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, 2010
 
 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
                      
                      98-0588402(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   ̈    No  x
 
 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   ̈    No  x.
 
 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.    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 company x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes  ̈    No x.
 
 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, 2009, as reported on the OTC Bulletin Board, was approximately
$4,095,000.
 
 As of
September 21, 2010, there were 16,500,000 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, 2010
 
 TABLE
OF CONTENTS
 
 PageCautionary
      Note Regarding Forward Looking Statements
                                                                -i-PART
      IItem
      1.
                                                                Business.
                                                                1Item
      1A.
                                                                Risk
      Factors.
                                                                21Item
      1B.
                                                                Unresolved
      Staff Comments.
                                                                41Item
      2.
                                                                Description
      of Properties.
                                                                41Item
      3.
                                                                Legal
      Proceedings.
                                                                41PART
      IIItem
      5.
                                                                Market
      for Common Equity, Related Stockholder Matters And Issuer Purchases of
      Equity Securities Market Information.
                                                                42Item
      6.
                                                                Selected
      Financial Data.
                                                                42Item
      7.
                                                                Management’s
      Discussion and Analysis or Plan of Operation.
                                                                43Item
      7A.
                                                                Quantitative
      and Qualitative Disclosures About Market Risk.
                                                                52Item
      8.
                                                                Financial
      Statements and Supplementary Data.
                                                                52Item
      9.
                                                                Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure.
                                                                52Item
      9A.
                                                                Controls
      and Procedures.
                                                                53Item
      9B.
                                                                Other
      Information.
                                                                54PART
      IIIItem
      10.
                                                                Directors, Executive
      Officers, Promoters and Control Persons; Compliance With Section
      16(a) of the Exchange
      Act.
                                                                55Item
      11.
                                                                Executive
      Compensation.
                                                                57Item
      12.
                                                                Security Ownership
      of Certain Beneficial Owners And Management and Related
      Stockholder Matters.
                                                                59Item
      13.
                                                                Certain
      Relationships and Related Transactions and Director
      Independence.
                                                                60Item
      14.
                                                                Principal
      Accountant Fees and Services.
                                                                61Part
      IVItem
      15.
                                                                Exhibits
                                                                62Index
      to Consolidated 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 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,” “guidance,” “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 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 obtain sufficient working capital to support our business
      plans;
 
 ·
              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
      ability to integrate any future
acquisitions;
 
 ·
              our
      implementation of required financial, accounting and disclosure controls
      and procedures and related corporate governance policies;
    and
  -i-
 
 ·
              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 Annual 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.
  -ii-
 
 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)         its
indirect wholly foreign owned subsidiary, Yantai Shencaojishi Pharmaceuticals
Co., Ltd., a PRC company (“WFOE”); and
 
 (iii)        the
WFOE’s variable interest entity, Yantai Bohai Pharmaceuticals Group Co., Ltd., a
PRC company (“Bohai”), which is our principal operating subsidiary.
 
 In
this Annual Report, we sometimes refer to BOPH, Chance High, WFOE and Bohai
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 of herbal
pharmaceuticals based on traditional Chinese medicine, or TCM, in the People’s
Republic of China.  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.  We
obtained Drug Approval Numbers for 29 varieties of traditional Chinese herbal
medicines in 2004, and we currently produce 15 varieties of approved traditional
Chinese herbal medicines in seven delivery systems: tablets, granules, capsules,
syrup, concentrated powder, tincture and medicinal wine.  Of these 15
products, 8 are prescription drugs and 7 are over-the-counter (OTC)
products.
 
 We
believe our rapid growth in recent years has been supported by the continuing
expansion of the market for TCM in the PRC.  This market is forecasted
to reach $24 billion by 2010 according to the Information Office of the State
Council of the People’s Republic of China, “Status Quo of Drug
Supervision.”
 
 In a
significant development, as of November 30, 2009, three of our lead products,
Tongbi Capsules and Tablets and Lung Nourishing Cream, became eligible for
reimbursement under China’s National Medical Insurance Program.  In
fiscal year ended June 30, 2010, these three products accounted for more than
50% of our revenues.
 
