot predict whether an active market
for our common stock will develop in the future.  In the absence of an active trading market:



| | ‚ | Investors may have difficulty buying and selling or obtaining market quotations;
| | - | --------------------------------------------------------------------------------



| | ‚ | Market visibility for our common stock may be limited; and
| | - | ----------------------------------------------------------



33







| | ‚ | A lack of visibility for our common stock may have a depressive effect on the market price for our common stock.
| | - | ----------------------------------------------------------------------------------------------------------------



The OTCQB is unorganized, inter-dealers,
over-the-counter markets that provides significantly less liquidity than NASDAQ or the NYSE AMEX.  No assurances can
be given that we will ever obtain a listing for our securities on a senior exchange.  The trading price of our common
stock is therefore expected to be subject to significant fluctuations in response to variations in quarterly operating results,
changes in analysts’ earnings estimates, announcements of innovations by us or our competitors, general conditions in the
industry in which we operate and other factors.  These fluctuations, as well as general economic and market conditions,
may have a material or adverse effect on the market price of our common stock.



The market price for our stock may
be volatile.



The market price for our stock may be
volatile and subject to wide fluctuations due to factors such as:



| | ‚ | the perception of US investors and regulators of US-listed Chinese companies;
| | - | -----------------------------------------------------------------------------



| | ‚ | actual or anticipated fluctuations in our quarterly operating results;
| | - | ----------------------------------------------------------------------



| | ‚ | changes in financial estimates by securities research analysts;
| | - | ---------------------------------------------------------------



| | ‚ | conditions in pharmaceutical markets;
| | - | -------------------------------------



| | ‚ | changes in the economic performance or market valuations of other pharmaceutical companies;
| | - | -------------------------------------------------------------------------------------------



| | ‚ | announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital
    commitments;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| |  | addition or departure of key personnel;
| |  | ---------------------------------------



| | ‚ | fluctuations of exchange rates between RMB and the U.S. dollar;
| | - | ---------------------------------------------------------------



| | ‚ | intellectual property or other litigation; and
| | - | ----------------------------------------------



| | ‚ | general economic or political conditions in China.
| | - | --------------------------------------------------



In addition, the securities market has
from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular
companies.  These market fluctuations may also materially and adversely affect the market price of our stock.



The accounting treatment for our
convertible securities is complex and subject to judgments concerning the valuation of embedded derivative rights within the applicable
securities.  Fluctuations in the valuation of these rights could cause us to take charges to our earnings and make our
financial results unpredictable.



Our Notes and Warrants issued in January
2010 contain, or may be deemed to contain from time to time, embedded derivative rights in accordance with GAAP.  These
derivative rights, or similar rights in convertible securities we may issue in the future, need to be, or may need to be, separately
valued as of the end of each accounting period in accordance with GAAP.  Changes in the valuations of these rights,
the valuation methodology or the assumptions on which the valuations are based could cause us to take charges to our earnings,
which would adversely impact our results of operations.  Moreover, the methodologies, assumptions and related interpretations
of accounting or regulatory authorities associated with these embedded derivatives are complex and in some cases uncertain, which
could cause our accounting for these derivatives, and as a result, our financial results, to fluctuate.  There is a
risk that questions could arise from investors or regulatory authorities concerning the appropriate accounting treatment of these
instruments, which could require us to restate previous financial statements, which in turn could adversely impact our results
of operations, our reputation and our public stock price.



34







Shares eligible for future sale
may adversely affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in
the public marketplace could reduce the price of our common stock.



Pursuant to the terms of the Registration
Rights Agreement and Securities Purchase Agreement, we agreed to file a registration statement with the SEC to register the common
stock underlying the Notes, Warrants and Placement Agent Warrants for public resale.  All of such shares may be freely
sold and transferred following conversion or exercise of the Notes and Warrants if such registration statement remains effective.  Additionally,
concurrently with the closing of the Private Placement, we engaged in a Share Exchange, and following the Share Exchange, the
former shareholders of Chance High (other than Glory Period) may be eligible to sell all or some of their shares of common stock
by means of ordinary brokerage transactions in the open market pursuant to such registration statement or SEC Rule 144, subject
to certain limitations.  In general, pursuant to Rule 144, a shareholder (or shareholders whose shares are aggregated)
who has satisfied an one-year holding period may, under certain circumstances, sell within any three-month period a number of
securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading
volume of the class during the four calendar weeks prior to such sale.  As of the date of this annual report, 1% of
our issued and outstanding shares of common stock equal approximately 17,861,085 shares. Rule 144 also permits, under certain
circumstances, the sale of securities, without any limitations, by a non-affiliate that has satisfied a one-year holding period.  Any
substantial sale of common stock pursuant to any resale prospectus or Rule 144 may have an adverse effect on the market price
of our common stock by creating an excessive supply.



Our controlling shareholder may
exercise significant influence over us.



Our controlling shareholder, Glory Period
Limited, owns approximately 50% of our outstanding common stock as of the closing of the Share Exchange.  Tan is the
sole shareholder of Glory Period and Qu is the sole director of Glory Period.  Either Tan or Qu has a controlling influence
in determining the outcome of any corporate transaction or other matters submitted to our shareholders for approval, including
mergers, consolidations and the sale of all or substantially all of our assets, election of directors, and other significant corporate
actions.  Tan and Qu may also have the power to prevent or cause a change in control.  In addition, without
the consent of Tan and Qu, we could be prevented from entering into transactions that could be beneficial to us.  As
Qu serves as our principal executive officer and Tan has provided consulting services to Bohai in the past, the interests of Tan
and Qu may differ from the interests of our other shareholders, which could create conflicts of interest and the potential for
approval of actions which may not be in the best interests of all of our shareholders.



Compliance with complex and changing
regulation of corporate governance and public disclosure, and our management’s inexperience with such regulations, will
result in additional expenses and creates a risk of non-compliance.



Changing laws, regulations and standards relating to corporate
governance and public legal and accounting disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have
created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public
markets and public reporting.  Our management team will need to invest significant management time and financial resources
to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative
expenses and a diversion of management time and attention from revenue generating activities to compliance activities.  In
addition, our management located in the PRC has little experience with compliance with U.S. laws (including securities laws).  This
inexperience may cause us to fall out of compliance with applicable regulatory requirements, which could lead to restatements
of our financial statements, breaches of covenants in our investor agreements, regulatory enforcement actions against us and a
negative impact on our stock price and our business generally.



The challenges we have with properly complying
with applicable disclosure and accounting regulations were evidenced when we were required to restate our financial statements
for the period ended March 31, 2010 to account for the embedded derivative liabilities associated with Notes and Warrants.  There
is a risk that we will face similar challenges in the future.



If we fail to maintain an effective
system of internal controls, we may not be able to accurately report our financial results or prevent fraud.



We are subject to reporting obligations
under the U.S. securities laws.  The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring every public company to include a management report on such company’s internal controls over financial reporting
in its annual report, which contains management’s assessment of the effectiveness of our internal controls over financial
reporting.  In addition, we may be required to have an independent registered public accounting firm attest to and report
on management’s assessment of the effectiveness of our internal controls over financial reporting.  Our management
may conclude that our internal controls over our financial reporting are not effective.  Moreover, even if our management
concludes that our internal controls over financial reporting are effective, our independent registered public accounting firm
may still decline to attest to our management’s assessment or may issue a report that is qualified if it is not satisfied
with our controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant
requirements differently from us.  Our reporting obligations as a public company will place a significant strain on
our management, operational and financial resources and systems for the foreseeable future.  Effective internal controls,
particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important
to prevent fraud.  As a result, our failure to achieve and maintain effective internal controls over financial reporting
could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business
and negatively impact the trading price of our stock.  Furthermore, we anticipate that we will incur considerable costs
and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the
Sarbanes-Oxley Act.



35







Our common stock may be considered
a “penny stock,” and thereby be subject to additional sale and trading regulations that may make it more difficult
to sell.



Our common stock, which is currently quoted
for trading on OTCQB, may be considered to be a “penny stock” if it does not qualify for one of the exemptions from
the definition of “penny stock” under Section 3a51-1 of the Exchange Act, as amended.  Our common stock
may be a “penny stock” if it meets one or more of the following conditions: (i) the stock trades at a price less than
$5 per share; (ii) it is NOT traded on a “recognized” national exchange; (iii) it is not quoted on the Nasdaq Capital
Market, or even if so, has a price less than $5 per share; or (iv) is issued by a company that has been in business less than
three years with net tangible assets less than $5 million.  The principal result or effect of being designated a “penny
stock” is that securities broker-dealers participating in sales of our common stock will be subject to the “penny
stock” regulations set forth in Rules 15-2 through 15g-9 promulgated under the Exchange Act.  For example, Rule
15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny
stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any
transaction in a penny stock for the investor’s account.  Moreover, Rule 15g-9 requires broker-dealers in penny
stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor.  This
procedure requires the broker-dealer to: (i) obtain from the investor information concerning his or her financial situation, investment
experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks
are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating
the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the
broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor,
confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives.  Compliance
with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to
third parties or to otherwise dispose of them in the market or otherwise.



We do not foresee paying cash dividends
in the foreseeable future and, as a result, our investors’ sole source of gain, if any, will depend on capital appreciation,
if any.



We do not plan to declare or pay any cash
dividends on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding
growth. As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend
income. Capital appreciation, if any, of our shares may be investors’ sole source of gain for the foreseeable future. Moreover,
investors may not be able to resell their common stock at or above the price they paid for them.



Item 1B.  Unresolved Staff Comments.



None.



Item 2. Description of Properties.



Our corporate headquarters is located
at No. 9 Daxin Road, Zhifu District, Yantai, Shandong Province, China.  Under the current PRC laws, land is owned by
the state, and parcels of land in rural areas which is known as collective land is owned by the rural collective economic organization.  “Land
use rights” are granted to an individual or entity after payment of a land use right fee is made to the applicable state
or rural collective economic organization. Land use rights allow the holder of the right to use the land for a specified long-term
period.  We have a land use right, expiring in 2047, for a total of approximately 30,637 square meters of land, on which
we maintain our manufacturing facility.  We currently have not obtained a land use right certificate for a piece of
land located in Xingfu Twelve Village of Zhifu District with the area of 11,222 square meters, on which we maintain our corporate
headquarters.  In the process of the planning of Yantai City, the usage of the aforesaid land use right has been changed
from “industrial use” to “commercial use” and therefore, the approval process for the land use right certificate
on the land for our corporate headquarters has been suspended until the completion of the planning.  We can not assure
you that we will eventually obtain the land use right certificate for this land.



On February 22, 2010, we entered into
a land-use right purchase agreement with Shandong Yantai Bureau of Land and Resources, pursuant to which we acquired the land
use right for a parcel of land totaling 333,335 square meters for RMB 97,500,000 (approximately $14,320,100).  As of
March 31, 2011, this purchase price was paid in full.



On August 8, 2011, we acquired Yantai
Tianzheng, pursuant to which we acquired the land use right for a parcel of land totaling 32,883.6 including a manufacture facility
of 10,908.83 square meters (approximately 117,421.668 square feet).



Item 3. Legal Proceedings.



We are not a party to any current or pending
legal proceedings that, if decided adversely to us, would have a material adverse effect upon our business, results of operations,
or financial condition, and we are not aware of any threatened or contemplated proceeding by any governmental authority against
us.  To our knowledge, we are not a party to any threatened civil or criminal action or investigation.



36







PART II



Item 5.   Market for Common Equity Related
Shareholder Matters and Issuer Purchases of Equity Securities Market Information.



Our common stock was listed for quotation
on the OTCBB and the OTCQB under the symbol “BOPH.” From January 9, 2008 until February 8, 2010, our common stock
was listed for quotation on the OTCBB under the symbol “LINK”.  Starting July 24, 2012, our common stock
is listed for quotation on the OTCQB only. The following tables set forth, for the calendar quarter indicated, the quarterly high
and low sales price for our common stock as reported on the OTCBB/OTCQB.  Trading in the common stock in the over-the-counter
market has been limited and sporadic and the quotations set forth below are not necessarily indicative of actual market conditions.  Further,
the quotations merely reflect the prices at which transactions were proposed, and do not necessarily represent actual transactions.



|                                    |  | High |      |  | Low |  
|----------------------------------- |  | ---- | ---- |  | --- | -
|2012 by Quarter                     |  |      |      |  |     |  
|July 1, 2011 - September 30, 2011   |  | $    | 1.00 |  |     |  
|October 1, 2011 - December 31, 2011 |  | $    | 0.89 |  |     |  
|January, 2012 - March 31, 2012      |  | $    | 0.48 |  |     |  
|April 1, 2012 – June 30, 2012       |  | $    | 0.55 |  |     |  
|                                    |  |      |      |  |     |  
|2011 by Quarter                     |  |      |      |  |     |  
|July 1, 2010 - September 30, 2010   |  | $    | 2.40 |  |     | $
|October 1, 2010 - December 31, 2010 |  | $    | 2.30 |  |     | $
|January, 2011 - March 31, 2011      |  | $    | 2.20 |  |     | $
|April 1, 2011 – June 30, 2011       |  | $    | 1.70 |  |     | $



Holders



As of September 28, 2011, there were 17,861,085
shares of our common stock outstanding held by approximately 65 shareholders of record.  The number of our shareholders
of record excludes any estimate by us of the number of beneficial owners of shares held in street name, the accuracy of which
cannot be guaranteed.



Dividend Policy



We have not paid any cash dividends on
our common stock to date, and we have no intention of paying cash dividends in the foreseeable future. Whether we will declare
and pay dividends in the future will be determined by our board of directors at their discretion, subject to certain limitations
imposed under Delaware corporate law. In addition, our ability to pay dividends may be affected by the foreign exchange controls
in China. The timing, amount and form of dividends, if any, will depend on, among other things, our results of operations, financial
condition, cash requirements and other factors deemed relevant by our board of directors.



Recent Sales of Unregistered Securities



None.



Item 6.  Selected Financial Data.



We are a “smaller reporting company”
as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to Regulation
S-K.



Item 7.  Management’s
Discussion and Analysis or Plan of Operation.



The following discussion and analysis
of financial condition and results of operations relates to the operations and financial condition reported in our audited consolidated
financial statements for the twelve months ended June 30, 2012 and 2011, and should be read in conjunction with such financial
statements and related notes included in this Annual Report. Those statements in the following discussion that are not historical
in nature should be considered to be forward looking statements that are inherently uncertain. Actual results and the timing
of the events may differ materially from those contained in these forward looking statements due to a number of factors, including
those discussed in the “Cautionary Note on Forward Looking Statements” set forth elsewhere in this Annual Report.



37







Overview



We are engaged in the production, manufacturing
and distribution in China of herbal pharmaceuticals based on traditional Chinese medicine, which we refer to herein as Traditional
Chinese Medicine, or TCM. We are based in the city of Yantai, Shandong Province, China and our operations are exclusively
in China.



Our medicines address rheumatoid arthritis,
viral infections, gynecological diseases, cardio vascular issues and respiratory diseases. Our initial operating subsidiary
Bohai obtained Drug Approval Numbers (or DANs) for 29 varieties of traditional Chinese herbal medicines in 2004, an additional
14 varieties in December 2010. Through our acquisition of Yantai Tianzheng in August 2011, we obtained DANs for another 5
varieties in August 2011. We currently produce 19 varieties of approved traditional Chinese herbal medicines in seven delivery
systems: tablets, granules, capsules, formulations, concentrated powder, tincture and medicinal wine. Of these 19 products,
12 are prescription drugs and 7 are over the counter (or OTC) products.



Three of Bohai’s lead products, Tongbi
Capsules and Tablets and Lung Nourishing Syrup, are eligible for reimbursement under China’s National Medical Insurance
Program (or NRDL), which we believe significantly increases the marketability of these products. In addition to these lead
products, three of our current products and five of our formulas we acquired in 2010 are eligible for NRDL reimbursement. In
addition, one of our current products and four of our newly acquired formulas are currently included on the Chinese government's
Essential Drug List (or EDL). Inclusion on either the EDL or NRDL allows for up to 100% insurance coverage by the Chinese
government. Yantai Tianzheng owns five prescription products approved by the State Food and Drug Administration of China (which
we refer to herein as the SFDA) and currently manufactures four of such products. Among Yantai Tianzheng’s products,
Fangfengtongsheng Granule has an exclusive status and is on the EDL and NDRL, and Zhengxintai Capsule has renewed its protective
status to August 2017 and is currently under the NDRL.



Prior to January 5, 2010, we were a public
“shell” company operating under the name “Link Resources, Inc.” On January 5, 2010, we consummated a share
exchange transaction (the “Share Exchange”) pursuant to which we acquired Chance High, the indirect parent company
of Bohai, our principal operating subsidiary, which is a Chinese variable interest entity that we (through a Chinese wholly-owned
foreign enterprise subsidiary) control through certain contractual arrangements. On August 8, 2011, WFOE II, a PRC company and
a newly formed subsidiary of Chance High, entered into a Share Purchase Agreement pursuant to which we acquired, from the three
individual holders thereof, one hundred percent (100%) of the outstanding shares of Yantai Tianzheng, which became our second
operating subsidiary effective as of July 1, 2011.





Use of Non-GAAP Financial Measures





We make reference to Non-GAAP financial measures in portions of this “Management’s Discussion
of Financial Condition and Results of Operations”. Management believes that investors may find it useful to review our financial
results that exclude certain non-cash income and expense, namely the aggregate change in the fair value of our warrants, amortization
of the beneficial conversion features in our convertible notes and the effective interest charges on our convertible notes, stock-based
compensation, and deferred income tax expenses as shown in the chart below in the aggregate net amount of $9,465,207
and$(2,234,879)income/(expenses) for the twelve months ended June 30, 2012 and 2011, respectively.



38







Management believes that these Non-GAAP
financial measures are useful to investors in that they provide supplemental information to intend to enhance our investors’
understanding of the underlying business trends and operating performance of our Company. We use these Non-GAAP financial
measures to evaluate operating performance.  However, Non-GAAP financial measures should not be considered as either a substitute
or alternative measurement of net income or any other performance measures derived in accordance with GAAP.



The following is a summary of reconciliations
of such Non-GAAP financial measures to the most directly comparable GAAP financial measures for the fiscal years ended June 30,
2012 and 2011:





|                                                                              |  | Twelve Months Ended |           
|----------------------------------------------------------------------------- |  | ------------------- | ----------
|                                                                              |  | June 30,            |           
|                                                                              |  |                     |           
|                                                                              |  | 2012                |           
|Net income available to Common shareholders -GAAP                             |  | $                   | 9,648,025 
|Add Back (Subtract):                                                          |  |                     |           
|Change in fair value of warrants                                              |  |                     | 273,369   
|Amortization of beneficial conversion features on convertible notes converted |  |                     | 9,317,897 
|Change in Option and Equity Based Compensation                                |  |                     | 44,000    
|Deferred income tax expenses - indefinite intangible assets                   |  |                     | (170,059  
|Adjusted net income available to Common shareholders -non-GAAP                |  | $                   | 19,113,232
|Net income margins -non-GAAP                                                  |  |                     | 13.91     
|Basic earning per share – GAAP                                                |  | $                   | 0.54      
|Add back (Subtract):                                                          |  |                     |           
|Change in fair value of warrants                                              |  |                     | 0.02      
|Amortization of beneficial conversion features on convertible notes converted |  |                     | 0.52      
|Change in Option and Equity Based Compensation                                |  |                     | 0.00      
|Deferred tax expenses  - indefinite intangible assets                         |  |                     | (0.01     
|Adjusted basic earning per share non-GAAP                                     |  | $                   | 1.07      
|                                                                              |  |                     |           
|Diluted earning per share-GAAP                                                |  | $                   | 0.54      
|Add back (Subtract):                                                          |  |                     |           
|Change in fair value of warrants                                              |  |                     | 0.02      
|Amortization of beneficial conversion features on convertible notes converted |  |                     | 0.52      
|Change in Option and Equity Based Compensation                                |  |                     | 0.00      
|Deferred tax expenses  - indefinite intangible assets                         |  |                     | (0.01     
|Adjusted diluted earning per share non-GAAP                                   |  | $                   | 1.07      
|                                                                              |  |                     |           
|Weighted average number of shares                                             |  |                     |           
|Basic                                                                         |  |                     | 17,861,085
|Diluted                                                                       |  |                     | 17,861,085





|(a) | We adopted the provisions of FASB accounting standard, ASC 815, which provides standards with respect
    to determine whether an instrument (or embedded feature) is indexed to an entity’s own stock (See note
    14).  As     a result of these measurements, we recognized non-cash credits of $(273,369) and $4,544,061 for the
    twelve months ended June     30, 2012 and 2011, respectively, from changes in fair value for investor and agent warrants and
    non-cash charges of $9,317,897 and     $1,029,487 for the twelve months ended June 30, 2012 and 2011, respectively, for
    unamortized beneficial conversion features     on convertible notes converted.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | We adopted stock-based compensation expense pursuant to FASB’s accounting standard regarding
    stock compensation which requires us to measure compensation cost for consultants and stock-based employee compensation plans
    at fair value at the grant date and recognize the expense over the employee's requisite service period. Under ASC Topic 718,
    our expected volatility assumption is based on the historical volatility of Company’s stock or the expected volatility
    of similar entities. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting
    termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield
    curve in effect at the time of grant. For the twelve months ended June 30, 2012 and 2011, we recognized $44,000 and $182,500
    of restricted stock as compensation expense. For the twelve months ended June 30, 2012 and 2011, we recognized $0 and $27,027,
    respectably as compensation expenses for our stock option plan.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



39







|(c) | We adopted the provisions of FASB accounting standard, ASC 350, which provides standards with respect
    to the deferred tax liability for indefinite intangible assets and FASB accounting standard, ASC 360, which provides
    standards with respect to accounting for the impairment or disposal of long-lived assets.  As a result of these
    measurements, we recognized net non-cash deferred tax charges of $(170,059) and $434,726 for the twelve months ended June
    30, 2012 and 2011, respectively, from deferred tax expenses and impairment losses of $0 and $635,442 for the twelve months
    ended June 30, 2012 and 2011, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Principal Factors Affecting Our Financial Performance



We believe that the following factors will
continue to affect our financial performance:



Sales of Key Products



Our top selling products as a percentage
of total net revenue consist of the following:



|                          |  | For the twelve months ended |     
|------------------------- |  | --------------------------- | ----
|                          |  | June 30,                    |     
|                          |  | 2012                        |     
|Lung Nourishing Syrup     |  |                             | 16.6
|Tongbi Capsules           |  |                             | 22.8
|Tongbi Tablets            |  |                             | 9.1 
|Zhengxintai Capsule       |  |                             | 10.6
|Fangfengtongsheng Granule |  |                             | 18.3
|Other Products            |  |                             | 22.6
|Total Sales               |  |                             | 100 



We expect that a significant portion of
our future revenue will continue to be derived from sales of our top five products.



We held the Certificates of Protected Variety
of Traditional Chinese Medicine (Grade Two) issued by the SFDA for Tongbi Capsules and Anti-flu Granules which
gave the Company exclusive or near-exclusive rights to manufacture and distribute these two medicines. Tongbi Capsules’ certificates
expired in September 2009. We filed an application for extending the protection period on March 12, 2009 and received certification
extension until September 13, 2016. Lung Nourishing Syrup received a patent with duration of 20 years from the State Intellectual
Property Office of the PRC and the patent will expire on September 12, 2027.



Price Control of Drugs by PRC Government
and SDRC



The State Development and Reform Commission
of the PRC (“SDRC”) and the price administration bureaus of the relevant provinces of the PRC in which the pharmaceutical
products are manufactured are responsible for the retail price control over our pharmaceutical products. The SDRC sets the
price ceilings for certain pharmaceutical products in the PRC. All of our products except those under the protection periods are
subject to such price controls and could affect our future revenue growth. However, due to the direct support of TCM
by the Chinese government, China’s immense market, and our protected drugs, we are optimistic regarding our continuous growth
potential for TCM in China.



Financial Highlights





| | £ | Net revenues for the twelve months ended June 30, 2012 increased 68.9% to $137.4 million compared
    to the same period in 2011.
| | - | ---------------------------------------------------------------------------------------------------------------------------------





| | o | 68% of net revenues was from Bohai and 32% was from Yantai Tianzheng this fiscal year compared to the last fiscal year.
| | - | -----------------------------------------------------------------------------------------------------------------------



| | o | Sales were mostly derived from our lead products, Lung Nourishing Syrup, Tongbi Capsules, Tongbi Tablets, Fangfengtongsheng
    Granule, and Zhengxintai Capsules, which together represented over 77.4% of our total net revenues for the twelve months ended
    June 30, 2012, respectively.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | o | 78% of net revenue was derived from sales of prescription products and 22% was from Over-the-Counter products for the
    twelve months ended June 30, 2012.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------



40









| | £ | Non-GAAP net income for the twelve months ended June 30, 2012 increased 62.4%
to $19.1 million compared to the same period in 2011. The difference was mainly due to increased net
income offset by net increase in change in fair value of warrants of $4.8 million in the twelve months ended June 30, 2012 compared
to the same period in last year and change in Amortization of beneficial conversion features on convertible notes converted of
$8.3 million in the twelve months ended June 30,2012 compared to the same period in last year. (See above Use of Non-GAAP Financial
Measures). GAAP net income for the twelve months endedJune 30, 2012 decreased 31.1% to $9.6 million compared to the same
period in 2011.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | o | Income from operations increased 55.4% to $28.4 million this fiscal year compared to the last fiscal year.
| | - | ----------------------------------------------------------------------------------------------------------



| | o | Net income margin decreasedfrom 17.2% for the twelve months ended June 30, 2011 to
    7.0% for the twelve months ended June 30, 2012. The decrease was mainly due to the net increase
    in certain non-cash activities such as effective interest chargesfrom convertible notes and deferred income tax expenses as well as increase in selling related
    expenses.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | o | Included in the net income this fiscal year ended June 30, 2012 were a non-cash charge in deferred income tax expenses
    of $0.8 million, and a non-cash credit of $0.3 million in changes in fair value of warrants.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | £ | Basic and diluted earnings per share were $0.54 and $0.54 for the twelve months ended June
    30, 2012.
| | - | --------------------------------------------------------------------------------------------------------





| | o | Non-GAAP Diluted earnings per share increased 62.1% to $1.07
for the twelve months ended June 30, 2012 compared to the same period in 2011.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| | o | Non-GAAP Basic earnings per share increased 57.4% to $1.07
for the twelve months ended June 30, 2012 compared to the same period in 2011.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------





| | £ | Including restricted cash, our total cash balance was $27.8 million as of June 30, 2012 and
    cash flow from operating activities was $20.6 million for the twelve months ended June 30, 2012.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | o | Total cash and cash equivalents increased by $5.0 million for the twelve months ended June 30, 2012 compared to June
    30, 2011.
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| | o | Major cash payment activities for the twelve months ended June 30, 2012 included $3.1 million for the repayment of short
    term bank loans and $9.7 million paid for acquisition.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operating Results



Comparison of the twelve months ended June 30, 2012 and
2011



The following table sets forth key components
of our results of operations for the twelve months ended June 30, 2012 and 2011, in US dollars:



|                                         |  | For The Twelve Months Ended |            
|---------------------------------------- |  | --------------------------- | -----------
|                                         |  | June 30,                    |            
|                                         |  |                             |            
|                                         |  | 2012                        |            
|                                         |  |                             |            
|Net revenues                             |  | $                           | 137,372,492
|                                         |  |                             |            
|Cost of revenue                          |  |                             | (33,532,900
|                                         |  |                             |            
|Gross profit                             |  |                             | 103,839,592
|                                         |  |                             |            
|Operating expenses                       |  |                             | (75,468,125
|                                         |  |                             |            
|Income from operations                   |  |                             | 28,371,467 
|                                         |  |                             |            
|Total other income (expenses)            |  |                             | (11,408,560
|                                         |  |                             |            
|Income before provision for income taxes |  |                             | 16,962,907 
|                                         |  |                             |            
|Provision for income taxes               |  |                             | (7,314,882 
|                                         |  |                             |            
|Net income                               |  | $                           | 9,648,025  



41







The following table sets forth key components
as a percentage of net revenue for the twelve months ended June 30, 2012 and 2011:



|                                              |  | For The Twelve Months Ended |      
|--------------------------------------------- |  | --------------------------- | -----
|                                              |  | June 30,                    |      
|                                              |  | 2012                        |      
|                                              |  |                             |      
|Net revenues                                  |  |                             | 100.0
|                                              |  |                             |      
|Cost of sales                                 |  |                             | (24.4
|                                              |  |                             |      
|Gross profit                                  |  |                             | 75.6 
|                                              |  |                             |      
|Selling, general, and administrative expenses |  |                             | (54.9
|                                              |  |                             |      
|Income from operations                        |  |                             | 20.7 
|                                              |  |                             |      
|Total other income(expenses)                  |  |                             | (8.3 
|                                              |  |                             |      
|Income before provision for income taxes      |  |                             | 12.3 
|                                              |  |                             |      
|Provision for income taxes                    |  |                             | (5.3 
|                                              |  |                             |      
|Net income                                    |  |                             | 7.0  



Net Revenues



Net revenues
are comprised of sales of 19 traditional Chinese medicines in China during the twelve months ended June 30, 2012 (we currently
sell 19 medicines following our acquisition of Yantai Tianzheng on August 8, 2011). Net revenues for the twelve monthsended
June 30, 2012 increased by $56,043,937, or 68.9%, to $137,372,492 as compared to $81,328,555 for the twelve months ended June
30, 2011. Net revenues were $93,167,083 and $44,205,409 for Bohai and Yantai Tianzheng, respectively, for the twelve months ended
June 30, 2012. The increase in Bohai’s revenue was primarily due to a net increase in revenues of 17.7% from our four lead products
in Bohai: Lung Nourishing Syrup, Tongbi Capsules, Tongbi Tablets, and Shantongning Tablets, which together accounted
for over 82.1% of our total net revenues for Bohai. All of our lead products are
listed for coverage and reimbursement under national medical insurance program starting in December 2009. The sale of our
prescription drug products for the twelve months ended June 30, 2012represented 77.5% of total net revenue compared to
60.7% for the same period in last year. The increase in prescription sales was primary due to
increases in sales volume from our two prescription drugs, Tongbi Capsules and Tongbi Tablets as well as prescription product
sales from Yantai Tianzheng. Yantai Tianzheng was acquired on July 1, 2011.



Cost of Revenues



Cost of revenues
is comprised of raw material costs, labor cost, overhead costs associated with the manufacturing processes and related expenses
which are directly attributable to our revenues. Our cost of revenues for the twelve months ended June 30, 2012
was $33,532,900 as compared to $17,293,680 for the twelve months ended June 30, 2011, representing an increase of $16,239,220,
or 93.9%. Cost of revenues were $20,269,019 and $13,263,881 for Bohai and Yantai Tianzheng, respectively, for the twelve
months ended June 30, 2012.  The increase in overall cost of revenue was also due to cost of revenues of approximately
$8.7 million from Yantai Tianzheng which was acquired on July 1, 2011. The increase in cost of revenues was also attributable
to an increase in total cost of raw material, labor, and overhead as a result of an increase in overall sales from Bohai for
the twelve months ended June 30, 2012 and attributable to increased unit cost mainly caused by increase raw material cost compared
to the same period in last year.



Gross Profit



Gross profit
represents thedifference between net revenues and cost of revenues. We achieved gross profit of $103,839,592 for
the twelve months ended June 30, 2012, compared to $64,034,875 for the same period in 2011, representing an increase of $39,804,717,
or 62.2%, over the same periods in 2011. The increase of the gross profit is due to gross profit from Tianzheng, which was
acquiredon July 1, 2011, as well as due to increased revenues from Bohai.



42







Our overall
gross profit margins as a percentage of net revenues decreased byapproximately 3.1% from 78.7% to 75.6% the twelve months
ended June 30, 2012 compared to the same period in 2011. The decrease of the gross profit margin
is because of increased raw material cost for the twelve months ended June 30, 2012 compared to the same period last year. Meanwhile,
the Company also makes the effort to improve the cost control to avoid negative inflation effect.



Operating Expenses



Our operating expenses increased by $29,689,115
to $75,468,125, for the twelve months ended June 30, 2012 compared to $45,779,010 for the same fiscal period in 2011. The overall
increase in operating expenses was related to increased depreciation and amortization expenses, services supporting an overall
increase in sales activities and new product promotions as well as increased activities arising from our acquisition of Yantai
Tianzheng. Operating expenses amounted to $25,537,188 from Yantai Tianzheng for the twelve months ended June 30, 2012. The
percentage of operating expenses to net revenues was 54.9% and 56.3% for the twelve months ended June 30, 2012 and 2011, respectively,
representing a decrease of 1.4% as a percentage of net revenues.



Total Other Income (Expenses)



Total other
income (expenses) are comprised of interest income (expenses), changes in fair value of derivative instruments, other income (expenses),
and amortization of deferred financing fees. Total other expenses were$11,408,560 for the twelve months
ended June 30, 2012 compared to total other income of $514,028 for the period ended June 30, 2011, an increase of total other
expenses of $11,922,588. The increase in total other expenses were principally due to a net increase
of$7,096,584 for interest expenses and a net increase in non-cash gain in fair value of warrants for $4,817,430for convertible notes in connection with our private placement on January 5, 2010. The effective interest expense for convertible
notes is calculated using a constant effective interest rate, applied to the carrying value of the notes each month. As the
carrying value increases, so does the interest expense. On December 31, 2011, the Company entered into an amendment to the Notes
with Euro Pacific as representative of the Investors (the “Amendment”) which: (i) extended the maturity date of the
Notes from January 5, 2012 to April 5, 2012 (such extra three month period, the “Extended Period”); and (ii) increased
the interest rate on the Notes to an annual rate of 12% (or 3% for the Extended Period). On May 14, 2011, the Company entered
into an amendment to the Notes with Euro Pacific as representative of the Investors (the “Second Amendment”) which:
(i) extended the maturity date of the Notes from April 5, 2012 to October 5, 2012 (such extra six month period, the “Second
Extended Period”); and (ii) remained the interest rate on the Notes at an annual rate of 12% (or 6% for the Second Extended
Period). As of June 30, 2012, there were 5,225,000 shares of the Company’s Common Stock issuable upon conversion of
the outstanding convertible notes. (See Note 14).



Provision for Income Tax



Our provisions
for income taxes for the twelve months ended June 30, 2012 and2011 were $7,314,882 and $4,765,018, an increase of
$2,549,864, or 53.5%, from this fiscal quarter to date over the same period last year. The increase in provision for income
tax was principally due to an increase in taxable income under the PRC law from Bohai as well as income tax provision
from Yantai Tianzheng (see Note 20 to the accompanying audited consolidated financial statements).



Net Income



We had a net
incomeof $9,648,025 for the twelve months ended June 30, 2012, as compared to net income of $14,004,875 for the twelve
months ended June 30, 2011, a decrease in net income of $4,356,850, or 31.1%. This translates into basic net income per common
share of $0.54 and $0.81 and diluted net income per common share of $0.54 and $0.75, for the twelve months ended June 30, 2012
and 2011, respectively. The decrease in net income was primarily attributable to an increase in total gross profit of $41,062,431 offset
by an increase in operating expenses of $30,946,829, an increase in total other expenses of $11,922,588 resulting from mostly
effective interest charges and change in fair value of derivative liabilities, and an increase in the tax provision of $2,549,864
this fiscal year compared to the same period in prior year.



Net incomemargin
was 7.0% for the twelve months ended June 30, 2012 compared to 17.2% for the same period last year, a decrease of 59.2%. The decrease
in net income margin for the twelve months ended June 30, 2012 over the same period in the previous fiscalyear was principally due to a net increase in certain non-cash related activities such as amortization of beneficial conversion
features on convertible notes converted and change in fair value of warrants for a total of$13,105,840, as well as a non-cash
net decrease in deferred tax expense of $1,240,227. If we excluded such net gains, the net incomemargin
would be 13.9% this fiscal year.



We had Non-GAAP net income of $19,113,232
for the twelve months ended June 30, 2012, as compared to Non-GAAP net income of $11,769,996 for the twelve months ended June 30,
2011, an increase in Non-GAAP net income of $7,343,236, or
62.4%. This translates into basic Non-GAAP net incomeper common
share of $1.07 and $0.68, and Non-GAAP diluted net income per common share of $1.07
and $0.66, for the twelve months ended June 30, 2012 and 2011, respectively (See Use of Non-GAAP Financial Measures above).



43







Total other
income included a non-cash charge in effective interestexpenses of $9,317,897 for the twelve months ended June 30, 2012 compared
to $1,029,487 for the same period in 2011.



Total other
income included a non-cash charge for the twelvemonths ended June 30, 2012 and 2011 also comprised of a non-cash debit
expense for fair value of warrants of $273,369 and income of $4,544,061, respectively.



Liquidity and Capital Resources



Liquidity is
the ability of a company to generate adequate amounts of cash to meet its needs for cash. As of June 30, 2012, we had cash
and cash equivalents of $18,386,288 and restricted cash of $9,449,905, substantially almost all of which is located in
financial institutions in China. The following table provides detailed information about our net cash flow for financial statement
periods presented in this report:



Summary of Cash Flow Statements



|                                                                    |  | For the twelve months ended |           
|------------------------------------------------------------------- |  | --------------------------- | ----------
|                                                                    |  | June 30,                    |           
|                                                                    |  | 2012                        |           
|Net cash provided by operating activities                           |  | $                           | 20,607,540
|Net cash used in investing activities                               |  |                             | (9,824,114
|Net cash used in financing activities                               |  |                             | (6,144,836
|Effect of foreign currency translation on cash and cash equivalents |  |                             | 403,272   
|Net increase (decrease) in cash and cash equivalent                 |  | $                           | 5,041,862 



On January 5, 2010, pursuant to a Securities
Purchase Agreement with 128 accredited investors, we sold 6,000,000 units for aggregate gross proceeds of $12,000,000, each unit
consisting of an 8% senior convertible promissory note in the principal amount of $2.0, or the Notes, and one common stock
purchase warrant, or the Warrants. The Notes bear interest at 8% per annum, payable quarterly in arrears on the last
day of each of our fiscal quarters. No principal payments are required until maturity of the Notes on January 5, 2012.
Each Note, plus all accrued but unpaid interest thereon, is convertible, in whole but not in part, at any time at the option
of the holder, into shares of the Company’s common stock at a conversion price of $2.00 per share, subject to adjustment
as set forth in the Note. If the convertible note holders did not convert their notes by their maturity date (January 5, 2012),
we will need to redeem those convertible notes at $2.0 per each note. As of June 30, 2012, there were 5,225,000 shares of the
Company’s Common Stock issuable upon conversion of the outstanding convertible notes. (See Note 14 to the accompanying
financial statements).



Effective as of June 30, 2010, we
entered into an Amendment and Agreement (the “A&A”) with the representative of the investors pursuant to which
we agreed to make certain amendments to the Notes and the Warrants.  Pursuant to the A&A, the anti-dilution protection
provisions in the Notes and the Warrants were eliminated and a provision specifically precluding net cash settlement by the
Company of the Notes and the Warrants was added. In return, and subject to certain non-financing exceptions, we agreed not
to issue any new equity securities at a price per share below $2.20 until the earlier of (i) January 5, 2013 or (ii) the date
on which, collectively with any prior conversions or exercises of Notes and Warrants, 75% of the principal face value of the Notes
in the aggregate has been converted into shares of Company common stock and Warrants representing, in the aggregate, 75%
of the aggregate shares of the Company’s common stock underlying the Warrants have been exercised. On March 30, 2011, we
entered into a Termination Agreement pursuant to which we and the representative of the investors agreed to terminate the A&A
because, after further study, we concluded that the original purpose of the A&A (to mitigate the impact of certain non-cash
embedded derivative liabilities associated with the Notes, Warrants and certain placement agent warrants) would not be achieved.
Therefore, we determined and agreed with the representative of the investors to terminate the A&A and to thereby restore the
Notes, Warrants and such placement agent warrants to their original terms.



On December 31, 2011, we entered into an
amendment to the Notes with Euro Pacific as representative of the Investors (the “Amendment”) which: (i) extended
the maturity date of the Notes from January 5, 2012 to April 5, 2012 (such extra three month period, the “Extended Period”);
and (ii) increased the interest rate on the Notes to an annual rate of 12% (or 3% for the Extended Period).



On May 14, 2012, we entered into an amendment
to the Notes with Euro Pacific as representative of the Investors (the “Second Amendment”) which: (i) extended the
maturity date of the Notes from April 5, 2012 to October 5, 2012 (such extra six month period, the “Second Extended Period”);
and (ii) remained the interest rate on the Notes to an annual rate of 12% (or 6% for the Extended Period).



See “Comparison of Years ended June
30, 2012 and 2011 – Cash Position” and “Obligations under Material Contracts” below for further discussion
of our liquidity needs.



44







In addition, as part of the contemplated
Second Amendment, we established an RMB denominated escrow account in China and to deposit into such escrow account the remaining
outstanding amount of the Notes, which we have no right to dispose of or use except for: (i) conversion into US Dollars for the
purpose of repayment of the Notes or (ii) releases from such Escrow Account from time to time in amounts equal to the decreases
in the outstanding amount of the Notes, either by payments made by us or conversion of the Notes by Note holders.



On May 8, 2012, a Three Parties Fund Escrow
Agreement (“Escrow Agreement”) was entered into among Yantai Shencaojishi Pharmaceuticals Co., Ltd., our wholly-owned
subsidiary (“YantaiShencaojishi”), Euro Pacific and Rural Credit Cooperative of Laishan District, Yantai City (the
“Bank”). Pursuant to the Escrow Agreement, an RMB-denominated escrow account (the “Escrow Account”) was
established with Bank and RMB 59 million (approximately $10.45 million) was deposited by YantaiShencaojishi into the Escrow Account.
On May 9, 2012, a Supplemental Agreement to the Escrow Agreement with details of the Escrow Account was entered into by us, Euro
Pacific and the Bank. The Escrow Agreement provides that the Escrow Account will be managed by both us and Euro Pacific and that
withdrawal of cash from the Escrow Account cannot be done without prior written consent from both us and Euro Pacific.



As of the date
of Report on Form 10-K, a repayment of approximately $414,000 was paid on the Notes (calculated based on an annual rate of 12%
as discussed above) anda repayment of principal of $631,000 was paid after June 30, 2012. As of the date of this Report,
the Escrow Account remains in place and we continue to work on converting RMB to Dollars in order to make payments under the Notes.
However, we expect that we will not be able to accomplish this by the conclusion of the Second Extended Period. We will continue
to work with Euro Pacific on this matter and will continue our efforts in order to meet our obligations to the Note holders.





The Company is currently working with Euro
Pacific as representative of the Investors on a fourth amendment to the Notes which would further extend the maturity date of
the Notes from October 5, 2012 to January 5, 2013. As of the date of this Annual Report, no written agreement has been entered
into in this regard. The Company is unable to predict whether an agreement will be reached. The non-payment of the loan in the
absence of an extension of the maturity date would constitute an event of default under the terms of loan agreement. The Company
can not predict what the implications of the non-payment of the loan would be other than the continued difficulty of repaying
the loan from escrowed funds due to currency conversion restriction.





Comparison of years ended June 30, 2012 and 2011



Net Cash Provided by Operating Activities



Net cash provided
by operating activitiestotaled $20,607,540 for the twelve months ended June 30, 2012 as compared to net cash provided
by operating activities of $10,958,943for the twelve months ended June 30, 2011. The increase in net
cash provided by operatingactivities, for the twelve months ended June 30, 2012 compared to the same period 2011, was
primarily due to an increase of $8.3 million in the effective interest on convertible notes, increased $4.8 million in change
in fair value of warrants, increased depreciation and amortization of $3.8 million, increased income taxes payable of $0.9 million,
and increased accrued liabilities of $1.9 million, offset by decreased net income of $4.4 million, increased accounts receivable
of $1.5 million, and decreased accretion of beneficial conversion feature of $1.0 million. We expect our cash flow from operating
activities to maintain a positive flow due to our acquisition of Yantai Tianzheng and our continuouscash flow management.



Net Cash Used In Investing Activities



Net cash used
in investing activitieswas $9,824,114 for the twelve months ended June 30, 2012 and $14,492,630 for the twelve months
ended June 30, 2011. The net decrease in cash used in investing activities was due to a cash payment
of approximately $9.7 million for our Yantai Tianzheng acquisition this fiscal year, offset by a cash receipt of $1.4 million
from Yantai Tianzheng’s acquisition, decreased purchase of leasedland use rights of $7.1 million, and decreased
purchase of formulas of $7.2 million.



The Company is unable to predict whether an agreement will be reached. The non-payment of the loan in
the absence of an extension of the maturity date would constitute an event of default under the terms of the note agreement. The
Company can not predict what implications of the non-payment would be other than the continued difficulty of repaying the loan
from escrowed funds due to currency restrictions.



Net Cash Used In Financing Activities



Net cash used
in financing activitiestotaled $6,144,836 for the twelve months ended June 30, 2012 as compared to net cash used in financing
activities of $1,131,618 forthe same period in 2011. The reason for the increase in cash used in financing
activities was due toincreased net restricted cash of $9.0 million, repayment of $414,000 convertible notes payable, $1.9
million less cash received from sales of common stock, and decreased payments of $1.5 million for short-term
bank loans, offset bya cash receiptof $6.3 million froman equity shareholder, Mr. Qu (our Chairman and CEO).  Mr. Qu made a permanent equity capital contribution of approximately
$6.3 million (RMB 40,000,000) into Bohai on August 3, 2011to support its future capital needs.



Cash Position



As of June 30,
2012, we had cashof $18,386,288 as compared to $13,344,426 as of June 30, 2011, an increase of $5,041,862. This increase
was due primarily to a capital contribution from an equity holder (our Chairman Mr. Qu) of $6.3 million,
and cash receipt of $1.4 million from our acquisition of Yantai Tianzheng,a decrease in cash from purchase of leased land
use rights of $7.1 million, and purchase of formulas of $7.2 million offset by a cash payment of approximately
$9.7 million for the Yantai Tianzheng acquisition, cash payments for the purchase of property, plant, equipment of $0.9 million,
decreased restricted cash of $9.0 million, , and cash payments of $3.1 million for short term bank loans.



45







We believe that we can meet our liquidity
and capital requirements for our ongoing operations from our currently available working capital and maintain our operations
at our current levels.