 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, which rights expire on
July 9, 2012.  We held the Certificates of Protected Variety of
Traditional Chinese Medicine (Grade Two) (the “Certificate of Protection”)
issued by State Food and Drug Administration of China (“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 and we are seeking to extend the protection
periods.  We submitted the application to extend such protection
period for Tongbi Capsules on March 12, 2009 and the SFDA’s review process is
ongoing.  We expect such approval may be granted by the end of
2010.  We have decided to not submit an extension application for
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.
 
 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 will seek to
significantly grow our revenues and earnings.
  1
 
 We are
focusing a significant portion of our marketing efforts on our Lung
Nourishing Cream and expect to continue this effort over the next several
years.  Lung Nourishing Cream, a liquid product similar to cough syrup
that is swallowed, 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 Cream 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.  For these reasons, we believe Lung Nourishing Cream 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 Cream 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 our
advertising for our Lung Nourishing Cream.
 
 As of
September 15, 2010, we had approximately 600 employees, including approximately
300 sales representatives, operating from 20 offices throughout
China.  More than 50% of our workforce is engaged in sales and
distribution activities.
 
 As is not
uncommon for Chinese companies listed in the U.S., we control our Chinese
operating subsidiary, Bohai, pursuant to into 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.
 
 Background
and Key Events
  Our Predecessor Company
  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.  Certain of the Chance High Shareholders are selling
stockholders hereunder.
  2
 
 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 stockholder 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, who are selling stockholders hereunder (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.
 
 Registration Rights
Agreement.  In connection with the private placement, we
entered into Registration Rights Agreement (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.  A registration statement relating to such shares 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
stockholder, 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 our Chairman, President and CEO 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 are required to be disbursed to us.
  3
  Corporate
Name Change
 
 On
January 29, 2010, we entered into an Agreement and Plan of Merger 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 stockholders became stockholders
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.
 
 Change
of Our Independent Registered Accounting Firm
 
 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 as our independent registered public
accounting firm
 
 Corporate
Structure and Related Agreements
 
 Our
current organizational structure 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 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.  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.
  4
 
 Following
the consummation of the Share Exchange, Glory Period holds 55% of the issued and
outstanding shares of our common stock (not taking into consideration the shares
of common stock underlying the Notes and Warrants issued in the private
placement).
 
 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.
 
 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 Helmut Kaiser Consultancy,
as a result of the increasing wealth of China and an aging population, it is
estimated that by 2010, China will be the fifth largest market for herbal
medicines in the world exceeding more than $24 billion in sales.
 
 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.
  5
  Our
Products
 
 Overview
 
 We
obtained Drug Approval Numbers for 29 varieties of traditional Chinese herbal
medicines in 2004 and currently produce 15 TCM pharmaceutical products, all
derived from herbal and organic sources.  These include both
prescription and non-prescription over-the-counter (OTC)
medicines.   The first five-year valid terms of such Drug
Approval Numbers have expired.  We submitted the applications for
re-registration on June 29, 2007 which were accepted by SFDA.  We have
been advised that the approval processes for these drugs has been recently
commenced by the Shandong Branch of SFDA.  During the renewal period,
we are permitted to continue manufacturing these drugs as if the renewals had
been approved.
 
 The
following is a list of approved pharmaceutical products that we are producing
with their intended uses:
 
 ·
              Lung Nourishing
      Cream.  Lung Nourishing Cream, an ingestible
      liquid, 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.
 
 ·
              Zhuangyuan shenhailong
      Medicinal Wine.  This liquid product is designed to
      promote kidney function and can be used to treat fatigue in the hips and
      knees, 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.
 
 ·
              Bazhen Yimu
      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.
 
 ·
              Huoxue Shujin
      Ting.  This product is designed to promote blood
      circulation and relieve blood congestion, and can be used to treat pain in
      the hips 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.
  6
 
 ·
              Stomach Nourishing
      Tablets. This product is designed to relieve heartburn, sour
      stomach, acid indigestion and stomach upset caused by chronic superficial
      gastritis.
 
 ·
              Yangxue Anshen
      Tablets.This product is
      designed to improve blood circulation and to treat dizziness, palpitation,
      fatigue, weakness and other menstrual
symptoms.
 
 ·
              Shujin Huoxue
      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.
 