However, during the current fiscal year
and thereafter, we will be required to fund two significant obligations (as well as others described under “Obligations
under Material Contracts” below):



| | (i) | the completion of the acquisition of Yantai Tianzheng ($5,000,000 million is due within 12 months as of June 30, 2012.  The
    installment balances can be turned into bank loans with a two-years term at 6% annual interest rate); and
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | the repayment our convertible promissory notes due October 5, 2012 ($10.04 million due as of June 30, 2012).
| | ---- | ------------------------------------------------------------------------------------------------------------



As such, we will be required to raise substantial
additional capital to fund these obligations, either through the issuance of debt or equity securities, bank loans or other methods. Readers
are cautioned that additional funding, capital or loans may be unavailable to us on favorable terms, if at all.  If
adequate funds are not available, we would likely have to renegotiate the terms of these obligations, which we may be unable to
do on favorable terms. We may thus be required to agree to unfavorable terms which could have a material adverse effect on
us, our financial condition and our results of operations and beyond.  Moreover, to the extent that additional capital
is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership
and potentially economic dilution to existing shareholders.



In addition, if we are faced with worldwide
financial and credit crises as occurred in 2008 and 2009 and very recently in 2011, it may make the future cost of raising funds
through the debt or equity markets more expensive or make financial markets unavailable to us at times when we require additional
financings.



Critical Accounting Policies and Estimates



As discussed in Part II, Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year
ended June 30, 2012, we consider our use of estimates, accounts receivable, revenue recognition, inventories, property plant and
equipment, and income taxes to be the most critical accounting policies in understanding the judgments that are involved in preparing
our audited consolidated financial statements. There have been no significant changes to these estimates in the twelve months
ended June 30, 2012.



Recent Accounting Pronouncements Adopted



See Note 3 to the consolidated financial
statements included in Item 1, Financial Information, of this Annual Report on Form 10-K.



Recent Accounting Pronouncements Not Yet Adopted



See Note 3 to the audited consolidated
financial statements included in Item 1, Financial Information, of this Annual Report on Form 10-K.



Obligations under Material Contracts



The following table summarizes our contractual
obligations as of June 30, 2012, and the effect these obligations are expected to have on our liquidity and cash flows in future
periods.



|                                              |  | Payments Due by Period |           
|--------------------------------------------- |  | ---------------------- | ----------
|                                              |  |                        |           
|                                              |  | Total                  |           
|Contractual Obligations:                      |  |                        |           
|Convertible notes                             |  | $                      | 10,036,000
|                                              |  |                        |           
|Construction In Process                       |  |                        | 463,234   
|                                              |  |                        |           
|Yantai Tianzheng acquisition                  |  |                        | 25,300,000
|                                              |  |                        |           
|Contract Research and Development Arrangement |  |                        | 1,040,170 
|                                              |  |                        |           
|Total Contractual Obligations:                |  | $                      | 36,839,404



46







Other than discussed above, there are no
other foreseeable material commitments or contingencies as of June 30, 2012.



Off-Balance Sheet Arrangements



We did not engage in any “off-balance
sheet arrangements” (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) during the twelve months ended
June 30, 2012. We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of
any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s
equity or that are not reflected in our audited consolidated financial statements. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support
to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk,
or credit support to us or engages in leasing, hedging, or research and development services with us.



Currency Exchange Risk



Our reporting currency is the U.S. dollar
and our operations in China use their local currency as their functional currencies. Substantially all of our revenue and
expenses are in the Chinese currency, the Renminbi. We are subject to the effects of exchange rate fluctuations with respect
to any of these currencies.  For example, the value of the Renminbi depends to a large extent on Chinese government
policies and China’s domestic and international economic and political developments, as well as supply and demand in the
local market.  Since 1994, the official exchange rate for the conversion of the Renminbi to the U.S. dollar had generally
been stable and the Renminbi had appreciated slightly against the U.S. dollar.  In July 2005, the Chinese government
changed its policy of pegging the value of the Renminbi to the U.S. dollar.  Under this policy, which was halted in
2008 due to the worldwide financial crisis, the Renminbi was permitted to fluctuate within a narrow and managed band against a
basket of certain foreign currencies.  In June 2010, the Chinese government announced its intention to again allow the
Renminbi to fluctuate within the 2005 parameters.  It is possible that the Chinese government could adopt an even more
flexible currency policy, which could result in more significant fluctuation of Renminbi against the U.S. dollar, or it could
adopt a more restrictive policy. We can offer no assurance that the Renminbi will be stable against the U.S. dollar or any
other foreign currency.



Our consolidated financial statements
are translated into U.S. dollars at the average exchange rates in each applicable period.  To the extent the U.S. dollar
strengthens against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced
revenue, operating expenses and net income for our international operations.  Similarly, to the extent the U.S. dollar
weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue,
operating expenses and net income for our international operations.  We are also exposed to foreign exchange rate fluctuations
as we convert the financial statements of our foreign consolidated subsidiaries into U.S. dollars in consolidation.  If
there is a change in foreign currency exchange rates, the conversion of the foreign consolidated subsidiaries’ financial
statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income.  In
addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional
currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to
a transaction gain or loss.  We have not entered into agreements or purchased instruments to hedge our exchange rate
risks, although we may do so in the future.  The availability and effectiveness of any hedging transaction may be limited
and we may not be able to hedge our exchange rate risks. Most of our transactions are settled in Renminbi and U.S. dollars. We
are not exposed to significant foreign currency risk.



Credit Risk



Our potential credit risk is mainly attributable
to our debtors and bank balances.  In respect of debtors, we have policies in place to ensure that it will only accept
customers from countries which are politically stable and customers with an appropriate credit history.  In addition,
all the bank balances were made with financial institutions with high-credit quality.  Thus, we are not considered to
be subject to significant credit risk.



Interest Rate Risk



Our interest rate risk is primarily attributable
to our short-term borrowings, loan to a third party and loan to equity holders.  Our borrowings carry interest at fixed
rate.  Our management has not used any interest rate swaps to hedge our exposure to interest rate risk.



Inflation



In recent years, the Chinese economy has
experienced periods of rapid expansion and high rates of inflation. During the past ten years, the rate of inflation in China
has been as high as 20.7% and as low as -2.2%. These factors have led to the adoption by Chinese government, from time to time,
of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. While
inflation has been more moderate since 1995, high inflation may in the future cause Chinese government to impose controls on credit
and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.



47







Item 7A.  Quantitative and Qualitative Disclosures
about Market Risk.



We are a “smaller reporting company”
as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to Regulation
S-K.



Item 8.  Financial Statements and Supplementary
Data.



Our Consolidated
Financial Statements and Notes thereto and the report of Marcum Bernstein Pinchuk LLP, our independent registered public accounting
firm, are set forth on pages F-1 through F-[28]of
this Annual Report.



Item 9.  Changes In and Disagreements with Accountants
On Accounting and Financial Disclosure.



None.



Item 9A.  Controls and Procedures.





Evaluation of Disclosure Controls and Procedures



The Company’s
management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the
reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer
or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.





48









As of the end of the
period covered by this Annual Report, our President and Chief Executive and Principal Accounting Officer (the “Certifying
Officer”), conducted an evaluation of our disclosure controls and procedures. Based on this evaluation, the Certifying Officer
has concluded that our disclosure controls and procedures were, due to certain factors, not effective to ensure that material information
is recorded, processed, summarized and reported by our management on a timely basis in order to comply with our disclosure obligations
under the Exchange Act and the rules and regulations promulgated thereunder.



Our management is also
responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control
over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles.



Our internal control over financial reporting includes those policies and procedures that:





| | • | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                
| | • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and
| |   |                                                                                                                                                                                                                                                                                                                                
| | • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.                                                                                                                             





As of June 30,
2012 we carried out an assessment of the effectiveness of our internal control over financial reporting based on the
framework in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation, our management concluded that our internal control over financial reporting was
not effective as of June 30, 2012. Management has specifically observed that our accounting systems and current staffing
resources in our finance department are currently insufficient to support the complexity of our financial reporting
requirements. We currently do not have any staff members in our accounting and finance department who have experience or
specialized training in preparing financial statements in the form and format required by the SEC. We have also experienced
difficulty in applying complex accounting and financial reporting disclosure rules as required under various aspects of GAAP
and SEC reporting regulations including those relating to accounting for business combinations, intangible assets,
derivatives and income taxes. Our former Chief Financial Officer, which was based in the United States, resigned from his
position with the Company during the quarter ended September 30, 2011. Subsequent thereto, we have engaged the service of an
outside financial reporting specialist to assist with the preparation of our financial statements and quarterly and annual
report; however, we have not hired a replacement for our CFO position at this time.



We have instituted
certain procedures to mitigate our internal control risks. Our Chief Executive Officer and our Controller based in China review
and approve substantially all of our major transactions to ensure the completeness and fair presentation of our financial statements.
We have, when needed, hired outside experts to assist us with implementing complex accounting principles. Management and the Board
of Directors believe that the Company must allocate additional human and financial resources to address these matters.



Changes in Internal Control over Financial
Reporting



Subject
to the foregoing disclosure, there were no changes in our internal control over financial reporting during our fiscal year
ended June 30, 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.



Limitations on the Effectiveness of Internal Controls



Readers are cautioned that our management
does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily
prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated
goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may deteriorate.



Item 9B.  Other Information.



None.



49







PART III



Item 10.   Directors, Executive Officers, Promoters
and Control Persons; Compliance With Section 16(A) of the Exchange Act.



The following table sets forth the name,
age, and position of our directors, our executive officers and key employees as of the date of this Annual Report.  Executive
officers are elected annually by our board of directors.  Each executive officer or key employee holds his office until
he resigns, is removed by the board of directors, or his successor is elected and qualified, subject to applicable employment
agreements.  We have a classified board of directors under which each of our directors is designated as a part of one
of three separate classes, with the directors in one class being elected annually by our shareholders at our annual meeting of
shareholders for a term of three years.  Each director holds his office until his successor is elected and qualified
or his earlier resignation or removal.  As used below, the term “Bohai” means YantaiBohai Pharmaceuticals
Group Co., Ltd., a PRC company and our operating subsidiary.



|Name           |  | Age |  | Position/Director Class                                                            
|-------------- |  | --- |  | -----------------------------------------------------------------------------------
|Hongwei Qu     |  | 37  |  | President, Chief Executive Officer and Chairman of the Board of Directors (Class 1)
|Ning Tang      |  | 52  |  | Vice President – Operations                                                        
|Hongbin Shan   |  | 43  |  | Vice President – Sales and Marketing                                               
|Chunhong Jiang |  | 47  |  | Secretary and Treasurer                                                            
|Chengde Wang   |  | 64  |  | Director (Class 1)                                                                 
|Thomas Tan     |  | 50  |  | Director (Class 2)                                                                 



Hongwei Qu.  Mr. Qu
became our President, Chief Executive Officer, Interim Chief Financial Officer, Treasurer and Secretary as of January 5,
2010, and, became the sole director and Chairman of the our board of directors effective as of January 16, 2010 upon filing
of Schedule 14(f) with the SEC on January 6, 2010 in compliance with Section 14(f) of the Exchange Act.  Mr. Qu
relinquished the positions of Interim Chief Financial Officer, Secretary and Treasurer in June 2010.  From 2001 to
May 2007, Mr. Qu was the founder and principal officer of YantaiHangwei Medical Trading Co., a PRC company engaged in the
wholesale of drugs and medical products and retail of medical devices. In May 2007, Mr. Qu took principal responsibilities
for the acquisition of Bohai.  From May 2007 until present, Mr. Qu has served as the General Manger and Executive
Director of Boha. Mr. Qu has significant experience in the medical and pharmaceutical sectors in China.  Mr. Qu
graduated from Shandong Economic University with a bachelor degree.



Ning Tang was appointed as Bohai’s
Vice President — Operations in November 2007 and our Vice President – Operations in June 2010.  Mr. Tang
has over 25 years of experience in management of pharmaceuticals companies in China.  Prior to his appointment with
Bohai, Mr. Tang served as General Manager for YantaiXiangyu Environmental Protection Equipment Co., Ltd. from 2004 to 2007, where
he was responsible for all affairs of corporate operations in China.  He served as Vice President of YantaiRongchang
Pharmaceuticals Co., Ltd. from 1998 to 2004, where he managed the departments of operation, administration, manufacturing and
product quality.  From 1986 to 1998, he served as Deputy Director for Yantai TCM Pharmaceuticals Corporation, where
he was responsible for production, product quality, purchase, research and development and sales.  He received his B.S.
degree in international trade and business from Shandong Economic University.



Hongbin Shan was appointed as Bohai’s
General Manager of Sales in May 2010 and as the Vice President – Sales and Marketing as of June 2010.  Mr. Shan
has over 10 years of experience in sales, marketing and management.  Prior to his appointment with us, from 1994 to
2010, Mr. Shan served as General Manager for the Qingdao Branch, Shandong Province of Shandong Green Leaf Pharmaceutical Co.,
Ltd. and manager of the Su-Min Region (including Jiangsu, Fujian, Hubei, Jiangxi and Anhui provinces) where he was responsible
for all affairs of marketing and sales.  He also served in the capacity of Assistant Director of the Oncology Division,
responsible for the national market of Shandong Green Leaf’s tumor line.  He received his B.S. degree from YantaiUniversity
and educational certificate from the senior MBA program of Tsinghua University.



Chunhong Jiang was appointed as
Bohai’s General Manager of Finance, Secretary and Treasurer in May 2007 and as our Secretary and Treasurer in June 2010.  Ms.
Jiang has over 20 years of experience in corporate finance, accounting and management.  Prior to her appointment with
Bohai, Ms. Jiang served as Financial Manager for YantaiFurao Trading Group from 2004 to 2007.  She served as Financial
Manager and department director for Yantai Garment Company, a subsidiary of China Garment Group from 1994 to 2003, where she was
responsible for overall accounting and financial reporting functions. She served as statistician, accountant and financial chief
for Yantai Hardware Factory from 1987 to 1993, where she managed the overall statistics, accounting and financial reporting functions.  She
graduated from Shandong Economic University.



50







Chengde Wang became an independent
director of our Company on July 12, 2010.  Mr. Wang has served as the director medical doctor and Ph.D./MD advisor of
Beijing Shuntiande Chinese Medicine Hospital since October 2005, where he is responsible for managing medical practice and research
projects.  Prior to joining Beijing Shuntiande Chinese Medicine Hospital, Mr. Wang worked at GuangAnmen Hospital under
China Academy of Chinese Medical Science and was the professor and the chief physician in the Beijing University of Chinese Medicine.  Mr.
Wang is an expert in Traditional Chinese Medicine and has been honored by the P.R.C. State Council.  He is a member
of National Committee of The Chinese People’s Political Consultative Conference, a director of Cooperation Center of State
Administration of Traditional Chinese Medicine with Taiwan, Hong Kong and Macao, director and Secretary-General of the Center
of Traditional Chinese Medicine Society and expert of review committee of National Essential Drugs Association.  Mr.
Wang graduated from Beijing University of Chinese Medicine.



Thomas Tan became an independent
director of our Company on September 6, 2011. Mr. Tan has over 15 years of experience in corporate finance and management in the
United States. In the last 3 years, he has served as the Managing Director of Capital Markets Group at Euro Pacific Capital, Inc.,
responsible for leading private placements for US listed Chinese companies and Canadian listed mining companies.  In addition,
Mr. Tan has focused on the precious metals and mining sectors since 2004, becoming, at the time, a popular independent blogger,
writer and contributor for many financial and precious metal websites.  Many of Mr. Tan’s articles were published and
treated as Editor’s Picks by Seeking Alpha.  Before joining Euro Pacific in 2008, from 1998 to 2008, Mr. Tan served
in various corporate finance positions at Pfizer, Inc. in the financial planning and analysis area, supporting research and
development, legal and manufacturing functions.  In 1997, he worked briefly as a banker for the Capital Markets Group
at Cargill, Inc.  Mr. Tan holds an MBA in Finance from the Fuqua School of Business at Duke University and has held the Chartered
Financial Analyst (CFA) designation since 2004.



Audit, Nominating, Compensation Committees and Director
Independence



Our board of directors is comprised of
a majority of “independent” directors (as defined under the Nasdaq Marketplace rules).



As part of obligations under the Securities
Purchase Agreement in connection with our January 2010 private placement, one of our directors is designated by Euro Pacific Capital,
the lead placement agent for such private placement.  Thomas Tan is the director designated by Euro Pacific Capital.



Effectively February 2, 2011, the Board
established three committees of the Board: an Audit Committee, Nominating and Corporate Governance Committee and Compensation
Committee.  In addition, the Board appointed the following directors to serve on such committees, as indicated below;



|Audit Committee                                       |  | Members: Thomas Tan                               
|----------------------------------------------------- |  | --------------------------------------------------
|                                                      |  |                                                   
|Nominating and Corporate
        Governance Committee |  | Chairman: Thomas Tan
        Members: Chengde Wang
|                                                      |  |                                                   
|Compensation Committee                                |  | Chairman: Thomas Tan
        Members: Chengde Wang



The Board of Directors has determined
that Mr. Tan qualifies as an “audit committee financial expert” as defined by applicable SEC rules.



Communication with our Directors



Shareholders or other interested parties
may communicate with our directors by sending mail to Mr. Hongwei Qu, c/o YantaiBohai Pharmaceuticals Group Co. Ltd., No.9 Daxin
Road, Zhifu District, Yantai, Shandong Province, China 264000.



Board of Directors’ Meetings



During our fiscal year ended June 30,
2012, we did not hold any meetings of the board of directors, although our board of directors did act by unanimous written consent.



51







Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange
Act of 1934, as amended, requires our officers, directors and persons who beneficially own more than 10% of a registered class
of our equity securities (“ten percent shareholders”) to file reports of ownership and changes in ownership with the
SEC. Officers, directors and ten percent shareholders are charged by the SEC regulations to furnish us with copies of all Section
16(a) forms they file.



Based solely upon a review of copies of
Section 16(a) reports and representations received by us from reporting persons, and without conducting any independent investigation
of our own, in fiscal year ended on June 30, 2010, our officers, directors and ten percent shareholders are in compliance with
Section 16(a).



Item 11. Executive Compensation



The following table sets forth all compensation
received during the last two fiscal years by our Chief Executive Officer, Chief Financial Officer and each of the other most highly
compensated executive officers whose total compensation exceeds $100,000 in such fiscal years.  These officers are referred
to as the Named Executive Officers in this Annual Report.



All the executive officers were paid in
RMB and the amounts reported in this table have been converted from Renminbi to U.S. dollars based on the June 30, 2012 conversion
rate of RMB 6.3519 to $1.00.



|SUMMARY COMPENSATION TABLE  | 
|--------------------------- | 
|Name and Principal Position | 
|Hongwei Qu                  | 
|Chief Executive Officer     | 
|                            | 
|Gene Hsiao*                 | 
|Chief Financial Officer     | 



*Effective December 31, 2011, Mr. Hsiao resigned from his position
as CFO of the Company.



Employment Agreements



We presently do not have any employment
agreements or other compensation arrangements with Mr. Qu.





|Director Compensation | 
|--------------------- | 
|Name (a)              | 
|Hongwei Qu            | 
|Chengde Wang          | 
|Adam Wasserman*       | 
|Gene Hsiao**          | 



*         Mr.
Wasserman resigned from our board of directors on February 19, 2012.

**       Mr. Hsiao resigned from
our board of directors on December 31, 2011.



Hongwei Qu is paid in his capacity as
executive officer of our Company and he does not receive any additional compensation for his service as director.



Gene Hsiao was paid in his capacity as
chief financial officer of our Company and he does not receive any additional compensation for his service as director.



52







On January 11, 2010, Dr. Chengde Wang
entered into such agreements with the Company, which became effective on July 12, 2010 with his appointments to the Company’s
board of directors and the Company’s execution thereof.  On September 6, 2011, Thomas Tan entered into an independent
director and indemnification agreement with the Company and it is effective as of such date.  The form of independent
director and indemnification agreements are filed as Exhibit 10.1 to our Current Report on Form 8-K, dated July 13, 2010 (the
“Independent Director Agreement”).



Pursuant to the Independent Director Agreements:



(i)           each
independent director will be retained as a director of the Company until the director or the Company terminates the agreement
upon thirty (30) days prior written notice, with or without cause;



(ii)          
Mr. Tan receives a $20,000 annual director’s fee and a five year non-qualified option to purchase 6,000 shares of restricted
common stock of the Company at a price equal to $2.00 per share with cashless exercise feature; and



(iii)        
Dr. Wang receives a $22,000 annual director’s fee.



The Independent Director Agreement also
contains standard confidentiality provisions and provides that the Company shall indemnify the directors to the fullest extent
permitted by law against personal liability for actions taken in the performance of their duties to the Company.



53







Item 12.  Security Ownership of Certain Beneficial
Owners and Management



The table sets forth below certain information
regarding the beneficial ownership of our common stock as of the date of this Annual Report, based on 17,861,085 aggregate shares
of common stock outstanding as of such date, by: (i) each person who is known by us to own beneficially more than 5% of our outstanding
common stock with the address of each such person, (ii) each of our present directors and officers, and (iii) all officers and
directors as a group. Beneficial ownership is determined in accordance with SEC rules and generally includes voting or investment
power with respect to securities. Unless otherwise indicated, the shareholders listed in the table have sole voting and investment
power with respect to the shares indicated. Unless otherwise noted, the principal address of each of the shareholders, directors
and officers listed below is No. 9 Daxin Road, Zhifu District, Yantai, Shandong Province, China. All share ownership figures include
shares of our Common Stock issuable upon securities convertible or exchangeable into shares of our Common Stock within sixty (60)
days of the date of this Annual Report, which are deemed outstanding and beneficially owned by such person for purposes of computing
his or her percentage ownership, but not for purposes of computing the percentage ownership of any other person.



|Name of Beneficial Owner                        |  | Shares of Common
    Stock Owned |           |  | Percent of Class
    Beneficially Owned (1) | 
|----------------------------------------------- |  | -------------------------------- | --------- |  | ------------------------------------------- | 
|Glory Period Limited (2)(3)(4)                  |  |                                  | 8,942,471 |  |                                             | 
|Hongwei Qu (4)                                  |  |                                  | 8,942,471 |  |                                             | 
|Chengde Wang (5)                                |  |                                  | -         |  |                                             | 
|Thomas Tan (6)                                  |  |                                  | -         |  |                                             | 
|All Executive Officers and Directors as a group |  |                                  | 8,982,471 |  |                                             | 



|(1) | Based on 17,861,085 shares of common stock issued and outstanding as of June 30, 2012.
|--- | --------------------------------------------------------------------------------------



|(2) | Joshua Tan is the sole shareholder of Glory Period, but pursuant to a Call Option Agreement, he has no right to sell any
    shares without prior written consent by Hongwei Qu.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Hongwei Qu is the executive director of Glory Period.
|--- | -----------------------------------------------------



|(4) | On December 7, 2009, Mr. Qu, who is a PRC citizen, entered into the Call Option Agreement with Mr. Tan, a Singapore passport
    holder and the sole shareholder of Glory Period.  Under the Call Option Agreement, Mr. Qu shall have right and option
    to acquire up to 100% shares of Glory Period for nominal consideration within the next 3 years.  The Call Option
    Agreement also provides that Mr. Tan shall not dispose any of the shares of Glory Period without Mr. Qu’s consent.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Dr, Wang is a director of our company.
|--- | --------------------------------------



|(6) | Mr. Tan is a director of the Company. Pursuant to his independent directors agreement with
    us, Mr. Chan is expected to receive, effective September 6, 2011, and provided he is still serving with our Company, a five
    year non-qualified option to purchase 20,000 sharesof restricted common stock of the Company at a price equal to $2.00 per share with cashless exercise feature
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 13. Certain Relationships and Related Transactions
and Director Independence.