 Of our 15
products, currently 8 (Tongbi Tablets, Tongbi Capsules, Shangtongning Tablets,
Danqi Tablets and Huoxue Shunjin Ting, Compound Manshanhong
Syrup, Sanqi
Shang Tablets, and Shujin Huoxue Tablets) are available only through
prescription.
 
 In
addition to the 15 medicines currently in production, we hold the rights to
produce 14 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
production capacity for the fiscal year June 30, 2010 was
approximately:
 
 ·
              1.35
      billion tablets and 370 million
capsules;
 
 ·
              30
      million bags granules;
 
 ·
              15
      million bottles/units of concentrated
  decoctions;
 
 ·
              10
      million bottles/units of syrup;
 
 ·
              1
      million bottles/units of tinctures;
and
 
 ·
              1
      million bottles/units medical wine
 
 We
believe that during the fiscal year ended June 30, 2010, on average, we operated
at approximately 50% of our production capacity.
 
 One of
our pharmaceutical products (Tongbi
Capsules)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.  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 Tongbi Capsules.
 
 We have
the exclusive rights to manufacture our Tongbi Capsules product.  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.  We held the Certificate of Protection issued by 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 and we filed an application for
extending the protection period for Tongbi Capsules on March 12,
2009.  We elected to not submit an extension application for
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.  We share
manufacturing rights with one or more manufacturers for our Anti-flu Granules
product, which rights expire on July 9, 2012.
  7
 
 During
our current fiscal year ending June 30, 2011, we plan 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 2011.  In addition to the Tongbi medicines
and the Lung Nourishing Cream, other substantial contributors to our revenues
include Shangtongning Tablets, sales of which are also expected to grow in
fiscal 2011.  Sales of our OTC product Bazhen Yimu Cream, used to
strengthen the immune system, the enhancement of physical strength and
conditioning, are also projected to grow in fiscal 2011.
 
 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.
 
 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 1.3 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 RMB34,000 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%.
  In July,
2008, The Information Office of the State Council of the PRC published a white
paper titled “Status Quo of Drug Supervision in
China”.The following
are highlights from the report:
  ·
              With a 20% Compound Annual
      Growth Rate from 2000to2007, TCM Represents
      Approximately 27% of China’s Pharma Market. According to the
      report, the PRC government believes that TCM and folk medicine have
      special characteristics and advantages and are also important parts of the
      culture of the Chinese nation.  More than 9,000 kinds of TCM
      preparations have been approved by the state to be sold on the market, and
      about 58,000 approval numbers have been granted.  In 2007, the
      industrial output value of TCM reached 177.2 billion yuan, accounting for
      26.53% of the total pharmaceutical industrial output value.  The
      Chinese government attaches great importance to TCM’s role in the
      prevention and treatment of diseases, has drawn up a series of
      administrative regulations and policies, works constantly to improve the
      supervision of TCM, and promotes the steady improvement of the quality of
      TCM.
  8
  ·
              Constant improvement of the
      national TCM standards system.According to the
      report, there are 7,014 national standards for TCM.  Among them, the
      2005 Pharmacopoeia of the People’s Republic of China records 582 kinds of
      Chinese crude drugs, prepared slices of Chinese crude drugs, fats and
      extracts, as well as 564 kinds of TCM preparations.  Standards made
      by the ministry and bureaus record 438 Chinese crude drugs and prepared
      slices of Chinese crude drugs, 4,690 TCM preparations, 308 crude folk
      drugs and 432 folk drug preparations.  To ensure the safety and
      efficacy of TCM injections, and establish effective quality control
      methods, the PRC government is seeking to enhance the standardization of
      TCM injections.  In 2000, the state launched the ÒImprovement of
      Quality Standards of TCM Injections with the Production Permission and
      Work on Fingerprints ChromatogramÓ, and issued the Technological
      Requirements of Fingerprint Chromatogram Research of TCM
      Injections.  Presently, China is working hard to improve the
      safety and quality control and indices of 123 kinds of TCM injections sold
      on the market, fix the production areas of crude drugs of TCM injections,
      strictly control the quality of raw materials, intermediate products and
      finished products, and realize overall quality control for production and
      processing.
 
 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.
 
 Population
and Aging
 
 ·
              The
      total population of China was 1.325 billion at the end of 2008, according
      to World Bank 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 times (5x) 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 1.3 billion citizens, greatly expanding the market for TCM
pharmaceuticals, as well as other health care products and
services.   We believe that this development creates potential
for a very significant expansion of our markets in China, which we will seek to
capitalize into increased sales growth for our company.
 
 In April,
2009, the Central Committee of the Communist Party of China and the State
Council jointly endorsed and issued Guidelines on Deepening the Reform of
Health-care System (the “Chinese Healthcare Reform Plan”) after approximately
three years of debate and revision.  The Chinese Healthcare Reform Plan
aims to provide “equitable and universal
access to essential health care for all in China.”We believe that these
trends will be very beneficial for our company.  Highlights from
Chinese Healthcare Reform Plan include the following:
  9
 
 ·
              $125Billion over 3
      Years.  The
      Chinese Healthcare Reform Plan calls for spending of 850 billion yuan (125
      billion U.S. dollars) from 2009 to 2011 to help ensure universal access to
      basic health insurance in China, introduction of an essential drug system,
      improved primary health care facilities, equitable access to basic public
      health services and pilot reform of state-run
  hospitals.
 
 ·
              Rural Focus. The
      Chinese Healthcare Reform Plan did not elaborate on precisely how the 850
      billion yuan would be used.  But it is widely expected to be
      spent on subsidizing basic medical insurance programs, supporting
      grassroots-level health facilities and in underdeveloped western and rural
      regions of China.
 
 ·
              90% Coverage
      Target. According to the Chinese Healthcare Reform Plan, the
      Chinese governments desires to have more than 90% of its population
      covered by some sort of basic medical insurance by
  2011.
 
 ·
              Government Authored List of
      Essential Drugs.  To lower
      prescription costs, the Chinese Healthcare Reform Plan calls for the PRC
      government to promote a system of essential medicines for state-run
      hospitals, clinics and pharmacies.
 
 ·
              Increased Focus on Minor
      Diseases. According to the
      Chinese Healthcare Reform Plan, the focus of the Chinese insurance
      system will shift from major diseases to also covering minor diseases.
      Commercial medical care insurance will also be made available to meet
      individual needs, according to the
guidelines.
 
 ·
              Basic Medical Insurance to
      Cover all Listed Drugs.  The
      Chinese Healthcare Reform Plan indicated that China will speed up the
      establishment of a drug supply system to ensure basic supply and safety.
       The system is based on a catalogue of necessary drugs that are
      produced and distributed under government control and supervision.
       The basic medical insurance will cover all listed drugs to
      effectively provide access to a range of basic medicines and to reduce
      quality problems, and prevent manufacturers and business people from
      circumventing the government’s price
controls.
 
 ·
              Targeting 900 Million RuralCitizens.  The
      Chinese Healthcare Reform Plan indicates that China is deficient in
      offering good public medical care.  Hotels in large cities are often
      full of hopeful patients who complain about how long they must wait to
      register at hospitals and be treated.  The less-developed rural
      regions, where 900 million citizens live, are even worse off in terms of
      medical facilities and staff, and the gap has continued to widen with the
      country’s fast urbanization.  The Chinese Healthcare Reform Plan
      seeks to reform these deficiencies.
 
 ·
              2,000 Hospitals, 3,700
      Clinics, and 13,400 Health Service Centers to be Built. According to an
      implementation plan for medical reform released by the State Council in
      Beijing, China will set up at least one clinic in every village within
      three years to improve the health care at grassroots level.  The
      government will also support the construction of 2,000 hospitals at the
      county level to guarantee that each county has a hospital that meets the
      national standard and more township hospitals and clinics will be built or
      expanded.  China will build or renovate 3,700 community clinics
      and 11,000 health service centers in urban areas within three years.
       The central government will also build 2,400 such centers in
      underdeveloped urban areas during the same
  period.
 
 In
addition, 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).”
  10
 
 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..
 
 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 600 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, Lung Nourishing Cream and Shangtongning Tablets, using these
as door-openers for our other medicines.
 