Chance High owns 100% of the issued and
outstanding capital stock of WFOE, a wholly foreign owned enterprise incorporated under the laws of the PRC.  On December
7, 2009, WFOE entered into the VIE Agreements with Bohai, a company incorporated under the laws of the PRC, and its three shareholders
which include Mr. Qu (our President and Chief Executive Officer, who owns 90% of Bohai’s shares) and two unaffiliated parties.  Pursuant
to the VIE Agreements, WFOE does not directly own the equity of our operating subsidiary, but rather assumed management of the
business activities of Bohai and has the right to appoint all executives and senior management and the members of the board of
directors of Bohai.  The VIE Agreements are comprised of a series of agreements, including a Consulting Services Agreement,
Operating Agreement, Proxy Agreement, Equity Pledge Agreement, and Option Agreement, through which WFOE has the right to advise,
consult, manage and operate Bohai for an annual fee in the amount of Bohai’s yearly net profits after tax.  Additionally,
Bohai’s shareholders have pledged their rights, titles and equity interest in Bohai as security for WFOE to collect consulting
and services fees provided to Bohai through an Equity Pledge Agreement. In order to further reinforce WFOE’s rights to control
and operate Bohai, Bohai’s shareholders have granted WFOE the exclusive right and option to acquire all of their equity
interests in Bohai through an Option Agreement.



54







Through WFOE, Chance High operates and
controls Bohai through the VIE Agreements. WFOE used the contractual arrangements to acquire control of Bohai, instead of using
a complete acquisition of Bohai’s assets or equity to make Bohai a wholly-owned subsidiary of WFOE because: (i) PRC laws
governing share exchanges with foreign entities, which became effective on September 8, 2006, make the consequences of such acquisitions
uncertain and (ii) other than by share exchange transactions, PRC laws require Bohai to be acquired for cash and WFOE was not
able to raise sufficient funds to pay the full appraised value for Bohai’s assets or shares as required under PRC laws.



Slow Walk Arrangements



On December 7, 2009, Mr. Qu, who is a
PRC citizen, entered into the Call Option Agreement with Joshua Tan, a Singapore passport holder and the sole shareholder of Glory
Period.  Under the Call Option Agreement, Mr. Qu shall have right and option to acquire up to 100% shares of Glory Period
for nominal consideration within the next 3 years.  The Call Option Agreement also provides that Mr. Tan shall not dispose
any of the shares of Glory Period without Mr. Qu’s consent.



Other



Other than employment and the foregoing
arrangements, none of the following persons has any direct or indirect material interest in any transaction to which we are a
party since our incorporation or in any proposed transaction to which we are proposed to be a party: (i) any of Bohai’s
directors or officers; (ii) any person who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting
rights attached to our common stock; or any relative or spouse of any of the foregoing persons, or any relative of such spouse,
who has the same house as such person or who is a director or officer of any parent or subsidiary of our company.



Review, Approval or Ratification of Related Party Transactions



Our board of directors is responsible
for reviewing all “Related Person Transactions” as defined by Item 404 of Regulation S-K of the rules promulgated
by the SEC.  Directors and executive officers are responsible for bringing a potential Related Person Transaction to
the attention of our Board.



In reviewing a related person transaction,
our board of directors will, after reviewing all material information regarding the transaction, take into account, among other
factors it deems appropriate, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated
third party under the same or similar circumstances and the extent of the related person’s interest in the transaction.



Item 14.  Principal Accountant Fees and Services.



The following table sets forth fees billed
to us by our independent registered public accounting firms Marcum Bernstein &Pinchuk, LLP, during the fiscal years ended
June 30, 2012 and June 30, 2011, respectfully for: (i) services rendered for the audit of our annual financial statements
and the review of our quarterly financial statements; (ii) services by our independent registered public accounting firms that
are reasonably related to the performance of the audit or review of our financial statements and that are not reported as audit
fees; (iii) services rendered in connection with tax compliance, tax advice and tax planning; and (iv) all other fees for services
rendered.



|                   |  | June 2012 |         |  | June 2011 |  
|------------------ |  | --------- | ------- |  | --------- | -
|Audit Fees         |  | $         | 130,500 |  |           | $
|Audit Related Fees |  |           | 3,073   |  |           |  
|Tax Fees           |  |           | 3,000   |  |           |  
|All Other Fees     |  |           |         |  |           |  
|TOTAL              |  | $         | 136,573 |  |           | $



55







Part IV



Item 15.  Exhibits



|Exhibit
        No. |  | Description                                                                                                                                                                                                
|------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1                 |  | Share Exchange Agreement, dated January 5, 2010, by and among the Company, Chance High and Shareholders of Chance High
    (1)                                                                             
|3.1                 |  | Articles of Incorporation of the Company (2)                                                                                                                                                               
|3.2                 |  | Bylaws of the Company (3)                                                                                                                                                                                  
|3.3                 |  | Certificate of Amendment to Articles of Incorporation (4)                                                                                                                                                  
|3.4                 |  | Articles of Merger and Agreement and Plan of Merger as filed with the Secretary of State of Nevada on January 29, 2010
    (5)                                                                             
|4.1                 |  | Form of Note issued to the Investors in the Private Placement, dated January 5, 2010 (1)                                                                                                                   
|4.2                 |  | Form of Warrant issued to the Investors in the Private Placement, dated January 5, 2010 (1)                                                                                                                
|4.3                 |  | Form of Placement Agent Warrant issued to affiliates of Euro Pacific Capital, Inc. and to Chardan Capital Markets, LLC,
    dated January 5, 2010 (1)                                                      
|5.1                 |  | Opinion of Ellenoff Grossman &Schole LLP*                                                                                                                                                                  
|10.1                |  | Securities Purchase Agreement, dated January 5, 2010, by and among the Company, the Investors in the Private Placement
    and Euro Pacific Capital, Inc. as representative of the Investors (1)           
|10.2                |  | Registration Rights Agreement, dated January 5, 2010, by and among the Company and the Investors in the Private Placement
    (1)                                                                          
|10.3                |  | Securities Escrow Agreement, dated January 5, 2010, by and among the Company, Euro Pacific Capital, Inc., as representative
    of the Investors, Glory Period Limited and Escrow, LLC, as escrow agent (1)
|10.4                |  | Closing Escrow Agreement, dated December 10, 2009, by and among the Company, Euro Pacific Capital, Inc., as representative
    of the Investors, and Escrow, LLC, as escrow agent (1)                      
|10.5                |  | Form of Independent Director Agreement and Indemnify Agreement (6)                                                                                                                                         
|10.6                |  | Unofficial English Translation of the Intangible Assets Transfer Agreement, dated December 9, 2010, by and between the
    Company and Shandong Daxin Microbiology Pharmaceutical Industry Co., Ltd. (7)   
|10.7                |  | Form of Subscription Agreement for the Company’s Regulation S financing (8)                                                                                                                                
|10.8                |  | Termination Agreement dated and entered into effective for all purposes as of March 30, 2011, by and between the Company
    and Euro Pacific Capital, Inc., as investor representative. (9)               
|10.9                |  | Unofficial English Translation of Share Purchase Agreement, dated as of August 8, 2011 among WFOE II, Mr. Jiangbo Chi,
    Ms. Shulian Wang and Mr. Bohai Yu. (10)                                         
|21.1                |  | Subsidiaries of the Registrant +                                                                                                                                                                           
|31.1                |  | Certification of Registrant’s Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
    Act of 1934. +                                                                   
|31.2                |  | Certification of Registrant’s Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
    Act of 1934. +                                                                   
|32.1                |  | Certification of Registrant’s Chief Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange
    Act of 1934 and 18 U.S.C. Section 1350. +                                        
|32.2                |  | Certification of Registrant’s Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange
    Act of 1934 and 18 U.S.C. Section 1350. +                                        
|99.1                |  | Unofficial English translation of Consulting Services Agreement, dated December 7, 2009, between Bohai and the WFOE (1)                                                                                    
|99.2                |  | Unofficial English translation of Operating Agreement, dated December 7, 2009, by and among Bohai, its Shareholders and
    the WFOE (1)                                                                   
|99.3                |  | Unofficial English translation of Voting Rights Proxy Agreement, dated December 7, 2009, by and among Bohai, its Shareholders
    and the WFOE (1)                                                         
|99.4                |  | Unofficial English translation of Equity Pledge Agreement, dated December 7, 2009, by and among Bohai, its Shareholders
    and the WFOE (1)                                                               
|99.5                |  | Unofficial English translation of Option Agreement, dated December 7, 2009, by and among Bohai, its Shareholders and the
    WFOE (1)                                                                      
|99.6                |  | Unofficial English translation of Call Option Agreement dated December 7, 2009 (1)                                                                                                                         
|99.7                |  | Opinion of AllBright Law Offices, dated December 31, 2009, with respect to certain PRC matters (11)                                                                                                        



|*   |  | Previously filed                                                                                                                                    
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|+   |  | Filed herewith                                                                                                                                      
|(1) |  | Incorporated by reference to the Company’s Current Report of Form 8-K, filed on January 11, 2010.                                                   
|    |  |                                                                                                                                                     
|(2) |  | Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement of Form S-1 (File Number 333-153102),
    filed on August 20, 2008.



|(3)  |  | Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement of Form S-1
    (File Number 333-153102), filed on August 20, 2008.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                     
|(4)  |  | Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 17, 2009.                                    
|     |  |                                                                                                                                                     
|(5)  |  | Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 17, 2009.                                   
|     |  |                                                                                                                                                     
|(6)  |  | Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 13, 2010.                                       
|     |  |                                                                                                                                                     
|(7)  |  | Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on February 4, 2010.                                   
|     |  |                                                                                                                                                     
|(8)  |  | Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on January 25, 2011.                                   
|     |  |                                                                                                                                                     
|(9)  |  | Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on April 1, 2011.                                      
|     |  |                                                                                                                                                     
|(10) |  | Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on August 10, 2011.                                    
|     |  |                                                                                                                                                     
|(11) |  | Incorporated by reference to Exhibit 99.7 to the Company’s Registration Statement on Form S-1, filed on June 1,
    2010.                           



56







REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



To the Audit Committee of the Board of Directors and Shareholders

Of Bohai Pharmaceuticals Group, Inc.



We have audited the accompanying consolidated
balance sheets of Bohai Pharmaceuticals Group, Inc. and Subsidiaries (the “Company”) as of June 30, 2012 and 2011
and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for
the years then ended. These consolidated financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable
basis for our opinion.



In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of Bohai Pharmaceuticals Group, Inc
and Subsidiaries as of June 30, 2012 and 2011 and the consolidated results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted in the United States of America.



|/s/ Marcum Bernstein & Pinchuk LLP | 
|---------------------------------- | 
|                                   | 
|New York, New York                 | 
|September 28, 2012                 | 











BOHAI PHARMACEUTICALS GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                  |  | June 30, |             |  | June 30, |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ----------- |  | -------- | -
|                                                                                                                                                                  |  | 2012     |             |  | 2011     |  
|ASSETS                                                                                                                                                            |  |          |             |  |          |  
|Current assets:                                                                                                                                                   |  |          |             |  |          |  
|Cash                                                                                                                                                              |  | $        | 18,386,288  |  |          | $
|Restricted cash                                                                                                                                                   |  |          | 9,449,905   |  |          |  
|Accounts receivable                                                                                                                                               |  |          | 29,670,552  |  |          |  
|Inventories                                                                                                                                                       |  |          | 3,795,915   |  |          |  
|Prepaid expenses and other current assets                                                                                                                         |  |          | 879,696     |  |          |  
|                                                                                                                                                                  |  |          |             |  |          |  
|Total current assets                                                                                                                                              |  |          | 62,182,356  |  |          |  
|                                                                                                                                                                  |  |          |             |  |          |  
|Non - current assets:                                                                                                                                             |  |          |             |  |          |  
|Property, plant and equipment, net                                                                                                                                |  |          | 11,681,272  |  |          |  
|Prepayment for property, plant and equipment                                                                                                                      |  |          | 594,508     |  |          |  
|Intangible assets - pharmaceutical formulas                                                                                                                       |  |          | 24,345,353  |  |          |  
|Long term prepayments - land use right, net                                                                                                                       |  |          | 18,739,297  |  |          |  
|Other intangible assets, net                                                                                                                                      |  |          | 22,763,094  |  |          |  
|Goodwill                                                                                                                                                          |  |          | 5,092,139   |  |          |  
|Debt issue costs, net                                                                                                                                             |  |          | -           |  |          |  
|Total Non - current assets                                                                                                                                        |  |          | 83,215,663  |  |          |  
|                                                                                                                                                                  |  |          |             |  |          |  
|TOTAL ASSETS                                                                                                                                                      |  | $        | 145,398,019 |  |          | $
|                                                                                                                                                                  |  |          |             |  |          |  
|LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                              |  |          |             |  |          |  
|                                                                                                                                                                  |  |          |             |  |          |  
|Current liabilities:                                                                                                                                              |  |          |             |  |          |  
|Convertible notes, net of discount of $0 and $9,317,897 as of June 30, 2012 and June 30, 2011,
    respectively                                                   |  | $        | 10,036,000  |  |          | $
|Accounts payable                                                                                                                                                  |  |          | 3,334,101   |  |          |  
|Accrued expenses                                                                                                                                                  |  |          | 8,478,054   |  |          |  
|Income taxes payable                                                                                                                                              |  |          | 2,338,825   |  |          |  
|Short-term borrowings                                                                                                                                             |  |          | -           |  |          |  
|Acquisition purchase price payable - current portion                                                                                                              |  |          | 5,000,000   |  |          |  
|Derivative liabilities - investor and agent warrants                                                                                                              |  |          | 1,211,236   |  |          |  
|Due to Related Party                                                                                                                                              |  |          | 36,002      |  |          |  
|                                                                                                                                                                  |  |          |             |  |          |  
|Total current liabilities                                                                                                                                         |  |          | 30,434,218  |  |          |  
|                                                                                                                                                                  |  |          |             |  |          |  
|Non - current liabilities:                                                                                                                                        |  |          |             |  |          |  
|Acquisition purchase price payable - non-current portion                                                                                                          |  |          | 20,300,000  |  |          |  
|Deferred tax liability                                                                                                                                            |  |          | 8,161,269   |  |          |  
|Total Non - current liabilities                                                                                                                                   |  |          | 28,461,269  |  |          |  
|                                                                                                                                                                  |  |          |             |  |          |  
|TOTAL LIABILITIES                                                                                                                                                 |  |          | 58,895,487  |  |          |  
|                                                                                                                                                                  |  |          |             |  |          |  
|COMMITMENTS, CONTINGENCIES, AND OTHER MATTERS                                                                                                                     |  |          |             |  |          |  
|                                                                                                                                                                  |  |          |             |  |          |  
|STOCKHOLDERS' EQUITY                                                                                                                                              |  |          |             |  |          |  
|Common stock , $0.001 par value, 150,000,000 shares authorized, 17,861,085 shares issued and  outstanding as of June
    30, 2012 and June 30, 2011, respectively |  |          | 17,861      |  |          |  
|Additional paid-in capital                                                                                                                                        |  |          | 24,615,353  |  |          |  
|Accumulated other comprehensive income                                                                                                                            |  |          | 6,236,076   |  |          |  
|Statutory reserves                                                                                                                                                |  |          | 2,201,817   |  |          |  
|Retained earnings                                                                                                                                                 |  |          | 53,431,425  |  |          |  
|                                                                                                                                                                  |  |          |             |  |          |  
|Total stockholders’ equity                                                                                                                                        |  |          | 86,502,532  |  |          |  
|                                                                                                                                                                  |  |          |             |  |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                        |  | $        | 145,398,019 |  |          | $



See accompanying notes to the consolidated
financial statements



F-1







BOHAI PHARMACEUTICALS GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF INCOME AND COMPREHENSIVE INCOME



|                                               |  | For the years ended June
    30 |            
|---------------------------------------------- |  | ------------------------------- | -----------
|                                               |  | 2012                            |            
|                                               |  |                                 |            
|Net revenues                                   |  | $                               | 137,372,492
|                                               |  |                                 |            
|Cost of revenues                               |  |                                 | 33,532,900 
|                                               |  |                                 |            
|Gross profit                                   |  |                                 | 103,839,592
|                                               |  |                                 |            
|Operating expenses:                            |  |                                 |            
|Selling, general and administrative            |  |                                 | 72,889,809 
|Depreciation and amortization                  |  |                                 | 2,578,316  
|                                               |  |                                 |            
|Total Operating expenses                       |  |                                 | 75,468,125 
|                                               |  |                                 |            
|Income from operations                         |  |                                 | 28,371,467 
|                                               |  |                                 |            
|Other income (expenses):                       |  |                                 |            
|Interest income                                |  |                                 | 69,308     
|Interest expense                               |  |                                 | (11,194,301
|Other (expenses) income, net                   |  |                                 | (10,198    
|Change in fair value of derivative liabilities |  |                                 | (273,369   
|                                               |  |                                 |            
|Total other income (expenses)                  |  |                                 | (11,408,560
|                                               |  |                                 |            
|Income before provision for income taxes       |  |                                 | 16,962,907 
|                                               |  |                                 |            
|Provision for income taxes                     |  |                                 | (7,314,882 
|                                               |  |                                 |            
|Net income                                     |  | $                               | 9,648,025  
|                                               |  |                                 |            
|Comprehensive income:                          |  |                                 |            
|Net income                                     |  |                                 | 9,648,025  
|Other comprehensive income                     |  |                                 |            
|Unrealized foreign currency translation gain   |  |                                 | 2,676,721  
|Comprehensive income :                         |  | $                               | 12,324,746 
|                                               |  |                                 |            
|Net income per common share                    |  |                                 |            
|                                               |  |                                 |            
|Basic                                          |  | $                               | 0.54       
|Diluted                                        |  | $                               | 0.54       
|                                               |  |                                 |            
|Weighted average common shares outstanding     |  |                                 |            
|                                               |  |                                 |            
|Basic                                          |  |                                 | 17,861,085 
|Diluted                                        |  |                                 | 17,861,085 



See accompanying notes to the consolidated
financial statements



F-2







BOHAI PHARMACEUTICALS GROUP,
INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED JUNE 30,
2012 AND 2011



|                                        |  | Common
    stock       |            |  | Additional |   |        | Accumulated
    other |  |   |                          |  |  |                        |           |  | Total                 |  
|--------------------------------------- |  | ---------------------- | ---------- |  | ---------- | - | ------ | --------------------- |  | - | ------------------------ |  |  | ---------------------- | --------- |  | --------------------- | -
|                                        |  | Shares
    outstanding |            |  | Amount     |   |        | paid-in
    capital   |  |   | comprehensive
    income |  |  | Statutory
    reserves |           |  | Retained
    Earnings |  
|                                        |  |                        |            |  |            |   |        |                       |  |   |                          |  |  |                        |           |  |                       |  
|Balance at June 30, 2010                |  |                        | 16,500,000 |  |            | $ | 16,500 |                       |  | $ | 15,317,621               |  |  | $                      | 460,570   |  |                       | $
|                                        |  |                        |            |  |            |   |        |                       |  |   |                          |  |  |                        |           |  |                       |  
|Stock based compensation                |  |                        | 85,000     |  |            |   | 85     |                       |  |   | 182,415                  |  |  |                        | -         |  |                       |  
|Option based compensation               |  |                        | -          |  |            |   | -      |                       |  |   | 27,028                   |  |  |                        | -         |  |                       |  
|Conversion of convertible notes         |  |                        | 527,703    |  |            |   | 528    |                       |  |   | 948,304                  |  |  |                        | -         |  |                       |  
|Issuance of common stock                |  |                        | 748,382    |  |            |   | 748    |                       |  |   | 1,870,207                |  |  |                        | -         |  |                       |  
|Foreign currency translation difference |  |                        | -          |  |            |   | -      |                       |  |   | -                        |  |  |                        | 3,098,785 |  |                       |  
|Net income for the year                 |  |                        | -          |  |            |   | -      |                       |  |   | -                        |  |  |                        | -         |  |                       |  
|                                        |  |                        |            |  |            |   |        |                       |  |   |                          |  |  |                        |           |  |                       |  
|Balance at June 30, 2011                |  |                        | 17,861,085 |  |            |   | 17,861 |                       |  |   | 18,345,574               |  |  |                        | 3,559,355 |  |                       |  
|                                        |  |                        |            |  |            |   |        |                       |  |   |                          |  |  |                        |           |  |                       |  
|Capital contribution from stockholder   |  |                        | -          |  |            |   | -      |                       |  |   | 6,225,779                |  |  |                        | -         |  |                       |  
|Stock based compensation                |  |                        | -          |  |            |   | -      |                       |  |   | 44,000                   |  |  |                        | -         |  |                       |  
|Foreign currency translation adjustment |  |                        | -          |  |            |   | -      |                       |  |   | -                        |  |  |                        | 2,676,721 |  |                       |  
|Net income                              |  |                        | -          |  |            |   | -      |                       |  |   | -                        |  |  |                        | -         |  |                       |  
|                                        |  |                        |            |  |            |   |        |                       |  |   |                          |  |  |                        |           |  |                       |  
|Balance at June 30, 2012                |  |                        | 17,861,085 |  |            | $ | 17,861 |                       |  | $ | 24,615,353               |  |  | $                      | 6,236,076 |  |                       | $



See accompanying notes to the consolidated
financial statements





F-3











BOHAI PHARMACEUTICALS GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  | For the Years Ended |            
|--------------------------------------------------------------------------------- |  | ------------------- | -----------
|                                                                                  |  | June 30,            |            
|                                                                                  |  | 2012                |            
|                                                                                  |  |                     |            
|Cash flows from operating activities:                                             |  |                     |            
|                                                                                  |  |                     |            
|Net income                                                                        |  | $                   | 9,648,025  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                     |            
|                                                                                  |  |                     |            
|Depreciation and amortization                                                     |  |                     | 4,330,595  
|Bad debt expense                                                                  |  |                     | -          
|Gain (loss) on disposal of property, plant and equipment                          |  |                     | (1,414     
|Impairment loss on intangible assets – pharmaceutical formulas                    |  |                     | -          
|                                                                                  |  |                     |            
|Amortization of debt issue costs                                                  |  |                     | 485,039    
|Non-cash interest-convertible notes                                               |  |                     | 9,317,897  
|Change in fair value of warrants                                                  |  |                     | 273,369    
|Stock based compensation                                                          |  |                     | 44,000     
|Deferred income taxes                                                             |  |                     | (170,059   
|                                                                                  |  |                     |            
|Changes in operating assets and liabilities:                                      |  |                     |            
|Accounts receivable                                                               |  |                     | (6,309,216 
|Inventories                                                                       |  |                     | (900,652   
|Prepaid expenses and other current assets                                         |  |                     | 416,173    
|Accounts payable                                                                  |  |                     | (428,745   
|Accrued liabilities                                                               |  |                     | 3,054,618  
|                                                                                  |  |                     |            
|Income taxes payable                                                              |  |                     | 847,910    
|                                                                                  |  |                     |            
|Net cash provided by operating activities                                         |  |                     | 20,607,540 
|                                                                                  |  |                     |            
|Cash flows used in investing activities:                                          |  |                     |            
|Purchases of property, plant and equipment                                        |  |                     | (914,448   
|Proceeds from disposal of property, plant and equipment                           |  |                     | 26,764     
|Land use rights payments                                                          |  |                     | -          
|Purchase of drug formulas                                                         |  |                     | -          
|Property, plant and equipment deposits                                            |  |                     | (594,508   
|Cash received in acquisition of business                                          |  |                     | 1,358,078  
|Cash paid for acquisition of business                                             |  |                     | (9,700,000 
|                                                                                  |  |                     |            
|Net cash used in investing activities                                             |  |                     | (9,824,114 
|                                                                                  |  |                     |            
|Cash flows from financing activities:                                             |  |                     |            
|Proceeds from short term borrowings                                               |  |                     | -          
|Repayment of short term borrowings                                                |  |                     | (3,062,076 
|Borrowing from related party                                                      |  |                     | 23,879     
|Repayment of convertible notes                                                    |  |                     | (414,000   
|Capital contribution from shareholder                                             |  |                     | 6,297,328  
|Proceeds from issuance of common stock                                            |  |                     | -          
|Deposit of restricted cash-convertible note escrow deposit                        |  |                     | (10,044,756
|Release of restricted cash- convertible note escrow deposit                       |  |                     | 1,054,789  
|                                                                                  |  |                     |            
|Net cash flows used in financing activities                                       |  |                     | (6,144,836 
|                                                                                  |  |                     |            
|Effect of foreign currency translation on cash and cash equivalents               |  |                     | 403,272    
|                                                                                  |  |                     |            
|Net increase (decrease) in cash and cash equivalents                              |  |                     | 5,041,862  
|                                                                                  |  |                     |            
|Cash and cash equivalents at beginning of year                                    |  |                     | 13,344,426 
|                                                                                  |  |                     |            
|Cash and cash equivalents at end of year                                          |  | $                   | 18,386,288 
|                                                                                  |  |                     |            
|Cash paid during the period for:                                                  |  |                     |            
|Interest                                                                          |  | $                   | 868,875    
|Income taxes                                                                      |  | $                   | 6,697,654  
|                                                                                  |  |                     |            
|Supplemental cash flow information                                                |  |                     |            
|                                                                                  |  |                     |            
|Non-cash investing and financing activities:                                      |  |                     |            
|Common stock issued upon conversion of convertible
    notes and accrued interest |  | $                   | -          
|                                                                                  |  |                     |            
|Acquisition liability                                                             |  | $                   | 25,300,000 



See accompanying notes to the consolidated
financial statements



F-4







BOHAI PHARMACEUTICALS GROUP, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2012 AND
2011



|1. | ORGANIZATION AND PRINCIPAL ACTIVITIES
|-- | -------------------------------------



Bohai Pharmaceuticals Group, Inc. (“BPGI”) was
incorporated under the laws of the State of Nevada on January 9, 2008 under the name of Link Resources, Inc. Prior to January
5, 2010, BPGI was a public “shell” company. BPGI became a public operating company on January 5, 2010 pursuant
to a Share Exchange Transaction completed on January 5, 2010.



BPGI is engaged in the production, manufacturing and distribution
of herbal pharmaceuticals based on traditional Chinese medicine (“TCM”) in the People’s Republic of China (“China”
or the “PRC”) through the following two operating subsidiaries:



(i)  YantaiBohai Pharmaceuticals Group Co., Ltd., (“Bohai”)
a PRC company and the Company’s original operating subsidiary BPGI controls Bohai through a variable interest entity arrangement
(“VIE”) described below; and



(ii)  Yantai Tianzheng Pharmaceuticals Company, Ltd.,
a PRC company (“Yantai Tianzheng”) which BPGI acquired in August 2011 (with an effective date of July 1, 2011) through
a newly formed PRC wholly-foreign owned enterprise subsidiary, YantaiNirui Pharmaceuticals, Ltd. (“WFOE II”).



BPGI owns 100% of Chance High International Limited, a British
Virgin Islands company (“Chance High”). Chance High owns 100% of the issued and outstanding shares of capital
stock of a Chinese wholly-foreign owned enterprise known as YantaiShencaojishi Pharmaceuticals Co., Ltd. (the “WFOE”). On
December 7, 2009 (prior to the date of the Share Exchange Transaction), the WFOE entered into a series of variable interest entity
contractual agreements (the “VIE Agreements”) with Bohai and its three shareholders, including Mr. Hongwei Qu, the
Company’s current Chairman and Chief Executive Officer (“Mr. Qu”). Mr. Qu currently owns 96.7% of the outstanding
equity interests of Bohai and two other shareholders who collectively own the remaining 3.3% of Bohai.



The VIE Agreements include (i) a Consulting Services Agreement,
(ii) an Operating Agreement, and (iii) a Proxy Agreement, through which the WFOE has the right to advise, consult, manage and
operate Bohai for an annual fee equal to all of Bohai’s yearly net profits after tax.  Pursuant to these
agreements, the WFOE indirectly owns but has 100% managerial and economic control of the business activities of Bohai including
the right to appoint all executives and senior management and members of the board of directors of Bohai.  Additionally,
Bohai’s shareholders pledged their rights, titles and equity interest in Bohai as security for the WFOE to collect consulting
and services fees provided to Bohai pursuant to an equity pledge agreement. In order to further reinforce the WFOE’s rights
to control and operate Bohai, Bohai’s shareholders granted the WFOE an exclusive right and option to acquire all of their
equity interests in Bohai through an option agreement. The VIE Agreements have perpetual terms unless otherwise determined
by PRC law, and can (particularly in the case of the Consulting Services Agreement (which is the principal VIE Agreement) be terminated
by the parties under certain circumstances, including material breach, the termination of Bohai’s business or a liquidation
of Bohai. The WFOE (which is controlled indirectly by BPGI through Chance High) can also terminate the Consulting Services
Agreement at will.



BPGI, its wholly owned subsidiary
Chance High, WFOE, WFOE II, Bohai and Yantai Tianzheng are referred to herein collectively and as a consolidated basis as the
“Company” or “we”, “us” or “our” or similar terminology.Mr. Qu currently
serves the Company’s Chairman, Chief Executive Officer and President. As used herein, the term
“Common Stock” means the common stock of BPGI, $0.001 par value per share.



BPGI is headquartered and maintains its principal operations
in the city of Yantai, Shandong Province, China, and conducts business operations exclusively in the PRC.



|2. | LIQUIDITY AND FINANCIAL CONDITION
|-- | ---------------------------------



The Company’s net income amountedto $9,648,025 for the year ended June 30, 2012. The Company’s cash flows from operations amounted to approximately
$20,607,540 for the year ended June 30, 2012. The Company had working capital of approximately $31,748,138as of June 30, 2012,including a $10,036,000 convertiblenote obligation, which pursuant to
an amendment thereto is set to mature on October 5, 2012 (see below and Note 14) but excluding a $1,211,236derivative liability for the fair value of warrants that are not expected to result in a cash settlement. The Company has historically
financed its operations principally from cash flows generated from operating activities and external financing raised in private
placement transactions completed concurrently with and subsequent to the consummation of the Share Exchange.



F-5







As described further in Note 4, the Company completed its
acquisition of Yantai Tianzheng on August 8, 2011 (the “Execution Date”), with an effective control date of July
1, 2011, for aggregate purchase consideration of US$35,000,000.The purchase price was originally payable in four installments
in the equivalent of Chinese Renminbi, the functional currency of the PRC (“RMB”) including $6,000,000 paid prior
to the tenth calendar day after the Execution Date of the acquisition; $12,000,000 was due to be paid on or before the sixth
month anniversary of the Execution Date; $12,000,000 is due to be paid on or before the 12 month anniversary of the Execution
Date; and the remaining $5,000,000 is due to be paid on or before the 18 month anniversary of the Execution Date. As
described in Note 4, the Company has the ability to convert each of the remaining payments that are due into two year term
loans bearing interest at 6% per annum. The Company has paid
$9,700,000 and deferred $8,300,000as of June 30, 2012. As of June 30, 2012, the amount of
outstanding payments was $25,300,000, of which $20,300,000 originally due at installments dates that occurred through July 1,
2012 were converted into two year term loans bearing interest at 6% per annum and $5,000,000 is due as scheduled on July 1,
2013. Yantai Tianzheng is a TCM manufacturer of principally for prescription medicines based in
Yantai, Shandong Province, China, and conducts business operations exclusively in the PRC.



The Company has expanded its existing product lines and has additional production capacity through its acquisition of YantaiTianzheng. The company expects
to gain the benefits of the economies of scale that management believes could be realized by combining and streamlining the cost
structures of the historical Bohai and the acquired Yantai Tianzheng business. On June 8, 2010, YantaiHuanghai Construction Co.
signed an agreement with Yantai Tianzheng to perform certain portions of a factory construction located at the premises of Yantai
Tianzheng. The total contract price is approximately $3.07 million (RMB 19.5 million) and the construction is estimated to be
completed by the end of December 2012. The remaining commitment of the contract was approximately
$1.24million (RMB 7.9 million) as of June 30, 2012.



In August 2011, Mr. Qu made a permanent equity capital contribution
of $6,225,779 (RMB 40,000,000) into Bohai to support the Company’s future capital needs.



Management believes, based on the Company’s historical
ability to fund operations using internally generated cash flow and the progress made towards expanding the business through the
Yantai Tianzheng acquisition, that the Company’s currently available cash and funds it expects to generate from operations
will enable it to operate the business and satisfy short term obligations through at least July 1, 2013.



Notwithstanding, the Company still has substantial obligations
described below and there is no assurance that unforeseen circumstances would not have a material adverse effect on the Company’s
financial condition.



As described above, the Company has ongoing
obligations with respect to the Yantai Tianzheng acquisition, whether or not the intended benefits of the acquisition are
realized. The Company is also required to repay the remaining $10,036,000 balance due on the Company’s convertible
notes on the amended contractual maturity date of October 5, 2012 (the “Notes”). On December 31, 2011, the
Company entered into an amendment to the Notes with Euro Pacific as representative of the Note holders (the
“Amendment”) which: (i) extended the maturity date of the Notes from January 5, 2012 to April 5, 2012 (such extra
three months period, the “Extended Period”); and (ii) increased the interest rate on the Notes to an annual rate
of 12% (or 3% for the Extended Period). On May 14, 2012, the Company entered into a second amendment to the Notes with Euro
Pacific as representative of the Note holders (the “Second Amendment”) which: (i) extended the maturity date of
the Notes from April 5, 2012 to October 5, 2012 (such extra six months period, the “Second Extended Period”); and
(ii) remained the interest rate on the Notes at an annual rate of 12% (or 6% for the Second Extended Period). The
Company has been unable to convert a sufficient number of RMBs into US dollars due to certain currency restrictions in China.
As a result, the Company deposited an amount of funds in RMBs into an escrow account to secure the repayment of this obligation as further described in Note 14. The Company believes it has sufficient liquidity to repay the convertible notes
and fund the ongoing operational needs of the business. The non-payment of the
loan in the absence of an extension of the maturity date would constitute an event of default under the terms of loan
agreement. The Company can not predict what the implications of the non-payment of the loan would be other than the continued
difficulty of repaying the loan from escrowed funds due to currency conversion restriction. The non-payment of the note could
have a material adverse effect on the Company should the note holders declare an event of default.



The Company will require significant additional capital in
order to fund these obligations and execute its longer term business plan. If the Company is unable to generate sufficient
operating cash flows or raise additional capital, or encounters unforeseen circumstances that place constraints on its capital
resources, management will be required to take various measures to conserve liquidity. Such measures could include, but not necessarily
be limited to, curtailing the Company’s business development activities, suspending the pursuit of one or more elements
of its business plan, and controlling overhead expenses.  There is a material risk, and management cannot provide any
assurances, that the Company will raise additional capital if needed.  The Company has not received any commitments
for new financing, and cannot provide any assurance that new financing will be available to the Company on acceptable terms, if
at all. The failure of the Company to fund its obligations when needed would have a material adverse effect on its business and
results of operations.



|3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------



Principles of Consolidation



The accompanying consolidated financial statements include
the accounts of BPGI, its wholly-owned subsidiary Chance High, WFOE, WOFEII,
Bohai and Yantai Tianzheng. All significant intercompany accounts and transactions have been eliminated in consolidation.



The Company, in determining whether it is required to consolidate
investee businesses, considers both the voting and variable interest models of consolidation as required under applicable GAAP.  We
adopted FAS Accounting Standards Codification (“ASC”) 810-10-15-14 and also ASC 810-10-05-8, which requires that a
Variable Interest Entity (“VIE”) to be consolidated by a company if that company is entitled to receive a majority
of the VIE’s residual returns and has the direct ability to make decisions on all operating activities of the VIE. We
control Bohai through the series of VIE Agreements described in Note 1.



F-6







Under the Operating Agreement entered into between WFOE and
Bohai, the WFOE has the direct ability to make decisions on all the operating activities and exercise all voting rights of Bohai.
Under the Consulting Services Agreement entered into between WFOE and Bohai, Bohai agreed to pay all of its net income to WFOE
quarterly as a consulting fee. Accordingly, WFOE has the right to receive the expected residual returns of Bohai.  As
such, the Company is the primary beneficiary of and maintains a controlling managerial and financial interest in, Bohai in
accordance with ASC 810-10-15-14. Accordingly, Bohai’s financial position and results of operations are consolidated with
those of the Company for all periods presented.



We initially measured the assets, liabilities, and non-controlling
interests of Bohai at their carrying amounts as of the date of the acquisition. We have subsequently accounted for the assets,
liabilities, and non-controlling interest of Bohai as if it was consolidated based on voting interests.  The usual accounting
rules for which the VIE operates are applied as they would to a consolidated subsidiary as follows:



| | · | Carrying
                                                                                                                                  amounts
                                                                                                                                  of
                                                                                                                                  the
                                                                                                                                  VIE
                                                                                                                                  are
                                                                                                                                  consolidated
                                                                                                                                  into
                                                                                                                                  the
                                                                                                                                  financial
                                                                                                                                  statements
                                                                                                                                  of
                                                                                                                                  the
                                                                                                                                  Company
                                                                                                                                  as
                                                                                                                                  the primary
                                                                                                                                  beneficiary,
                                                                                                                                  or
                                                                                                                                  Primary
                                                                                                                                  Beneficiary
                                                                                                                                  (“PB”);
                                                                                                                                  and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Inter-company
                                                                                                                                  transactions
                                                                                                                                  and
                                                                                                                                  balances,
                                                                                                                                  such
                                                                                                                                  as
                                                                                                                                  revenues
                                                                                                                                  and
                                                                                                                                  costs,
                                                                                                                                  receivables
                                                                                                                                  and
                                                                                                                                  payables
                                                                                                                                  between
                                                                                                                                  or
                                                                                                                                  among
                                                                                                                                  the
                                                                                                                                  PB
                                                                                                                                  and
                                                                                                                                  the
                                                                                                                                  VIE(s)
                                                                                                                                  are
                                                                                                                                  eliminated
                                                                                                                                  in
                                                                                                                                  their
                                                                                                                                  entirety.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The carrying amount and classification of Yantai Bohai’s
assets and liabilities included in the Consolidated Balance Sheets are as follows:





|                            |  |               |            |  | June 30, |  
|--------------------------- |  | ------------- | ---------- |  | -------- | -
|                            |  | June 30, 2012 |            |  | 2011     |  
|                            |  |               |            |  |          |  
|Total current assets*       |  | $             | 51,470,381 |  |          | $
|Total assets*               |  |               | 99,899,826 |  |          |  
|Total current liabilities** |  |               | 11,689,137 |  |          |  
|Total liabilities**         |  | $             | 15,277,230 |  |          | $







*           Includes
intercompany accounts in the amounts of $20,338,295 and $1,896,933 in current assets as of June 30, 2012 and June 30, 2011,
respectively, that were eliminated in consolidation.



**         Includes
intercompany accounts in the amounts of $2,490,528and $11,660,222 in current liabilities as of June
30, 2012 and June 30, 2011, respectively that were eliminated in consolidation.



Business Combinations



The Company uses the acquisition method of accounting for business
combinations which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their
respective fair values. Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized
at fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability
assumed that arises from a contingency cannot be determined, the asset or liability is recognized if probable and reasonably estimable;
if these criteria are not met, no asset or liability is recognized. Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date. Any excess of the purchase price (consideration
transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure
the acquired company are expensed as incurred. The operating results of acquired business are reflected in the acquirer’s
consolidated financial statements and results of operations after the date of the acquisition.



Reclassifications



Certain amounts in the June 30, 2011 consolidated financial
statement have been reclassified to conform to the June 30, 2012 presentation.



Business Segments



The Company’s operates its business through a single
reporting segment.



F-7







Use of Estimates



The preparation of the audited consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Management makes these estimates using the best information available at the time the
estimates are made; however, actual results could differ materially from those results.



Significant estimates and assumptions include allocating purchase
consideration issued in business combinations, valuing equity securities and derivative financial instruments issued in financing
transactions and in share-based payment arrangements, accounts receivable reserves, inventory reserves, deferred tax reserves
estimating the useful lives of long-lived assets and evaluating the carrying amounts of intangible assets including conducting
impairment tests. Certain estimates, including accounts receivable and inventory reserves and the carrying amounts of intangible
assets (including present value of future cash flow estimates for the Company’s pharmaceutical formulas) could be affected
by external conditions including those unique to the Company’s industry and general economic conditions. It is reasonably
possible that these external factors could have an effect on management’s estimates that could cause actual results to differ
from management’s estimates.



Company management re-evaluates accounting estimates at least
quarterly based on these conditions and records adjustments, when necessary.



Cash and Cash Equivalents



We consider all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. We maintain bank accounts in the PRC and a checking account in
the United States of America that principally consist of demand deposits. We also have restricted cash accounts in the United
States that include funds designated for interest payments due to convertible note holders and for use in investor relations programs
pursuant to a securities purchase agreement.



Restricted Cash



The Company is required by its convertible note holders to
maintain deposits in escrow accounts to fund the convertible notes principal and interest payments. Escrow account
balances amounted to $9,449,905 and $11,043 as of June 30, 2012 and 2011, respectively. As of June 30, 2012, the Company had
one escrow account in China amounting $9,343,870 and one escrow account in US amounting $106,035. As of June 30, 2011,
the Company only had one escrow account in US.



Accounts Receivable



Accounts receivable consists of amounts due from customers.
We extend unsecured credit to our customers in the ordinary course of business but mitigate the associated risks by performing
credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based
on management’s assessment of known requirements, aging of receivables, payment history, the customer’s current credit
worthiness and the economic environment. As of June 30, 2012 and 2011, no allowance for doubtful accounts was deemed necessary
based on management’s assessment.



Inventories



Inventories are valued at the lower of cost, determined using
the weighted average method, or market. Finished goods inventories include the costs of raw materials, direct labor and overhead
associated with the manufacturing process. In assessing the ultimate realization of inventories, management makes judgments
as to future demand requirements compared to current or committed inventory levels.  Our reserve requirements generally increase/decrease
due to management’s projected demand requirements, market conditions and product life cycle changes. As of June 30, 2012
and 2011, management does not believe that any inventory reserves are necessary.



Property, Plant and Equipment



Property, plant and equipment are carried at cost and are depreciated
on a straight-line basis over the estimated useful lives of the assets which range from 5 to 10 years for office equipment, machinery,
and vehicles and 30 to 40 years for buildings. The cost of repairs and maintenance is charged to expense as incurred; major replacements
and improvements are capitalized.  When assets are retired or disposed of, the cost and accumulated depreciation are removed
from the accounts, and any resulting gains or losses are included in income in the year of disposition. We examine the possibility
of impairment in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value
may not be recoverable.



F-8







Common Stock Purchase Warrants and Other Derivative Financial
Instruments



The Company accounts for the issuance of common stock purchase
warrants issued as free standing financial instruments in accordance with the applicable provisions ASC 810 “Derivatives
and Hedging Activities.” Based on this guidance, the Company classifies as equity any contracts that (i) require physical
settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares
(physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that require net-cash
settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control
of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement
or net-share settlement). The Company assesses classification of its freestanding derivatives at each reporting date to determine
whether a change in classification between assets andliabilities is required. The Company determined that its freestanding
derivatives, which principally consist of warrants to purchase common stock required classification as liability instruments at
June 30, 2012 and 2011 due to the existence of non-standard anti-dilution privileges that caused the warrants to not be indexed
to the Company’s own stock.



Fair Value Measurements and Fair Value of Financial Instruments



We adopted the guidance of ASC 820 for fair value measurements,
which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy
to classify the inputs used in measuring fair value as follows:



Level 1 - Inputs are unadjusted quoted prices in active markets
for identical assets or liabilities available at the measurement date.



Level 2 - Inputs are unadjusted quoted prices for similar assets
and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active,
inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.



Level 3 - Inputs are unobservable inputs which reflect
the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability
based on the best available information.



The carrying amounts reported in the audited consolidated balance
sheets for cash, accounts receivable, other receivables, short-term borrowings, accounts payable and accrued expenses, customer
advances, and amounts due from related parties approximate their fair market value based on the short-term maturity of these instruments.



ASC 825-10 “ Financial Instruments,” allows
entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair
value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the
fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings
at each subsequent reporting date. We use Level 3 inputs to value the Company’s derivative liabilities.



The following table reflects gains and losses for the years
ended June 30, 2012 and 2011 for common stock purchase warrants classified and liabilities categorized as a Level 3 financial
instrument.



|Liabilities:                                       |  |   |           
|-------------------------------------------------- |  | - | ----------
|                                                   |  |   |           
|Balance of warrant liabilities as of June 30, 2010 |  | $ | 5,481,928 
|Change in the fair value of warrant liabilities    |  |   | (4,544,061
|Balance of warrant liabilities as of June 30, 2011 |  |   | 937,867   
|Change in the fair value of warrant liabilities    |  |   | 273,369   
|Balance of warrant liabilities as of June 30, 2012 |  | $ | 1,211,236 



Estimating the fair value of derivative financial instruments
requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the
instrument with related changes in internal and external market factors. The assumptions used to value the Company’s derivatives,
which had a direct effect on the fair values described above are more fully described in Note 14. In addition, valuation
techniques are sensitive to changes in the trading market price of the Common Stock estimated volatility and interest rate changes
and other variables or market conditions not within the Company’s control that can significantly affect management’s
estimates of fair value and changes in fair value. Because derivative financial instruments are initially and subsequently carried
at fair value, the Company’s net income may include significant charges or credits as these estimates and assumptions change.



Foreign Currency Translation



The Company’s reporting currency is the U.S. dollar. The
functional currency of the Company’s operating business based in the PRC is the RMB. For the Company’s subsidiaries
and affiliates whose functional currencies are the RMB, results of operations and cash flows are translated at average exchange
rates during the period, assets and liabilities are translated at the exchange rate in effect as of the end of the period, and
stockholders equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating
the functional currency financial statements into U.S. dollars are included in comprehensive income.



F-9







Exchange gains or losses arising from foreign currency transactions
are included in the determination of net income for the respective periods. All of the Company’s revenue transactions are
transacted in the functional currency. The Company has not entered into any material transactions that are either originated,
or are to be settled, in currencies other than the RMB. Accordingly, transaction gains or losses have not had, and are not expected
to have a material effect on the Company’s results of operations.



Period end exchange rates used to translate assets and liabilities
and average exchange rates used to translate results of operations in each of the reporting periods are as follows:



|                                        |  | June 30, 2012 |        |  | June 30, 2011 | 
|--------------------------------------- |  | ------------- | ------ |  | ------------- | 
|Period end US$: RMB exchange rate       |  |               | 6.3143 |  |               | 
|Average periodic US$: RMB exchange rate |  |               | 6.3519 |  |               | 



The RMB is not freely convertible into any other currencies.
In addition, all foreign exchange transactions in the PRC must be conducted through authorized institutions. Accordingly, management
cannot provide any assurance that the RMB underlying the consolidated financial statement amounts could have been, or could be,
converted into US dollars at the exchange rates used to translate the functional currency into the reporting currency.