 The
average cost to “open” each hospital to our products is $1,500, and we are
targeting our hospital efforts in the following Chinese provinces:
 
 Provinces
                    
                    Number of HospitalsZhejiang
                    
                    100Jiangsu
                    
                    80Anhui
                    
                    150Shandong
                    
                    220Sichuan
      (including Chongqing City)
                    
                    30Hubei
                    
                    100
 
 Build Awareness of Lung Nourishing
Cream.  We have allocated a significant portion of the proceeds
from our January 2010 private placement for brand-building.  We will
primarily target consumers through television and print advertising to expand
awareness of the uses and effectiveness of our Lung Nourishing
Cream.  The advertising will incorporate messaging targeting smokers
and workers with occupational diseases as well as city dwellers exposed to
smog.  It is expected that our consumer television advertising program
will be focused in the following Chinese provinces during our fiscal 2011
year:
 
 TV Station LocationShandongAnhuiHubeiJiangsu
  11
  Expand to Rural
Areas.  We expect to execute a comprehensive marketing campaign
targeting 200 rural counties in 2011 as a result of the national government’s
emphasis on expansion of healthcare and health insurance into the country’s
rural areas.  We have started our rural marketing efforts in Shandong,
Anhui, Yunnan and Hubei provinces. Our sales team is currently marketing its
products to pharmacies, hospitals, physicians, herbal medicine experts, media
outlets and other opinion leaders in these rural areas.  We currently
have three products listed in the Essential Drug List (EDL) under New Rural
Cooperative Medical Care Plan, which assists these rural citizens with
reimbursement of medical expenses.
 
 Generally,
the cost of this professional relationship-building with each rural county is
$3,000 with a listing fee in the New Rural Cooperative Medical Directory costing
in excess of $1,000,000.  Our plan is to hire 80 sales people for this
effort and to equip each with a minivan to enable in-person
contacts.  Each employee will be responsible for 5
counties.  As of the date of this Annual Report, 30 sales people for
this effort have been hired.  All of these sales and marketing
initiatives will involve both OTC and prescribed products.
 
 Build Product Line 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 Cream and ZhuangyuanShenhailong Medicinal
Wine.  As part of our increase in sales and marketing staff, we
have retained special trainers and presenters who can conduct promotional events
and seminars to increase awareness of our products. We plan to make continuous
efforts to improve our market penetration in level-two class A hospitals as
certain of our products have become eligible for national insurance
coverage.
 
 Seek Acquisitions of Complimentary
Companies or Assets.  We believe that there may be TCM
companies 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 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 ofKeyBohai
      Product.  One of our 15 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.
 
 ·
              Patent Granted forLeadProduct.  Wehavereceived a patentin the
      PRCfor
      our Lung Nourishing Creamwith its production
      method for the treatment of LungQiDeficiency 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 Cream
      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.  Three of our lead products, Lung
      Nourishing Cream and Tongbi Capsules and Tablets, 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.
 
 ·
              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 300 people as of September
2010.
  12
  Raw
Materials and Suppliers
 
 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 Medical Materials Purchasing and Supply Station, Zibo Taibao
Forgery-proof Product Co., Ltd., and Zhejiang Yuhuan Kangning Medicine Packaging
CO., Ltd.  In the fiscal year ended June 30, 2010, one supplier
accounted for over 10% of our purchases of raw materials, although currently no
single supplier accounts for over 10% of our purchases of raw materials.
Approximately 30% of the raw material is purchased from Anhui Dechang
Pharmaceutical Tablet Co., Ltd., Shandong Yantai Medical Materials Purchasing
and Supply Station and Shandong Cangli Medicine Co., Ltd.
 
 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 toxicological tests, pharmalogical and
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”).
 
 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.
  13
 
 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.  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.  In our annual operations, we process approximately 800 tons
of herbal plants to extract, isolate and purify the compounds used in our
medicines and health supplements.The manufacturing staff
consists of approximately 200 production employees and approximately 20 quality
control inspectors as of September 2010.  We believe that, on average,
we operated at approximately 55% of our manufacturing capacity during our fiscal
year ended June 30, 2010.
 
 In
February 2010, we acquired land use right for a parcel of land totaling 333,335
square meters in Yantai City 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 300 sales
representatives located in 20 offices throughout China as of September
2010.  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.
 
 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 600
hospitals in provinces we already serve including Shandong, Zhejiang, Jiangsu,
Anhui, Sichuan and Hubei.  We believe that we will generate additional
revenue from the newly developed hospitals in those provinces.
 