Revenue Recognition



Revenue represents the invoiced value of goods sold recognized
upon the delivery of goods to distributors. Pursuant to the guidance of ASC Topic 605 and ASC Topic 36, revenue is recognized
when all of the following criteria are met:





| | — | Persuasive
                                                                                                             evidence of an arrangement
                                                                                                             exists;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | — | Delivery has occurred
                                                                                                             or services
                                                                                                             have been rendered;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | — | The
                                                                                                             seller’s price
                                                                                                             to the buyer is fixed
                                                                                                             or determinable; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | — | Collectability
                                                                                                             is reasonably assured.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------









We account for sales returns by establishing an accrual in
an amount equal to management’s estimate of sales recorded for which the related products are expected to be returned. We
determine the estimate of the sales return accrual primarily based on the Company’s historical experience regarding sales returns,
but also by considering other factors that could impact sales returns. These factors include levels of inventory in the distribution
channel, estimated shelf life, product discontinuances, and price changes of competitive products, introductions of generic products
and introductions of competitive new products. For the years ended June 30, 2012 and 2011, the Company’s sales returns
rate were insignificant. Accordingly, provision for sales returns is considered necessary.



Cost of Revenue



Cost of revenue consists primarily of raw material costs, labor
cost, overhead costs associated with the manufacturing process and related expenses which are directly attributable to our revenues.



Stock-based Compensation



Stock based compensation is accounted for based on the requirements
of the Share-Based Payment topic of ASC 718 which requires recognition in the consolidated financial statements of the cost of
employee and director services received in exchange for an award of equity instruments over the employee or director’s requisite
service period (presumptively, the vesting period). The FASB Accounting Standards Codification also requires measurement of the
cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.



Pursuant to ASC Topic 505-50, for share-based payments to consultants
and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over
the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain.
We record compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other
third-parties are then revalued, or the total compensation is recalculated based on the then current fair value, at each subsequent
reporting date.



Research and Development Costs



Research and development costs are
charged to expense as incurred and included in operating expenses. We have only one full-time employee who is engaged in research
and development, so the Company is mainly dependent on a third-party, Yantai Tianzheng Medicine Research and Development Co.,
Ltd., to perform the limited amount of research and development that the Company undertakes. Research and development costs amounted
to $0 and $497,903 for theyears ended June 30, 2012 and 2011, respectively.



F-10







Shipping costs



Shipping costs are included in selling,
general and administrative expense. Shipping costsamounted to $1,303,710 and $832,401 for the years ended June 30, 2012
and 2011, respectively.



Advertising and Promotion



Advertising and promotion costs
are charged to expense as incurred. Advertising and promotion expenses included in selling, general and administrative expenses
amountedto $9,901,082 and $14,822,116 for the years ended June 30, 2012 and 2011, respectively.



Income Taxes



We are governed by the PRC’s Income Tax Laws and the
Internal Revenue Code of the United States. Income taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
and income tax base of assets and liabilities and operating loss and tax credit carry-forwards. Deferred tax assets are reduced
by a valuation allowance to the extent that management concludes it is more likely than not that the benefit of such tax assets
will not be realized in future periods. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in the periods that include the enactment date.





We account for certain tax positions based upon authoritative
guidance that prescribes a recognition threshold and measurement processes for financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return.  The guidance also provides direction on recognition,
classification, interest and penalties, accounting in interim periods and related disclosure.



Our policy is to classify assessments, if any, for tax related
to interest as interest expense and penalties as general and administrative expense.



Earnings per Share



We report earnings per share in accordance with ASC Topic 260,
“Earnings Per Share”. Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income
by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding
during the period. Common equivalent shares are excluded from the computation of diluted shares in periods for which they have
an anti-dilutive effect. Diluted shares underlying stock options and common stock purchase warrants are included in the determination
of diluted earnings per share using the treasury stock method.  Diluted shares underlying convertible debt obligations
are included in the determination of diluted loss per share using the “if converted” method (Note 16).



Recent Accounting Pronouncements



In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement
(Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amendments
change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about
the fair value measurements. The amendments include the following:



| | £ | Those that
                                                                                                                  clarify the
                                                                                                                  intent of the
                                                                                                                  Company’s
                                                                                                                  Board of Directors
                                                                                                                  regarding the
                                                                                                                  application
                                                                                                                  of existing
                                                                                                                  fair value measurement
                                                                                                                  and disclosure
                                                                                                                  requirements.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | £ | Those that
                                                                                                                   change a particular
                                                                                                                   principle or
                                                                                                                   requirement
                                                                                                                   for measuring
                                                                                                                   fair value
                                                                                                                   or for disclosing
                                                                                                                   information
                                                                                                                   about fair
                                                                                                                   value measurements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





The amendments in this Update are to be applied prospectively.
For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.  Early
application by public entities is not permitted.



F-11







The Company is currently evaluating the impact of this standard
and do not expect its adoption have a material impact on the Company’s audited consolidated financial statements.



In June 2011, the FASB issued ASU No. 2011-05, Comprehensive
Income (Topic 220): Presentation of Comprehensive Income. Under the amendments, an entity has the option to present the total
of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. The presentation option under current GAAP to
present the components of other comprehensive income as part of the statement of changes in shareholders’ equity has been
eliminated.



The amendments in this Update should be applied retrospectively.
For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December
15, 2011. Early adoption is permitted. The Company already complies with this presentation.



In September 2011, the FASB issued guidance on testing goodwill
for impairment (ASU 2011-8). The new guidance provides an entity the option to first perform a qualitative assessment to determine
whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines
that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential
goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an
entity determines that the fair value of a reporting unit is less than its carrying amount, the two-step goodwill impairment test
is not required. The Company adopted this guidance effective July 1, 2012.



In December 2011, the FASB issued guidance on offsetting (netting)
assets and liabilities. Entities are required to disclose both gross information and net information about both instruments and
transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement
similar to a master netting arrangement. The new guidance is effective for annual periods beginning after January 1, 2013. Accordingly
the Company will adopt this guidance effective July 1, 2013. The Company does not expect this guidance to have a material effect
on its consolidated financial statements.



|4. | BUSINESS ACQUISITION
|-- | --------------------



On August 8, 2011, the Company, through WFOE II, a newly formed
limited liability company formed under the laws of the PRC and wholly owned by Chance High (the Company’s wholly-owned subsidiary),
signed a share transfer agreement with the shareholders of Yantai Tianzheng to acquire 100% of Yantai Tianzheng’s equity
interests for total purchase consideration of US$35,000,000 (paid in its RMB equivalent), payable in four installments: US$6,000,000
was paid on or before the calendar day of the Execution Date of the acquisition; $12,000,000 was due to be paid on or before
February 8, 2012 the sixth month anniversary of the Execution Date; $12,000,000 is due to be paid on or before August 8,
2012 the 12 month anniversary of the Execution Date; and the remaining $5,000,000 is due to be paid on or before February
8, 2013 the 18 month anniversary of the Execution Date.



In the event that the Company fails to pay either a
portion or entire amount of any of the installments when due, such outstanding amount will be automatically converted into a
two-year term loan, with interest accruing on any unpaid portion of such loan from its due date until such installment is
paid in full at the rate of six percent (6%) per annum. As of June 30, 2012, $9,700,000 was paid, and the balance due amounts
to $25,300,000. Interest expense of $195,107 was accrued on $8,300,000 payments converted to a two year term loan and will
continue to accrue at the rate of six percent (6%) per annum until the loan is paid in full (with interest). As of June
30, 2012, $20,300,000 of installment payments due through July 1, 2012 were converted to two year term loans with interest at
6% per annum and the remaining $5,000,000 installment that has not been converted is due on January 1, 2013 and is therefore
classified as a current liability in the accompanying consolidated balance sheet.





The Company acquired Yantai Tianzheng to expand its TCM product
lines and cross leverage the Bohai’s and Yantai Tianzheng’s sales markets, which include hospitals and retail drug
stores.  In addition, Yantai Tianzheng has excess manufacturing capacity that will allow Bohai to further expand production.  Bohai
is currently consolidating and integrating the two companies' operations, which management believes creates the potential for
significant improvements in the operating efficiency of the combined business.



The Company accounted for its acquisitions of Yantai Tianzheng
using the acquisition method of accounting. Accordingly, the results of operations for the year ended June 30, 2012, include
the revenues and expenses of the acquired businesses since the effective control date of acquisition on July 1, 2011, which is
the date the Company assumed control of Yantai Tianzheng pursuant to the terms of the Share Transfer agreement between WFOE II
and the shareholders of Yantai Tianzheng.



The fair value of the purchase consideration issued to the
sellers of Yantai Tianzheng was allocated to fair value of the net tangible assets acquired, with the resulting excess allocated
to separately identifiable intangibles including customer relationships and pharmaceutical formulas with finite lives and the
remainder recorded as goodwill.



Goodwill recognized from the transactions mainly represented
the expected operational synergies upon acquisition of the subsidiary and intangibles not qualifying for separate recognition. Goodwill
is nondeductible for income tax purposes in the tax jurisdiction of the acquired business.



F-12







The purchase price was allocated as follows*:



|Purchase Consideration:                                               |  |   |            |  
|--------------------------------------------------------------------- |  | - | ---------- | -
|Cash paid to sellers immediately following the closing                |  | $ | 6,000,000  |  
|Acquisition installment obligation payable to sellers                 |  |   | 29,000,000 |  
|Less cash acquired                                                    |  |   | (1,358,078 | )
|Net purchase consideration                                            |  |   | 33,641,922 |  
|                                                                      |  |   |            |  
|Tangible assets acquired:                                             |  |   |            |  
|Restricted cash                                                       |  |   | 386,787    |  
|Accounts receivable                                                   |  |   | 6,893,730  |  
|Other receivable and advance to suppliers                             |  |   | 208,240    |  
|Inventories                                                           |  |   | 1,312,170  |  
|Property, plant and equipment                                         |  |   | 5,078, 026 |  
|Construction in progress                                              |  |   | 1,073,180  |  
|Long term prepayments - land use rights                               |  |   | 1,394,291  |  
|Accounts payable                                                      |  |   | (2,386,576 | )
|Other payable and accrued expenses                                    |  |   | (1,081,425 | )
|Income taxes payable                                                  |  |   | (729,796   | )
|Advance from customers                                                |  |   | (170,186   | )
|Short-term borrowings                                                 |  |   | (2,088,652 | )
|Deferred tax liabilities                                              |  |   | (5,261,605 | )
|Net tangible assets acquired                                          |  |   | 4,628,184  |  
|                                                                      |  |   |            |  
|Purchase consideration in excess of fair value of net tangible assets |  |   | 29,013,738 |  
|                                                                      |  |   |            |  
|Allocated to:                                                         |  |   |            |  
|Customer relationships                                                |  |   | 14,151,156 |  
|Drug product formulas (non-prescription)                              |  |   | 9,887,987  |  
|Goodwill                                                              |  |   | 4,974,595  |  
|                                                                      |  | $ | -          |  



The purchase price allocation was based, in part, on management’s
knowledge of Yantai Tianzheng’s business and the results of a third party appraisal commissioned by management.  Amounts
presented above were translated into US dollars using the exchange rate in effect at the date of the acquisition, which was 6.4635.



Yantai Tianzheng’s results of operations are consolidated
with the Company effective July 1, 2011. The following table presents the unaudited pro-forma financial results, as if the acquisition
of Yantai Tianzheng had been completed as of July 1, 2010.



|                            |  | Year Ended    |            
|--------------------------- |  | ------------- | -----------
|                            |  | June 30, 2011 |            
|Net Sales                   |  | $             | 126,934,504
|Net income                  |  | $             | 21,090,583 
|Earnings per share- basic   |  | $             | 1.23       
|Earnings per share- diluted |  | $             | 1.07       



The unaudited pro-forma results of operations are presented
for information purposes only. The unaudited pro-forma results of operations are not intended to present actual results that
would have been attained had the acquisition been completed as of July 1, 2010 or to project potential operating results as of
any future date or for any future periods.



|5. | INVENTORIES
|-- | -----------



Inventories consist of the following:



|                  |  | June 30, |           |  | June 30, |  
|----------------- |  | -------- | --------- |  | -------- | -
|                  |  | 2012     |           |  | 2011     |  
|                  |  |          |           |  |          |  
|Raw materials     |  | $        | 2,079,480 |  |          | $
|Work in progress  |  |          | 882,005   |  |          |  
|Finished goods    |  |          | 834,430   |  |          |  
|Total inventories |  | $        | 3,795,915 |  |          | $



F-13







|6. | PREPAID EXPENSES AND OTHER CURRENT ASSETS
|-- | -----------------------------------------



Prepaid expenses and other currents assets consist of the following:



|                                                |  | June 30, |         |  | June 30, |  
|----------------------------------------------- |  | -------- | ------- |  | -------- | -
|                                                |  | 2012     |         |  | 2011     |  
|Prepaid advertising and promotion               |  | $        |         |  |          | $
|Other receivables                               |  |          | 862,727 |  |          |  
|Other miscellaneous deposits and prepayments    |  |          | 16,969  |  |          |  
|Total Prepaid expenses and other current assets |  | $        | 879,696 |  |          | $



|7. | PROPERTY, PLANT AND EQUIPMENT, NET
|-- | ----------------------------------



Property, plant and equipment consist of the following:



|                                         |  | June 30, |            |   | June 30, |  
|---------------------------------------- |  | -------- | ---------- | - | -------- | -
|                                         |  | 2012     |            |   | 2011     |  
|                                         |  |          |            |   |          |  
|Buildings                                |  | $        | 8,928,545  |   |          | $
|Plant equipment                          |  |          | 2,490,764  |   |          |  
|Office equipment                         |  |          | 208,539    |   |          |  
|Motor vehicles                           |  |          | 285,610    |   |          |  
|Total                                    |  |          | 11,913,458 |   |          |  
|                                         |  |          |            |   |          |  
|Less: accumulated depreciation           |  |          | (2,188,340 | ) |          |  
|Construction in progress                 |  |          | 1,956,154  |   |          |  
|                                         |  |          |            |   |          |  
|Total Property, plant and equipment, net |  | $        | 11,681,272 |   |          | $



Depreciation expense for property,
plant and equipment for the years ended June 30, 2012 and 2011 amounted to $563,214 and $366,338,
respectively.



On June 8, 2010, YantaiHuanghai
Construction Co. signed an agreement with Yantai Tianzheng to perform certain portions of a factory construction located at the
premises of Yantai Tianzheng. The total contract price is approximately $3.07 million (RMB 19.5 million) and the construction
is estimated to be completed by the end of December 2012. The remaining commitment of the contract wasapproximately
$1.24 million(RMB 7.9 million) as of June 30, 2012.



|8. | INDEFINITE LIVED INTANGIBLE ASSETS – PHARMACEUTICAL FORMULAS
|-- | ------------------------------------------------------------





The Company purchased, and
currently owns exclusive rights to, a series ofpharmaceutical formulas that were approved by the State
Food and Drug Administration of China (“SFDA”).The intellectual property underlying theseformulas can be renewed every 5 years without limitation for anominalfee and are subject to
certain protections under PRC drug regulations for an indefinite period of time. These regulations mitigate competition and the
ability of other suppliers to replicate the Company’s products or produce comparable substitutes. These intangible assets
are measured initially at cost not subject to amortization and are tested for impairment annually or in interim reporting periods
if events or changes in circumstances indicate that the carrying amounts of these intangible asset might not be recoverable.







F-14













Pharmaceutical formulaswith
indefinite lives consist of the following:





|                                                       |  | June 30, |           
|------------------------------------------------------ |  | -------- | ----------
|                                                       |  | 2012     |           
|                                                       |  |          |           
|Pharmaceutical formulas, without amortization, at cost |  | $        | 24,345,353







On December 9, 2010, we entered into an Intangible Assets
Transfer Agreement with Shandong Daxin Microbiology Pharmaceutical Industry Co., Ltd. (“Daxin”), an
unrelated party, pursuant to which Daxin transferred to us all rights and title for 14 State Food and Drug Administration
previously approved traditional Chinese medicine formulas. The aggregate purchase price which amounted to approximately
$7,186,100 (RMB 48,000,000), was paid during the quarter ended March 31, 2011. The 14 formulas consist of two new
product categories, powder and pellet formulations. Additionally, 4 of the 14 formulas are included in the Chinese
government’s Essential Drug List (“EDL”) and an additional 5 medicines are included in the
National Drug Reimbursement List (“NDRL”).





The Company’s active products that
are currently generating revenues were derived from formulas that have an aggregate carrying amount of $16,439,373. Product formulas
representing a substantial majority of the remaining carrying amount were purchased in December 2010. The Company is currently
evaluating new product candidates to be derived from these formulas that it would market in future periods. In addition, drug product
formulas are transferrable in the PRC and as such could be sold to approved purchasers as an alternative means of recovery.





During the fourth quarter of our 2011 fiscal year, we determinate
that we will no longer manufacture or seek to develop markets for 8 specific product formulas due to a change in our business
strategy. Accordingly we recorded a $635,442 impairment charge during the fourth quarter of our fiscal year ended June 30, 2011.
There are no further impairment charges the year ended June 30, 2012.



|9. | LONG TERM PREPAYMENTS - LAND USE RIGHTS, NET
|-- | --------------------------------------------



|                                         |  | June 30, |           
|---------------------------------------- |  | -------- | ----------
|                                         |  | 2012     |           
|                                         |  |          |           
|Land use rights, at cost                 |  | $        | 20,240,623
|Less: Accumulated amortization           |  |          | (1,501,326
|Intangible assets – land use rights, net |  | $        | 18,739,297



There is no private ownership of
land in PRC. All land is owned by the government, which grants land use rights for specified periods of time. Amortization expense
of land use rights amounted to $676,515 and $171,767 forthe years ended June 30, 2012 and 2011,
respectively. Amortization is calculated over a period of 50 years. Amortization of land use rights for fiscal years ending subsequent
to June 30, 2012 is as follows:



|           |  | Amortization |           
|---------- |  | ------------ | ----------
|2013       |  | $            | 676,515   
|2014       |  |              | 676,515   
|2015       |  |              | 676,515   
|2016       |  |              | 676,515   
|2017       |  |              | 676,515   
|Thereafter |  |              | 15,356,722
|Total      |  | $            | 18,739,297



F-15







|10. | OTHER INTANGIBLE ASSETS, NET
|--- | ----------------------------





Other Intangible assets, net includes customer relationships
and certain non-prescription drug product formulas that are sold over the counter. The Company acquired these assets in its business
combination with YantaiTianzheng (Note 4). Customer relationships are amortized on a straight line basis over periods of 5 and
8 years. Pharmaceutical formulas are amortized on a straight line basis over periods of 8 years.







Other intangible assets – net at June 30, 2012 is as follow:







|                         |  | Customer Relationships |            |   | Drug Formulas |   |            | Total | 
|------------------------ |  | ---------------------- | ---------- | - | ------------- | - | ---------- | ----- | 
|Cost                     |  | $                      | 14,485,533 |   |               | $ | 11,386,833 |       | 
|                         |  |                        |            |   |               |   |            |       | 
|Accumulated Amortization |  |                        | (1,844,068 | ) |               |   | (1,265,204 | )     | 
|                         |  |                        |            |   |               |   |            |       | 
|Net carrying amount      |  | $                      | 12,641,465 |   |               | $ | 10,121,629 |       | 







Amortization expense for fiscal years ending subsequent to June
30, 2012 is as follows:







|           |  | Amortization |           
|---------- |  | ------------ | ----------
|2013       |  | $            | 3,090,866 
|2014       |  |              | 3,090,866 
|2015       |  |              | 3,090,866 
|2016       |  |              | 3,090,866 
|2017       |  |              | 3,090,866 
|Thereafter |  |              | 7,308,764 
|Total      |  | $            | 22,763,094





|11. | DEBT ISSUE COSTS
|--- | ----------------



We incurred total placement fees of $2,152,454 in connection
with our private placement of Convertible Notes (see Note 14) that occurred on January 5, 2010. The placement fees are being amortized
on a straight line basis over the two year expected life of the Convertible Notes, starting on the date of closing, January 5,
2010.



|                                    |  | June 30, |         
|----------------------------------- |  | -------- | --------
|                                    |  | 2012     |         
|                                    |  |          |         
|Beginning balance                   |  | $        | 485,039 
|Transferred to equity on conversion |  |          | -       
|Amortization                        |  |          | (485,039
|Ending balance                      |  | $        | -       



|12. | ACCRUED EXPENSES
|--- | ----------------



Accrued expense consists of the following:



|                                   |  | June 30, |           |  | June 30, |  
|---------------------------------- |  | -------- | --------- |  | -------- | -
|                                   |  | 2012     |           |  | 2011     |  
|                                   |  |          |           |  |          |  
|Accrued expense to sales personnel |  | $        | 3,778,996 |  |          | $
|Other taxes payable                |  |          | 1,879,334 |  |          |  
|Other accrued expense              |  |          | 2,073,741 |  |          |  
|Accrued payroll and welfare        |  |          | 357,975   |  |          |  
|Accrued advertising expense        |  |          | 388,008   |  |          |  
|Total                              |  | $        | 8,478,054 |  |          | $



F-16









|13. | SHORT-TERM BORROWINGS
|--- | ---------------------



The Company has short-term loan facilities from financial institutions
in the PRC. Short-term borrowings as of June 30, 2012 and June 30, 2011 consist of the following:







|Loan from                        |  |                                          |  | Annual        |      |   | June 30, |   |   | June 30, | 
|-------------------------------- |  | ---------------------------------------- |  | ------------- | ---- | - | -------- | - | - | -------- | 
|financial institution            |  | Loan period                              |  | interest rate |      |   | 2012     |   |   | 2011     | 
|                                 |  |                                          |  |               |      |   |          |   |   |          | 
|YantaiLaishan Rural Credit Union |  | September 21, 2010 to September 20, 2011 |  |               | 9.03 | % |          |   | - |          | 
|YantaiLaishan Rural Credit Union |  | September 21, 2010 to September 20, 2011 |  |               | 6.90 | % |          |   | - |          | 
|Total short-term borrowings      |  |                                          |  |               |      |   |          | $ | - |          | 



Interest expense for short-term
borrowings for the years ended June 30, 2012 and 2011 amountedto $19,943 and $187,446, respectively.



|14. | CONVERTIBLE PROMISSORY NOTES AND WARRANTS
|--- | -----------------------------------------



On January 5, 2010, pursuant to
a Securities Purchase Agreement (the “Securities Purchase Agreement”) with 128 accredited investors (the “Investors”),
BPGI sold 6,000,000 units for aggregate gross proceeds of $12,000,000, each unit consisting of an 8% senior convertible promissory
note in the principal amount of $2 and one Common Stock purchase warrant (collectively, the “Investor Warrants”).
By agreement with the Investors, each investor received: (i) A single Note representing the aggregate number of Notes purchased
by them as part of the units (each, a “Note” and collectively, the “Notes”) and (ii) a single Investor
Warrant representing the aggregate number of Investor Warrants purchased by them as part of the units.The majority of
this debt is guaranteed by third-parties and our CEO, Mr. Qu, and a portion is secured by our inventories and fixed assets.



The Notes bear interest at 8% per
annum, payable quarterly in arrears on the last day of each fiscal quarter of the Company. Principal is due on January 5, 2012
according to the original agreement. Each Note, plus all accrued but unpaid interest thereon, is convertible, in whole but not
in part, at any time at the option of the holder, into shares of Common Stock at a conversion price of $2.00 per share, subject
to adjustment as set forth in the Note.The Notes issued have face amounts that range from $43,200 to $500,000.



The conversion price of the Notes is subject to standard anti-dilution
adjustments for stock splits and similar events. In addition, if we issue or sell any additional shares of Common Stock or instruments
convertible or exchangeable for Common Stock at a price per share less than the conversion price then in effect or without consideration,
then the conversion price upon each such issuance will be adjusted to that price determined by multiplying the conversion price
then in effect by a fraction: (1) the numerator of which is the sum of (x) the number of shares of Common Stock outstanding immediately
prior to the issuance of such additional shares of Common Stock plus (y) the number of shares of Common Stock which the aggregate
consideration for the total number of such additional shares of Common Stock so issued would purchase at a price per share equal
to the conversion price then in effect, and (2) the denominator of which is the number of shares of Common Stock outstanding immediately
after the issuance of such additional shares of Common Stock. Notwithstanding any provision of the Note to the contrary,
no adjustment will cause the conversion price to be less than $1.00, as adjusted for any stock dividend, stock split, stock combination,
reclassification or similar transaction.



The Notes contain certain events of default, including non-payment
of interest or principal when due, bankruptcy, failure to maintain a listing of the Common Stock or to make required filings on
a timely basis. No premium is payable by us if an event of default occurs. However, upon an Event of Default, and provided no
more than 50% of the aggregate face amount of the Notes have been converted, the Investors holding Notes have the right to receive
a portion, based on their pro-rata participation in the transaction, of 1,000,000 shares of our Common Stock that have been placed
in escrow by our principal shareholder. The shares in escrow will be returned to our principal shareholder when 50% of the aggregate
face amount of the Notes has been converted or, if later, when the Notes are repaid.



Effective as of June 30, 2010, the Company entered into an
Amendment and Agreement (the “A&A”) with Euro Pacific Capital, Inc., as representative of the Investors (the “Investor
Representative”), pursuant to which the Company and the Investors agreed to make certain amendments to the Notes and the
Warrants.  Pursuant to the A&A, the anti-dilution protection provisions in the Notes and the Warrants were eliminated
and a provision specifically precluding net cash settlement by us of the Notes and the Warrants was added.  In return, and
subject to certain non-financing exceptions, we agreed not to issue any new equity securities at a price per share below $2.20
until the earlier of (i) January 5, 2013 or (ii) the date on which, collectively with any prior conversions or exercises of Notes
and Warrants, 75% of the principal face value of the Notes in the aggregate has been converted into shares of Common Stock
and Warrants representing, in the aggregate, 75% of the aggregate shares of Common Stock underlying the Warrants have been exercised.
The A&A did not change the Company’s accounting for the Notes and the Warrants described below.



On and effective as of March 30, 2011, the Company entered
into a Termination Agreement (the "Termination Agreement") with the Investor Representative pursuant to which the Company
and the Investor Representative agreed to terminate the A&A. As a result of the Termination Agreement, the A&A and each
of its provisions were terminated. The Termination Agreement was entered into because, after further study, the Company concluded
that the original purpose of the A&A (to mitigate the impact of certain non-cash embedded derivative liabilities associated
with the Notes, Warrants and Agent Warrants) would not be achieved. Therefore, the Company determined and agreed with the Investor
Representative to terminate the A&A and to thereby restore the Notes, Warrants and Agent Warrants to their original terms.



F-17







The Notes contain certain events of default, including non-payment
of interest or principal when due, bankruptcy, failure to maintain a listing of the Common Stock or to make required filings on
a timely basis. No premium is payable by us if an event of default occurs. However, upon an Event of Default, and provided no
more than 50% of the aggregate face amount of the Notes have been converted, the Investors holding Notes have the right to receive
a portion, based on their pro-rata participation in the transaction, of 1,000,000 shares of our Common Stock that have been placed
in escrow by our principal shareholder. The shares in escrow will be returned to our principal shareholder when 50% of the aggregate
face amount of the Notes has been converted or, if later, when the Notes are repaid.



The Investor Warrants expire on January 5, 2013 and may be
exercised by the holder at any time to purchase one share of Common Stock at an exercise price of $2.40 per share (subject to
adjustment as set forth in the Investor Warrants). The exercise price of the Investor Warrants is subject to adjustment in the
same manner as the conversion price of the Notes described above, except that the exercise price will not be adjusted to less
than $1.20, as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction.
The Investor Warrants may only be exercised for cash and do not permit the holder to perform a cashless exercise.



In connection with the sale of the units, the Company paid
its placement agents a cash fee of $1,200,000. In addition, the placement agents received warrants (the “Placement Agent
Warrants” and, together with the Investor Warrants, the “Warrants”) to purchase 600,000 shares of Common Stock,
which Placement Agent Warrants are substantially identical to the Investor Warrants, except that, pursuant to separate lock-up
agreements executed by the holders of the Placement Agent Warrants, the Placement Agent Warrants are not exercisable until the
six month anniversary of the later of: (i) the date of effectiveness of the registration statement registering the resale of the
Common Stock underlying the Notes and Warrants or (ii) the date of commencement of sales in connection with such registration
statement.



In addition to the placement agent fee, the Company paid $370,000
of legal and other expenses. As required by the Securities Purchase Agreement, $500,000 of the proceeds from the sale of the units
were placed in escrow to pay investor relations expenses to be incurred by the Company and $240,000, equivalent to one quarter’s
interest expense on the Notes, was also placed in escrow. The interest escrow will be released to the Company at such time as
75% of all shares underlying the Notes have been issued upon conversion of Notes. After payment of the placement agent fees and
other expenses and the amounts required to be placed in escrow, the Company received net proceeds of $9,690,000. At June 30, 2011
and 2010, $11,043 and $576,019, respectively, remained in escrow and is included in restricted cash.



The Company also entered into a Registration Rights Agreement
with the Investors. It agreed to file, no later than March 6, 2010, a registration statement to register the shares underlying
the Notes and the Warrants and to have such registration statement effective no later than August 13, 2010. The required registration
statement was filed on March 2, 2010 and became effective on August 12, 2010. Accordingly, the Company no registration delay payments
were incurred.



On December 31, 2011, the Company’s Chinese operating
subsidiary was unable to convert a sufficient number of RMB’s needed to repay the notes on their contractual maturity date
of January 5, 2012. As a result, the Company entered into an amendment to the Notes with Euro Pacific as representative of the
Investors which: (i) extended the maturity date of the Notes from January 5, 2012 to April 5, 2012 (such extra three month period,
the “Extended Period”); and (ii) increased the interest rate on the Notes to an annual rate of 12% (or 3% for the
Extended Period). The Company and Euro Pacific negotiated a second amendment to the Notes to further extend the maturity
date thereof. See Note 2.



On May 8, 2012, a Three Parties Fund Escrow Agreement (“Escrow
Agreement”) was entered into among Yantai Shencaojishi Pharmaceuticals Co., Ltd., the wholly-owned subsidiary of the Company
(“Yantai Shencaojishi”), Euro Pacific and Rural Credit Cooperative of Laishan District, Yantai City (the “Bank”).
Pursuant to the Escrow Agreement, an RMB-denominated escrow account (the “Escrow Account”) was established with Bank
and RMB 59 million (approximately $10.45 million) was deposited by Yantai Shencaojishi into the Escrow Account. On May 9, 2012,
a Supplemental Agreement to the Escrow Agreement with details of the Escrow Account was entered into by the Company, Euro Pacific
and the Bank. The Escrow Agreement provides that the Escrow Account will be managed by both the Company and Euro Pacific and that
withdrawal of cash from the Escrow Account cannot be done without prior written consent from both the Company and Euro Pacific.



On May 14, 2012, the Company entered into another amendment
(the “Second Amendment”) to the Notes with Euro Pacific. The Company repaid a portion of amounts due under its two-year
8% convertible notes, as amended, in the amount of approximately $314,000, which is equivalent to the amount of the first quarter
2012 interest payment on the Notes (calculated based on an annual rate of 12% as currently provided for in the Notes). The Company
repaid an additional amount of approximately $100,000 on June 28, 2012 and $631,000 on July 3, 2012. In addition, the maturity
date of the notes was extended from April 5, 2012 to October 5, 2012 (such extra six month period, the “Second Extended
Period”); and (ii) the interest rate on the Notes remains at an annual rate of 12% (or 6% for the Second Extended Period).
($731,000 has been paid July 5, 2012).



F-18







On June 27, 2012, we and Euro Pacific entered into a Third Amendment to the Notes (the “Third Amendment”) to remove
the limitations on our ability to incur debt, to incur liens or to make capital expenditures. The purpose of the Third Amendment
is to provide us with enhanced flexibility to seek potential sources of financing.



The Company is currently working with Euro Pacific
as representative of the Investors on a fourth amendment to the Notes which would further extend the maturity date of
the Notes from October 5, 2012 to January 5, 2013. As of the date of this Annual Report, no written agreement has been
entered into in this regard. The Company is unable to predict whether an agreement will be reached. The non-payment of the
loan in the absence of an extension of the maturity date would constitute an event of default under the terms of loan
agreement. The Company can not predict what the implications of the non-payment of the loan would be other than the continued
difficulty of repaying the loan from escrowed funds due to currency conversion restriction. The non-payment of the note could
have a material adverse effect on the Company should the note holders declare an event of default.



Valuation



At the time the Notes and Warrants were issued, there had not
been any market activity for the Common Stock. Accordingly, determining the fair value of the Common Stock required us to
make complex and subjective judgments. We estimated the value of our enterprise as of January 5, 2010 based on a review of the
enterprise value derived from the use of market and income valuation approaches. We also reviewed an asset-based approach to assess
whether the result of such an approach was consistent with the value derived from the market and income valuation approaches.
The market approach was based on the market price to earnings multiple for companies considered by management to be comparable
to us. The income approach was based on applying discount rates to estimated future net income. The estimated enterprise value
was then allocated to our existing outstanding Common Stock, the Notes and the Warrants using the Binomial option pricing method.
The option pricing method was based on the two year period to maturity of the Notes and the three year period to expiration of
the Warrants, risk-free interest rates commensurate with those periods and the expected volatility used was based on a review
of the historical volatility of companies considered by management to be comparable to us.



Based on the allocation of the estimated enterprise value,
we estimated the fair value of the Common Stock at $2.28 per share, as of January 5, 2010. The Investor Warrants and the Placement
Agent Warrants were valued at $5,824,538 and $582,454, respectively, based on the estimated fair value of the Common Stock of
$2.28, a term equal to the remaining life of the Warrants, an expected dividend yield of 0%, a risk-free interest rate of 1.57%
based on constant maturity rates published by the U.S. Federal Reserve applicable to the remaining life of the Warrants and estimated
volatility of 65%, based on a review of the historical volatility of companies considered by management to be comparable to us. 
As noted above, prior to the June 30, 2010 Amendment described above, the Warrants contained a down-round anti-dilution protection feature.
As of January 5, 2010, the value of this feature was not considered to be material and no adjustment was made for it in the
estimated fair value of the Warrants.



Accounting for Convertible Notes



At January 5, 2010, June 30, 2011 and June 30, 2012, the conversion
options embedded in the Notes are not derivative instruments as defined in FASB ASC 815-10-15-83 because the Notes do not permit
or require net settlement, there is no market mechanism outside the contracts that permits net settlement and the shares to be
received on conversion of the Notes are not readily convertible to cash. At the time the Notes were issued, there had not been
any market activity for the Common Stock.  Although market trading activity for our Common Stock has developed, the Notes
can be exercised only in whole but not in part and through June 30, 2011 and continuing, there has been insufficient trading volume to
permit the shares to be received on conversion of each Note to be readily sold in the market, thus precluding the shares to be
received by the holder of each Note from being readily convertible to cash.



In future periods, whether or not the embedded conversion option
in each Note is considered to be a derivative instrument will depend on whether or not the aggregate number of shares to be received
on exercise of each of the Notes, which Notes can be exercised only in whole but not in part, could be readily sold in the market
without significantly affecting the market price of the Common Stock, thus permitting the shares received by the holder of
each Note to be readily convertible to cash. At each reporting date, the Company will re- evaluate each Note, based on the level
of activity in the market for the Common Stock at that time, to determine whether or not the embedded conversion option
in each Note is a derivative instrument. Depending on the trading volume for the Common Stock that develops in the future and
the face amount of each Note, the embedded conversion option may be considered a derivative instrument for some Notes but
not for others and its status as a derivative instrument may vary from period to period.



FASB ASC 815-10-15-74 provides that a contract which would
otherwise meet the definition of a derivative instrument but that is both (a) indexed to a company’s own stock and (b) classified
in shareholders’ equity in the statement of financial position would not be considered a derivative financial instrument.
FASB ASC 815-40-15 and 815-40-25 provide guidance for determining whether those two criteria are met. Because the Company’s
functional currency is the Renminbi, but the Notes are denominated in U.S. Dollars, FASB ASC 815-40-15-71 provides that the embedded
conversion options are not considered to be indexed only to our Common Stock. Furthermore, prior to the June 30, 2010 Amendment
described above, the criteria that the instruments be indexed only to the Common Stock was also not met because the conversion
price of the Notes would be reduced if we issued securities at a lower exercise or conversion price.



Because the requirement that the instruments be indexed only
to the Common Stock is not met, the exemption in FASB ASC 815-10-15-74 will not be available and we will account for the embedded
conversion options in the Notes as derivative instrument liabilities, if and when the shares to be issued on conversion are considered
to be readily convertible to cash.



F-19







Derivative financial instruments are initially measured at
their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or
credits to income. If and when the embedded conversion option in any of the Notes first qualifies as a derivative instrument,
the fair value at that time of the embedded derivative instrument will be re-classified and separately recognized and subsequently
marked-to-market each reporting period, as long as the embedded conversion option continues to qualify as a derivative instrument.
If the embedded conversion option ceases to be a derivative instrument, it will be marked-to-market as of the date of re-classification
but thereafter will no longer be marked-to-market.



Warrants



The Investor Warrants expire on January 5, 2013 and may be
exercised by the holder at any time to purchase one share of Common Stock at an exercise price of $2.40 per share (subject to
adjustment as set forth in the Investor Warrants). The exercise price of the Investor Warrants is subject to adjustment in the
same manner as the conversion price of the Notes described above, except that the exercise price will not be adjusted to less
than $1.20, as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction.
The Investor Warrants may only be exercised for cash and do not permit the holder to perform a cashless exercise.



In connection with the sale of the units, BPGI paid the placement
agents a cash fee of $1,200,000. In addition, the placement agents received warrants (the “Placement Agent Warrants”
and, together with the Investor Warrants, the “Warrants”) to purchase 600,000 shares of Common Stock, which Placement
Agent Warrants are substantially identical to the Investor Warrants.



At January 5, 2010, the Investor
Warrants were valued at $5,824,538. At June 30, 2011, the Investor Warrants were re-valued at $852,607, using a binomial
model, based on the closing market price on that date of $1.05, a term equal to the remaining life of the Warrants which is 1.52
years, an expected dividend yield of 0%, a risk-free interest rate of 0.33%, based on constant maturity rates published by the
U.S. Federal Reserve applicable to the remaining life of the Warrants and estimated volatility of 55%, based on a review of the
historical volatility of companies considered bymanagement to be comparable to the Company. The
effect of the down-round anti-dilution protection was not considered to be material and no adjustment was made for it in the estimated
fair value of the Investor Warrants. At June 30, 2012, the fair values of the Investor Warrants amounted$1,101,123,
using a binomial model, based on the closing market price on that date of $0.51, a term equal to the remaining life of the Warrants
which is 0.52 year, an expected dividend yield of 0%, a risk-free interest rate of 0.16%, based on constant maturity rates published
by the U.S. Federal Reserve applicable to the remaining life of the Warrants and estimated volatility of 130%, based on a review
of the historical volatility of companies considered by management to be comparable to the Company. The effect of the down-round
anti-dilution protection was not considered to be material and no adjustment was made for it in the estimated fair value of the
Investor Warrants and the Placement Agent Warrants.



The Placement Agent Warrants were
initially valued at $582,454. The cost of these instruments, together with the cash fees paid to the placement agents and the
other fees and expenses paid by us, as described above, in the aggregate amount of $2,152,454, have been deferred and are
being amortized on a straight-line basis over the two year period to maturity of the Notes. At June 30, 2011, the
Placement Agent Warrants were re-valued at $85,260, based on the closing market price on that date of $1.05, a term equal
to the remaining life of the Warrants which is 1.52 years, an expected dividend yield of 0%, a risk-free interestrate of 0.33% and estimated volatility of 55%. The effect of the down-round anti-dilution protection was not considered to be
material and no adjustment was made for it in the estimated fair value of the Placement Agent Warrants. At June 30,
2012, the Placement Agent Warrants were re-valued at $110,112, based on the closing market price on that date of $0.51, a
term equal to the remaining life of the Warrants which is 0.52 year, an expected dividend yield of 0%, a risk-free interest
rate of 0.16% and estimated volatility of 130%. The effect of the down-round anti-dilution protection was not considered to be
material and no adjustment was made for it in the estimated fair value of the Placement Agent Warrants.



The aggregate change in fair value
of the Investor and Placement Agent Warrants for the years ended June 30, 2012 and 2011 of$(273,369) and$4,544,061, respectively, has been recorded as a component of other income (expense), respectively, on the audited consolidated
statements of income.



The following table summarizes the weighted average remaining
contractual life and exercise price of all of our outstanding warrants.



|Warrants Outstanding |     
|-------------------- | ----
|                     |     
|                     |     
|                     |     
|                     |     
|Exercise             |     
|Price                |     
|                     |     
|$                    | 2.40



F-20







Convertible Notes



The Convertible Notes were initially
recorded at a discounted carrying amount of zero as a result of having allocated a portion of the proceeds to (i) the fair value
of the warrants, which were recorded as liabilities stated at fair value, and (ii) a beneficial conversion feature that was not
bifurcated as a free standing derivative at the time of issuance or at subsequent reporting dates based on periodic classification
assessments. Accretion of the note discount amounted to$8,997,898 and $1,033,201 for the years
ended June 30, 2012 and 2011, respectively. Accretion of the discount was recorded as a component of interest expense in the accompanying
statements of income and comprehensive income. Contractual interest expense amountedto $0 and $1,029,487 forthe years ended June 30, 2011 and 2012, respectively. There is an aggregate of 5,018,000 shares of Common Stock issuable under
all remaining convertible notes as of June 30, 2012.



Convertible notes, net of unamortized original issuance discounts
are as follows:



|                                                                                               |  | June 30, |           
|---------------------------------------------------------------------------------------------- |  | -------- | ----------
|                                                                                               |  | 2012     |           
|                                                                                               |  |          |           
|Convertible notes payable, at full principal value                                             |  | $        | 10,036,000
|Less: unamortized beneficial conversion feature and warrants discount on
    convertible notes |  |          | -         
|Convertible notes, net                                                                         |  | $        | 10,036,000



Escrowed Shares



As of January 5, 2010 and at June 30, 2012 and 2011, the Company’s
principal shareholder, Mr. Qu, is obligated to deliver 1,000,000 shares of Common Stock to the Investors if certain Events of
Default occur (as defined in the Notes).



| | 15. | COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
| | --- | --------------------------------------------



| | (a) | Contract Research and Development Arrangement
| | --- | ---------------------------------------------



On May 2009, the Company entered
into a contract with Yantai Tianzheng Medicine Research and Development Co. to perform research and development on two new pharmaceutical
products, namely Fern Injection and Forsythia Capsule. The total contract price is approximately $2,345,509 (RMB 15,000,000). Yantai
Tianzheng Medicine Research and Development Co. is committed to complete all research work required for the clinical trial within
3 years. As of June 30, 2012, the Company has paid $1,305,339 (RMB 8,300,000) with respective to the contract. The remaining
payment will be made over the remaining of the contract as the services are rendered. The Company has extended the contract with
Yantai Tianzheng Medicine Research and Development Co. to May 10, 2017 to allow more time to complete the development process
due to changes in government regulatory requirements. Research and development costs associated with this contract amounted to$0 and $497,903 for the years ended June 30, 2012 and 2011, respectively.



| | (b) | Supplier Concentrations
| | --- | -----------------------



We have the following concentrations of business with each
supplier constituting greater than 10% of the Company’s purchases of raw materials or other supplies:



|                                                        |  | June 30, |  
|------------------------------------------------------- |  | -------- | -
|                                                        |  | 2012     |  
|Shandong Yantai Medicine Procurement and Supply Station |  | 13.2     | %
|Anhui Dechang Pharmaceutical Co. Ltd.                   |  | 16.2     | %



* Constitutes less than 10% of the Company’s purchases.



We had a commitment to purchase
certain rawmaterials totaling $3,930,135as of June 30, 2012 that was fulfilled upon the delivery
of the goods in July 2012.



We have short term raw material purchase obligations with unrelated
parties in the amount of $2,986,618 (RMB 18,990,408) that were fulfilled in October 2011.



F-21







| | (c) | Sales Product Concentrations
| | --- | ----------------------------



Five of the Company’s products,
namely Tongbi Capsules, Tongbi Tablets, Lung Nourishing Syrup, Zhengxintai Capsules and Fangfengtongsheng Tablets representedapproximately 22.8%, 9.1%, 16.6%, 10.6% and 18.3%, respectively, of total sales for the years ended June 30, 2012.



Four of the Company’s products,
namely Tongbi Capsules, Tongbi Tablets, Lung Nourishing Syrup andShangtongning Tabletsrepresentedapproximately 27.4%, 14.4%, 26.2% and 8.7%, respectively, of total sales for the year ended June 30, 2011.



| | (d) | Economic and Political Risks
| | --- | ----------------------------



The Company’s operations are conducted solely in the
PRC. There are significant risks associated with doing business in the PRC, which include, among others, political, economic,
legal and foreign currency exchange risks. The Company’s results may be adversely affected by changes in political and social
conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures,
currency conversion, remittances abroad, and rates and methods of taxation, among other things.



| | (e) | Concentrations of Credit Risk
| | --- | -----------------------------



Financial instruments which potentially subject us to concentrations
of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is deposited
in state-owned banks within the PRC, and no deposits are covered by insurance. We have not experienced any losses in such accounts
and believe that the Company’s loss exposure is insignificant due to the fact that banks in the PRC are state owned and
are generally high credit quality financial institutions. A significant portion of the Company’s sales are credit sales
which are made primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas.
We continually monitor the credit worthiness of the Company’s customers in an effort to reduce credit risk.



At June 30, 2012 and June 30, 2011,
the Company’s cash balances bygeographic area were as follows:



|                                |  | June 30, |           
|------------------------------- |  | -------- | ----------
|                                |  | 2012     |           
|Country:                        |  |          |           
|United States                   |  | $        | 23,406    
|China                           |  |          | 18,362,882
|Total cash and cash equivalents |  | $        | 18,386,288



| | (f) | Certificate of land use right
| | --- | -----------------------------



The Company’s corporate headquarters is located at No.
9 Daxin Road, Zhifu District, Yantai, Shandong Province in China. Under the current PRC laws, land is owned by the state, and
parcels of land in rural areas which are known as collective land are owned by the rural collective economic organization. “Land
use rights” are granted to an individual or entity after payment of a land use right fee is made to the applicable state
or rural collective economic organization. Land use rights allow the holder of the right to use the land for a specified long-term
period. We have a land use right, expiring in 2047, for a total of approximately 30,637 square meters of land, on which the Company
maintains its manufacturing facility. The Company has not obtained a land use right certificate for a piece of land located in
Xingfu Twelve Village of Zhifu District with the area of 11,222 square meters, on which the Company maintains its corporate headquarters.
In the process of the planning of Yantai City, the usage of the aforesaid land use right has been changed from “industrial
use” to “commercial use” and therefore, the approval process for the land use right certificates on five relevant
parcels of land including the land occupied by us is suspended until the completion of the planning. We cannot provide any assurance
that the Company will eventually obtain the land use right certificate for this land. If the Company is asked by the local government
to relocate the Company’s facility, management believes that estimated relocation and other costs will be reimbursed by
the local government. The Company does not believe that a requirement to relocate operations would have a material adverse effect
on the business.



| | (g) | Business insurance
| | --- | ------------------



Business insurance is not readily available in the PRC. To
the extent that the Company suffers a loss of a type which would normally be covered by insurance in the United States, such as
product liability and general liability insurance, the Company would incur significant expenses in both defending any action and
in paying any claims that could result from a settlement or judgment.