 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 Cream, 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.
 
 During
fiscal 2011, we plan to develop relationships with 200 new county-level
hospitals in rural areas of Shandong, Anhui, Yunnan and Hubei provinces to
establish our primary marketing and distribution network in these rural
areas.
 
 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.  Management will allocate
a portion of the proceeds derived from our January 2010 private placement to
expand existing physician-education programs.
 
 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.
  14
  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 Cream with its production method for the treatment
of Lung Qi Deficiency Cough and Chronic Bronchitis.
 
 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) issued by Shandong Branch of SFDA on June 18,
2009.  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 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
we are planning to submit renewal application in compliance with the
requirements of the Shandong Branch of SFDA.
 
 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 first five
year valid terms of such Drug Approval Numbers have expired.  We
submitted the applications for re-registration on June 29, 2007 which were
accepted by SFDA.  We have been advised that the approval processes
for these drugs have been recently commenced by the Shandong Branch of
SFDA.  During the renewal period, we are permitted to continue
manufacturing these drugs as if the renewals had been approved.
  15
 
 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 subsidiary Yantai Shencaojishi Pharmaceuticals Co., Ltd. is a wholly foreign
owned enterprise, 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
 
 We
believe we are in compliance with the Environmental Protection Law of the PRC,
as well as applicable local regulations, except that as of the date of this
Memorandum we are in the process of applying for the Pollution Discharge Permit.
 Zhifu District Branch of Yantai Environment Protection Bureau issued a
written document on September 10, 2009, and stated that we have never been
subject to sanction due to violation of relevant environmental protection laws
since the incorporation.  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.
 
 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 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 the date of this Annual
Report, we have one payment of RMB 35,340,000 (approximately $5,180,400)
remaining under this purchase agreement that is required to be paid before March
31, 2011.  We will apply for the land use right certificate once the
purchase price is paid in full.
  16
  Employees
 
 Substantially
all of our employees are located in China.  As of September 15, 2010,
we had approximately 600 employees, including approximately 300 sales
representatives, operating from 20 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 $80,839, $85,024 and $82,586 for the fiscal years
ended June 30, 2008, 2009 and 2010, 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.
 
 Executive
Offices in China
 
 Our
executive office is located at No. 9 Daxin Road, Zhifu District, Yantai,
Shandong Province, P.R. China 264000. Our telephone number is
+86(535)-685-7928.
 
 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.  Certain of the Chance High Shareholders
are selling stockholders hereunder.
 
 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 stockholder 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 in June
2010.  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 with 8% coupon 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.
  17
 
 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.  As of the date of this Annual Report, we have fulfilled
this agreement.
 
 (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 that is reasonably
satisfactory to Euro Pacific.  As of the date of this Annual Report,
we have fulfilled this agreement.
 
 Registration Rights
Agreement.  In connection with the private placement, we
entered into 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 SEC
for public resale.  .
 
 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.  This agreement was
fulfilled when the Registration Statement was declared effective on August 12,
2010.
 
 The
Registration Rights Agreement provides that if we fail to maintain effectiveness
of Registration Statement due to a “maintenance failure” (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 stockholder, 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 Form 10-K.
 
 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
are required to be disbursed to us.
  18
 
 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.
 
 Effective
as of June 30, 2010, we entered into an Amendment and Agreement with the
Investors, pursuant to which the Company and the Investors agreed to make
certain amendments to the Notes and the Warrants.  Pursuant to the
Amendment, the anti-dilution protection provisions in the Notes and the Warrants
were eliminated and a provision specifically precluding net cash settlement 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.
 
 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, Yantai Shencaojishi 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 Yantai Bohai Pharmaceuticals Group, Inc. (the
“Domestic Company” or “Yantai Bohai”) 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. Hongwei Qu, 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 shareholder pledges 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.
  19
 
 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.
 
 [remainder
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  20
  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 accurs, 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.
 
 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 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 medicine 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 grow our business,
which funds may not be available on acceptable terms or at all, and, without
additional funds, we may not be able to maintain or expand our
business.
 
 We expect
that the net proceeds from our January 2010 private placement, 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 fund operating
expenses and growth plans to develop manufacturing, marketing and sales
capabilities and to 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.
  21
 
 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
    stockholders.
 