F-22







| | 16. | NET INCOME PER SHARE
| | --- | --------------------



Basic earnings per share is computed on the basis of the weighted
average number of shares of Common Stock outstanding during the period. Diluted earnings per share is computed on the basis of
the weighted average number of shares of Common Stock plus the effect of potentially dilutive common shares outstanding during
the period using the if-converted method for the convertible debt and equity securities and the treasury stock method for stock
options and common stock purchase warrants. The following table sets forth the computation of basic and diluted net income
per common share:



|                                                                             |  | Year ended    |           |  | Year ended    |  
|---------------------------------------------------------------------------- |  | ------------- | --------- |  | ------------- | -
|                                                                             |  | June 30, 2012 |           |  | June 30, 2011 |  
|                                                                             |  |               |           |  |               |  
|Net income available to common stockholders-basic                            |  | $             | 9,648,025 |  |               | $
|Effective interest on convertible notes and amortization of debt issue costs |  |               |           |  |               |  
|Net income available for common shareholders – diluted                       |  | $             | 9,648,025 |  |               | $



|                                                               |  | Year ended    |            |  | Year ended    |  
|-------------------------------------------------------------- |  | ------------- | ---------- |  | ------------- | -
|                                                               |  | June 30, 2012 |            |  | June 30, 2011 |  
|Weighted average number of common shares outstanding - basic   |  |               | 17,861,085 |  |               |  
|Options                                                        |  |               | -          |  |               |  
|                                                               |  |               | -          |  |               |  
|Common shares issuable upon conversion of Convertible Debt     |  |               | -          |  |               |  
|Weighted average number of common shares outstanding - diluted |  |               | 17,861,085 |  |               |  
|                                                               |  |               |            |  |               |  
|Earnings per share:                                            |  |               |            |  |               |  
|Basic                                                          |  | $             | 0.54       |  |               | $
|Diluted                                                        |  | $             | 0.54       |  |               | $



Warrants topurchase 6,600,000
shares of Common Stock and stock options to purchase32,000 sharesof Common Stock were outstanding as of June 30, 2012 and 2011 but both 6,600,000 shares of Common Stock and 32,000 shares of options
were excluded from the computation of diluted earnings per share where applicable as the exercise prices of these securities exceeded
the average stock prices for the years ended June 30, 2012 and 2011. Further, we excluded 5,018,000 shares issuable upon conversion of the convertible notes from the computation of diluted EPS
in 2012 as the effect of these shares are also antidilutive.



| | 17. | STOCK OPTIONS
| | --- | -------------



On May 2, 2011, the Company granted stock options to a director
for the purchase of 6,000 shares of our Common Stock at an exercise price of $2.00 per share. The options vested immediately
and expire five years from the date of issuance. These options have been valued at $3,184. The Company uses a binomial option
pricing model to calculate the grant date fair value of the options, with the following assumptions: no dividend yield, expected
volatility of 55%, risk free interest rate of 0.3%, expected term of 5 years.



The following table summarizes the weighted average remaining
contractual life and exercise price of our outstanding options as of June 30, 2012:



|Options Outstanding |     
|------------------- | ----
|Number              |     
|                    |     
|                    |     
|                    |     
|Exercise            |     
|Price               |     
|                    |     
|$                   | 2.00



The Company accounts for share-based payments in accordance
with ASC 718. Accordingly, it expenses the fair value of awards granted to the directors. Total compensation expense related to
the stock options for the years ended June 30, 2012 and 2011 was $0 and $27,027, respectively and was recorded as general and
administrative expense.



F-23







A summary of our stock option activity as of June 30,
2012, and changes during the twelve months ended June 30, 2012 is presented in the following table:



|                                                      |  |        |        |  |        |  |        | Exercise Price | 
|----------------------------------------------------- |  | ------ | ------ |  | ------ |  | ------ | -------------- | 
|                                                      |  | Option |        |  | Vested |  |        | per Common     | 
|                                                      |  | Shares |        |  | Shares |  |        | Stock Range    | 
|Balance, June 30, 2010                                |  |        | -      |  |        |  | -      |                | 
|                                                      |  |        |        |  |        |  |        |                | 
|Granted or vested during the year ended June 30, 2011 |  |        | 32,000 |  |        |  | 32,000 |                | 
|                                                      |  |        |        |  |        |  |        |                | 
|Exercised during the year ended June 30, 2011         |  |        | -      |  |        |  | -      |                | 
|                                                      |  |        |        |  |        |  |        |                | 
|Expired during the year ended June 30, 2011           |  |        | -      |  |        |  | -      |                | 
|                                                      |  |        |        |  |        |  |        |                | 
|Balance, June 30, 2011                                |  |        | 32,000 |  |        |  | 32,000 |                | 
|                                                      |  |        |        |  |        |  |        |                | 
|Granted or vested during the year ended June 30, 2012 |  |        | -      |  |        |  | -      |                | 
|                                                      |  |        |        |  |        |  |        |                | 
|Exercised during the year ended June 30, 2012         |  |        | -      |  |        |  | -      |                | 
|                                                      |  |        |        |  |        |  |        |                | 
|Expired during the year ended June 30, 2012           |  |        | -      |  |        |  | -      |                | 
|                                                      |  |        |        |  |        |  |        |                | 
|Balance, June 30, 2012                                |  |        | 32,000 |  |        |  | 32,000 |                | 



| | 18. | STOCKHOLDERS’EQUITY
| | --- | -------------------



Authorized Capital



The Company is authorized to issue 150 million shares of Common
Stock, par value $0.001 per share. Holders of its Common Stock are entitled to one vote for each share held of record on each
matter submitted to a vote of shareholders.



Issuance of Common Stock



On January 21, 2011, the Company closed a financing transaction
in which it sold an aggregate of 748,382 shares of Common Stock to a total of 42 individual investors domiciled in the PRC at
$2.50 per share, for total gross proceeds of $1,870,955.



Notes with an aggregate face amount of $1,050,000 and accrual
interest of $5,406 were converted into 527,703 shares of Common Stock during the year ended June 30, 2011.



Restricted Stock Awards



On June 4, 2010, we granted 120,000
shares of Restricted Common Stock to our Chief Financial Officer for three years of service. The Restricted Common Stock vests
in three equal annual installments over the related service period. We issued 40,000 shares of Restricted Common Stock with an
aggregate fair value of $95,000 under this agreement during the year ended June 30, 2011. The Company recorded $44,000
and$182,500 stock compensation expenses for this accrued during the years ended June 30, 2012 and
2011, respectively. There were no shares issued for the year ended June 30, 2012. Our Chief Financial Officer resigned on December
31, 2011.



On October 13, 2010, we granted stock options to two directors
for the purchase of 26,000 shares of our Common Stock at an exercise price of $2.00 per share. The options vested immediately
and expire five years from the date of issuance.



These options have been valued at $23,844. We use a binomial
option pricing model to calculate the grant date fair value of the options, with the following assumptions: no dividend yield,
expected volatility of 70%, risk free interest rate of 0.3%, expected term of 2.5 years.



On May 2, 2011, we granted stock options to a director for
the purchase of 6,000 shares of our Common Stock at an exercise price of $2.00 per share.  The options vested immediately
and expire five years from the date of issuance. These options have been valued at $3,184. We use a binomial option pricing model
to calculate the grant date fair value of the options, with the following assumptions: no dividend yield, expected volatility
of 55%, risk free interest rate of 0.3%, expected term of 5 years.



The following table summarizes the weighted average remaining
contractual life and exercise price of our outstanding options as of June 30, 2012:



F-24







|Options Outstanding |     
|------------------- | ----
|Number              |     
|                    |     
|                    |     
|                    |     
|Exercise            |     
|Price               |     
|                    |     
|$                   | 2.00



We account for share-based payments in accordance with ASC
718. Accordingly, we expense the fair value of awards granted to the directors. Total compensation expense related to the stock
options for the years ended June 30, 2012 and 2011 was $0 and $27,028, respectively and was recorded as general and administrative
expense.



Statutory Reserves



According to the laws and regulations in the PRC, we are required
to provide for certain statutory funds, namely, reserve fund by an appropriation from net profit after taxes but before dividend
distribution based on the local statutory financial statements of the PRC company prepared in accordance with the accounting principles
and relevant financial regulations.



In the PRC, we are required to allocate at least 10% of our
net profit to the reserve fund until the balance of such fund has reached 50% of its registered capital. Appropriation of enterprise
expansion fund are determined at the discretion of it directors. We had satisfied statutory reserve requirement by the first
quarter of the fiscal year 2010, no further allocation to the statutory reserve is required.



The reserve fund can only be used, upon approval by the relevant
authority, to offset accumulated losses or increase capital.



|19. | OPERATING EXPENSE
|--- | -----------------



For the years ended June 30, 2012 and 2011, operating expenses
consisted of the following:



|                                           |  | Year ended   |            |  | Year ended   |  
|------------------------------------------ |  | ------------ | ---------- |  | ------------ | -
|                                           |  | June 30,2012 |            |  | June 30,2011 |  
|                                           |  |              |            |  |              |  
|Travel and accommodation                   |  | $            | 18,401,199 |  |              | $
|Advertising and promotion                  |  |              | 9,901,082  |  |              |  
|Audit fees and expenses                    |  |              | 520,261    |  |              |  
|Commission                                 |  |              | 11,440,588 |  |              |  
|Conferences                                |  |              | 18,204,615 |  |              |  
|Depreciation and amortization              |  |              | 2,578,316  |  |              |  
|Staff costs                                |  |              | 2,723,569  |  |              |  
|Research and development cost              |  |              | -          |  |              |  
|Other operating expenses                   |  |              | 11,698,495 |  |              |  
|Impairment loss on Pharmaceutical formulas |  |              | -          |  |              |  
|Total Operating expenses                   |  | $            | 75,468,125 |  |              | $



|20. | INCOME TAXES
|--- | ------------



The Company is incorporated under the laws of the State of
Nevada in the United States of America and has legal subsidiaries in the British Virgin Islands (“BVI”) and the PRC.
The Company does not have any employees or assets nor or is it engaged in any income producing activities in the Unites States
or the BVI. The Company is currently filing Federal income tax returns in the United States. The Company is not subject to state
income tax in Nevada.



The Company’s only income producing activities are in
the PRC. The statutory corporation income tax rate in the PRC is 25%.



For the years ended June 30, 2012 and 2011, the provision for
income taxes consisted of the following:



|                              |  | Years Ended June 30, |           
|----------------------------- |  | -------------------- | ----------
|                              |  | 2012                 |           
|                              |  |                      |           
|Current taxes                 |  |                      |           
|United States                 |  | $                    | -         
|PRC                           |  |                      | 7,484,941 
|                              |  |                      |           
|Deferred taxes (benefit)      |  |                      |           
|United States                 |  |                      | (4,188,248
|PRC                           |  |                      | (170,059  
|                              |  |                      |           
|Change in valuation allowance |  |                      | 4,188,248 
|                              |  |                      |           
|Provision for Income Taxes    |  | $                    | 7,314,882 



F-25







As of June 30, 2012, we had $14,122,755 of net operating loss
carry forwards available for federal tax income purposes that may be used to offset future taxable income and will begin to expire
in 2030. We provided for full valuation allowance against the net deferred tax assets of $4,887,937 on the expected future tax
benefits from the net operating loss carry forwards for the year ended June 30, 2012 as management believes it is more likely
than not that these assets will not be realized in the future. During the years ended June 30, 2012 and 2011, the valuation allowance
increased by $4,188,248 and 391,282, respectively.



We are subject to income tax in the United States and the
PRC. There was a benefit for income tax in the United States because we had a taxable loss in the United States for the years
ended June 30, 2012 and 2011. The statutory  federal tax rate is 34%. The table below summarizes the differences between the
U.S. statutory federal rate and our effective tax rate as follows for the years ended June 30, 2012 and 2011:



|                              |  | For the Years Ended June
    30, |           
|----------------------------- |  | -------------------------------- | ----------
|                              |  | 2012                             |           
|                              |  |                                  |           
|US tax at statutory rate      |  | $                                | 5,767,388 
|Foreign tax differential      |  |                                  | (2,445,869
|Permanent differences         |  |                                  | (194,885  
|NOL True-up                   |  |                                  |           
|Record prior year DTL         |  |                                  |           
|Change in valuation allowance |  |                                  | 4,188,248 
|Provision for Income Taxes    |  | $                                | 7,314,882 



Our deferred tax assets as of June 30, 2012 and 2011 are as
follows:



|                          |  | June 30, |           
|------------------------- |  | -------- | ----------
|                          |  | 2012     |           
|Deferred tax asset:       |  |          |           
|NOL carryover             |  |          | 4,801,737 
|Stock compensation        |  |          | 86,200    
|Sub-total                 |  |          | 4,887,937 
|Deferred tax liabilities: |  |          |           
|Debt discount             |  |          |           
|Interest                  |  |          |           
|Sub-total                 |  |          | 4,887,937 
|Valuation allowance       |  |          | (4,887,937
|Total                     |  | $        | -         



The Company also has a deferred tax liability related to definite
and indefinite lived intangibles in the PRC jurisdiction of $8,161,269 and $2,878,397 for the years ended June 30, 2012 and 2011,
respectively.





The Company has permanently reinvested earnings in its foreign
subsidiaries. At June 30, 2012, approximately $66,000,0006of
accumulated earnings was permanently reinvested. If such earnings were repatriated, there could be additional federal income taxes
(net of available tax credits). It is not practicable to determine the amount of additional tax that might be payable on the undistributed
foreign earnings.





Management has evaluated and concluded that there were no material
uncertain tax positions requiring recognition in the Company’s consolidated financial statements for the years ended June
30, 2012 and 2011. Further, it is not anticipated that the unrecognized benefits will significantly change over the next twelve
months.



We and our subsidiaries file income tax returns in the U.S.
federal jurisdiction and in the PRC. For federal tax purposes, years beginning after June 30, 2009 are still open to examination.
Currently, no income tax returns are under examination.



F-26







|21. | VIE
|--- | ---



To satisfy PRC laws and regulations, the Company conducts certain
business in the PRC through the VIEs.





Resulting from the VIE Agreement signed between YantaiShencaojishi
Pharmaceuticals Co., Ltd (“WFOE”) and YantaiBohai Pharmaceuticals Group Co. Ltd (“Bohai”), the Company
includes the assets, liabilities, revenues and expenses of YantaiBohai Pharmaceuticals Group Co. Ltd (the “VIE”) in
its consolidated financial statements.



Substantially all of the Company’s assets, including those
of Bohai which is considered the VIE and Yantai Tianzheng, which is an acquired subsidiary of the Company are accessible to Bohai through WFOE II creditors irrespective of the VIE arrangement.





The VIE Agreements include:



Equity Interest Pledge Agreement.The
WFOE and Bohai Shareholders have entered into Equity Interest Pledge Agreements, pursuant to which each Bohai Shareholder has
pledged all of his shares of Bohai to the WFOE in order to guarantee cash-flow payments under the applicable Consulting Services
Agreement. The Equity Pledge Agreement further entitles the WFOE to collect dividends from Bohai during the term of the pledge.



Consulting Service Agreement.Bohai
and the WFOE has entered into a Consulting Services Agreement, which provides that the WFOE will be the exclusive provider of
technology services to Bohai and Bohai will pay all of its net income based on the quarterly financial statements to the WFOE
for such services. Any such payment from the WFOE to the Company would need to comply with applicable Chinese laws affecting payments
from Chinese companies to non-Chinese companies. See “Risk Factors – Risks Associated With Doing Business in China.”



Operating Agreement.Pursuant to
the operating agreement among the WFOE, Bohai and each of Bohai Shareholder, the WFOE provides guidance and instructions on Bohai’s
daily operations and financial affairs. The Bohai Shareholders must designate the candidates recommended by the WFOE as their
representatives on their respective boards of directors. The WFOE has the right to appoint senior executives of Bohai. In addition,
the WFOE agrees to guarantee Bohai’s performance under any agreements or arrangements relating to Bohai’s business
arrangements with any third party. Bohai, in return, agrees to pledge its accounts receivable and all of its assets to the WFOE.
Moreover, Bohai agrees that without the prior consent of the WFOE, Bohai will not engage in any transactions that could materially
affect its assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness,
sale or purchase of any assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in
favor of a third party or transfer of any agreements relating to its business operation to any third party.



These contractual arrangements may not be as effective in providing
the Company with control over the VIEs as direct ownership. Due to its VIEs structure, the Company has to rely on contract right
to effect control and management of the VIEs, which exposes it to the risk of potential breach of contract by the shareholders
of Yantai Bohai Pharmaceuticals Group Co. Ltd. Our VIE Agreements are subject to significant risks as set forth in the following
risk factors.





| | £ | The PRC
                                                                                                                   government
                                                                                                                   may determine
                                                                                                                   that the VIE
                                                                                                                   Agreements
                                                                                                                   which we utilize
                                                                                                                   to control
                                                                                                                   our operating
                                                                                                                   subsidiary
                                                                                                                   Bohai are not
                                                                                                                   in compliance
                                                                                                                   with applicable
                                                                                                                   PRC laws, rules
                                                                                                                   and regulations
                                                                                                                   and that they
                                                                                                                   are therefore
                                                                                                                   unenforceable.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | £ | There are
                                                                                                                   risks involved
                                                                                                                   with the operation
                                                                                                                   of Bohai under
                                                                                                                   the VIE Agreements.
                                                                                                                   We have been
                                                                                                                   advised by
                                                                                                                   PRC legal counsel
                                                                                                                   that if the
                                                                                                                   PRC government
                                                                                                                   determines
                                                                                                                   the VIE Agreement
                                                                                                                   used to control
                                                                                                                   the operating
                                                                                                                   company to
                                                                                                                   be unenforceable
                                                                                                                   as they circumvent
                                                                                                                   the PRC restrictions
                                                                                                                   relating to
                                                                                                                   foreign investment
                                                                                                                   restrictions,
                                                                                                                   the relevant
                                                                                                                   regulatory
                                                                                                                   authorities
                                                                                                                   would have
                                                                                                                   broad discretion
                                                                                                                   in dealing
                                                                                                                   with such breach
                                                                                                                   and could have
                                                                                                                   a material
                                                                                                                   adverse impact
                                                                                                                   on our business,
                                                                                                                   financial condition
                                                                                                                   and results
                                                                                                                   of operations.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | £ | We depend
                                                                                                                   upon the VIE
                                                                                                                   Agreements
                                                                                                                   in conducting
                                                                                                                   our production,
                                                                                                                   manufacturing,
                                                                                                                   and distribution
                                                                                                                   of traditional
                                                                                                                   Chinese herbal
                                                                                                                   medicines in
                                                                                                                   the PRC, which
                                                                                                                   may not be
                                                                                                                   as effective
                                                                                                                   as direct ownership.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | £ | We conduct
                                                                                                                   our production,
                                                                                                                   manufacturing
                                                                                                                   and distribution
                                                                                                                   of traditional
                                                                                                                   Chinese herbal
                                                                                                                   medicines in
                                                                                                                   the PRC and
                                                                                                                   generate the
                                                                                                                   revenues from
                                                                                                                   our Bohai business
                                                                                                                   through the
                                                                                                                   VIE Agreements.
                                                                                                                   The VIE Agreements
                                                                                                                   may not be
                                                                                                                   as effective
                                                                                                                   in providing
                                                                                                                   us with control
                                                                                                                   over Bohai
                                                                                                                   as direct ownership.
                                                                                                                   The VIE Agreements
                                                                                                                   are governed
                                                                                                                   by PRC laws
                                                                                                                   and provide
                                                                                                                   for the resolution
                                                                                                                   of disputes
                                                                                                                   through arbitration
                                                                                                                   proceedings
                                                                                                                   pursuant to
                                                                                                                   PRC laws. Accordingly,
                                                                                                                   the VIE Agreements
                                                                                                                   will be interpreted
                                                                                                                   in accordance
                                                                                                                   with PRC laws.
                                                                                                                   If Bohai or
                                                                                                                   its Shareholders
                                                                                                                   fail to perform
                                                                                                                   the obligations
                                                                                                                   under the VIE
                                                                                                                   Agreements,
                                                                                                                   we may have
                                                                                                                   to rely on
                                                                                                                   legal remedies
                                                                                                                   under PRC laws,
                                                                                                                   including seeking
                                                                                                                   specific performance
                                                                                                                   or injunctive
                                                                                                                   relief, and
                                                                                                                   claiming damages,
                                                                                                                   and there is
                                                                                                                   a risk that
                                                                                                                   we may be unable
                                                                                                                   to obtain these
                                                                                                                   remedies. The
                                                                                                                   legal environment
                                                                                                                   in China is
                                                                                                                   not as developed
                                                                                                                   as in other
                                                                                                                   jurisdictions.
                                                                                                                   As a result,
                                                                                                                   uncertainties
                                                                                                                   in the PRC
                                                                                                                   legal system
                                                                                                                   could limit
                                                                                                                   our ability
                                                                                                                   to enforce
                                                                                                                   the VIE Agreements.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  ̈ | The pricing
                                                                                                               arrangement under
                                                                                                               the VIE Agreements
                                                                                                               may be challenged
                                                                                                               by the PRC tax
                                                                                                               authorities.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | £ | We could
                                                                                                                   face adverse
                                                                                                                   tax consequences
                                                                                                                   if the PRC
                                                                                                                   tax authorities
                                                                                                                   determine that
                                                                                                                   the VIE Agreements
                                                                                                                   were not entered
                                                                                                                   into based
                                                                                                                   on arm’s
                                                                                                                   length negotiations.
                                                                                                                   If the PRC
                                                                                                                   tax authorities
                                                                                                                   determine that
                                                                                                                   the VIE Agreements
                                                                                                                   were not entered
                                                                                                                   into on an
                                                                                                                   arm’s
                                                                                                                   length basis,
                                                                                                                   they may adjust
                                                                                                                   the income
                                                                                                                   and expenses
                                                                                                                   of our Company
                                                                                                                   for PRC tax
                                                                                                                   purposes which
                                                                                                                   could result
                                                                                                                   in higher tax
                                                                                                                   liability
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-27







|22. | SUBSEQUENT EVENTS
|--- | -----------------



In preparing these financial statements, the Company has evaluated
events and transactions for potential recognition or disclosure through the reporting date, the date the financial statements
were available to be issued.



F-28









SIGNATURES



Pursuant to the requirements of the Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 28th  day of September, 2012.



|Bohai Pharmaceuticals Group, Inc.
|---------------------------------
|                                 
|                                 
|By:                              
|                                 
|                                 
|                                 



Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.



|Signature        |  | Title                                |  | Date              
|---------------- |  | ------------------------------------ |  | ------------------
|                 |  |                                      |  |                   
|/s/ Hongwei Qu   |  | Chief Executive Officer and Chairman |  | September 28, 2012
|Hongwei Qu       |  |                                      |  |                   
|                 |  |                                      |  |                   
|/s/ Chengde Wang |  | Director                             |  | September 28, 2012
|Chengde Wang     |  |                                      |  |                   
|                 |  |                                      |  |                   
|/s/ Thomas Tan   |  | Director                             |  | September 28, 2012
|Thomas Tan       |  |                                      |  |