 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 short-term debt obligations, which mature in less than one
year.  Our inability to extend the maturities of, or to refinance,
this debt could result in defaults, and in certain instances, foreclosures on
our assets.  Moreover, we may be unable to obtain financing to fund
ongoing operations and future growth.
 
 We
currently depend on short-term bank loans and net revenues to meet our
short-term cash requirements.  As of June 30, 2010, our total bank
debt outstanding was RMB 29.95 million (approximately $ 4.41 million as of June
30, 2010) which carries maturity periods ranging from six months to one year,
while the short-term and revolving nature of these credit facilities is common
in China.  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.  In China, short-term bank loans generally mature in one year
or less and contain no specific renewal terms.  However, it is
customary practice for banks and borrowers to negotiate roll-overs or renewals
of short-term borrowings on an on-going basis shortly before they mature. 
Although we have renewed our short-term borrowings in the past, we cannot assure
you that we will be able to renew these loans in the future as they
mature.  If we are unable to obtain renewals of these loans or
sufficient alternative funding on reasonable terms from banks or other parties,
we will have to repay these borrowings with the cash on our balance sheet or
cash generated by our future operations, if any.
 
 Moreover,
we cannot assure you that our business will generate sufficient cash flow from
operations to repay these borrowings.  Failure to obtain extensions of
the maturity dates of, or to refinance, these obligations or to obtain
additional equity financing to meet these debt obligations would result in an
event of default with respect to such obligations and could result in the
foreclosure on the collateral.  The sale of such collateral at
foreclosure would significantly disrupt our ability to produce products for our
customers in the quantities required by customer orders or deliver products in a
timely fashion, which could significantly lower our revenues and
profitability.
 
 In
addition, we may be exposed to changes in interest rates.  If interest
rates increase substantially, our results of operations could be adversely
affected.
 
 We
have a significant payment that we are required to make by March 31, 2011 in
connection with a land-use right purchase agreement.
 
 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 June 30, 2010, we have
paid approximately RMB 50,000,000 (approximately $7,343,700), which is included
in Prepayment for Land Use Right on the accompanying consolidated balance
sheets.  In addition, we paid RMB 12,160,000 (approximately
$1,796,000) in July 2010 and the remaining balance of RMB 35,340,000
(approximately $5,180,400) is required to be paid before March 31,
2011.
  22
  We
currently believe that we will generate sufficient cash flow from operations and
have access to the capital resources necessary to fund our requirements.
However, there is a 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 land-use right payment when due would result in an event of
default with respect to such obligations and could result in, among other
things, the forfeiture of the land-use right along with the deposit in the
amount of RMB 20,000,000 (approximately $2,937,480), which could cause a
material deterioration in our financial condition or operating
results.
 
 We
have not yet developed comprehensive independent corporate
governance.
 
 As of the
date of this Annual Report, we have no audit, compensation, or nominating
committees of our board of directors and have not established formal corporate
governance procedures.  A lack of independent controls over our
corporate affairs may result in inadequate board supervision of our management
generally, or potential or actual conflicts of interest between Mr. Qu and our
stockholders.  We presently have no policy to resolve such
conflicts.  The absence of customary standards of corporate governance
may cause our board to be unaware of corporate actions in China or leave our
stockholders without protections against interested director transactions,
conflicts of interest, if any, and similar matters and therefore our reputation
may become tainted, which could adversely impact our stock price and cause
potential investors to be reluctant to provide us with funds necessary to expand
our operations.
 
 We
have been heavily dependent on sales of four key products.
 
 Four of
our products, namely Tongbi Capsules, Tongbi Tablets, Lung Nourishing Cream and
Tongshangning Tablets represented approximately 25.68%, 14.62%, 26.18%, and
13.02%, respectively, of total sales for the fiscal year ended June 30, 2010. 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 we have filed an application for extending the protection
period on March 12, 2009 for Tongbi Capsules. We can not assure you that we will
obtain the approvals to renew the Certificate of Protected Variety of
Traditional Chinese Medicine and the loss of such protection will have a
material adverse effect on our revenues. If we are unable to obtain approvals,
these products can be manufactured and sold by other pharmaceutical
manufacturers in China once the relevant protection periods elapse, 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 cream 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.
  23
  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, in 2010 we discovered evidence of a counterfeit
Tongbi Capsule sold in China which we believe infringes on our intellectual
property rights.  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.  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.
 
 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 2006, there were 4,682 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.
  24
  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 havelimited 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 performresearch anddevelopment successfully, our business and results of
operations could be negatively impacted.
 
 As of the
date of this Annual Report, we have two products, namely Forsythia Capsule and
Fern Injection, under research and development. The research and development of
new products is costly and time consuming, and there are no assurances that our
research and development of new products will either be successful or completed
within the anticipated time frame, if ever at all.  There are also no
assurances that if the product is developed, that it will lead to actual
commercialization and sales.
 
 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.
  25
 
 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
 
 ·
              revenues
      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.
 
 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.
  26
 
 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
expires on December 31, 2010 and is material to our business.  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, 14, 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, and the valid terms of
such DANs have expired.  We submitted the applications for
re-registration on June 29, 2007 which were accepted by SFDA, although the
approvals have not yet been granted.  We have been advised that the
approval processes for these drugs have been started to be reviewed by the
Shandong Branch of SFDA.  During the renewal period, we will be
permitted to continue manufacturing these drugs as if the renewals had been
approved.  Our license to produce medical wine has a term valid
through December 31, 2010.
 
 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 have submitted application to extend the protection periods
for Tongbi Capsules to extend such protection period on March 12, 2009 and SFDA
has recently started its review process.  We have decided to not
submit an extension application for 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.
Our inability to regain the Certificate of Protection for Tongbi Capsules, which
is one of our leading products, and the loss of the Certificate of Protection
for our product Shangttongning 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 129 full-time employees.  We also
have 304 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
195 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 compensations
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.
  27
 
 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 Memorandum 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.
  28
  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 can not 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.
 
 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 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;
  29
  ·
              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 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.
 
 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.
  30
 
 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.
  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.
  31
 
 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 on the Notes.
 
 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.
  32
 
 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.  In particular, if Bohai, our PRC operating subsidiary, borrows
foreign currency through loans from us or other foreign lenders, these loans
must be registered with SAFE, and if we finance Bohai 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 Bohai’s ability to
obtain foreign exchange through debt or equity financing.
 
 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.
  33
 
 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 stockholder, Glory Period, is 100% owned by Joshua Tan, a Singapore
citizen.  As of September 21, 2010, Glory Period holds 54.19% 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.
  34
  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.
  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.
  35
 
 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 know 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.
 
 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
stockholders.
 
 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.
  36
 
 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.
 
 Risks
Related to Our Common Stock
 
 Trading
in our common stock has been extremely limited, so investors may not be able to
sell as many of their shares as they want at prevailing prices.
 
 Our
common stock is listed for quotation on OTCBB and the OTCQB under the symbol
“BOHP”, but trading in our common stock has been extremely
limited.  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.  If limited trading in the common stock continues, it
may be difficult for investors to sell such shares in the public market at any
given time at prevailing prices.  Also, the sale of a large block of
common stock, should it occur, could depress the market price of the common
stock to a greater degree than a company that typically has a higher volume of
trading of its securities.
 
 The
registration statement concerning 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, 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.
  37
  There
is currently limited trading in 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 OTCBB and the OTCQB, there has
been until only recently extremely limited trading in our stock.  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.  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.
 
 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
 
 ·
              A
      lack of visibility for our common stock may have a depressive effect on
      the market price for our common
stock.
 
 The OTCBB
and OTCQB are unorganized, inter-dealer, over-the-counter markets that provides
significantly less liquidity than NASDAQ or the NYSE AMEX.  The
trading price of the common stock is 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:
 
 ·
              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.
  38
  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.
 
 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 filed 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 stockholder (or
stockholders 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, and not accounting for the shares of common stock
underlying the Notes and Warrants issued in our January 2010 private placement,
1% of our issued and outstanding shares of common stock equals
approximately165,000 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 stockholder may exercise significant influence over us.
 
 Our
controlling stockholder, Glory Period Limited, owns approximately 55% 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
stockholders 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 stockholders, 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 stockholders.
  39
  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.  Moreover, because our management is located
principally in China and for the most part speaks only Chinese, we may
experience difficulties in effectively communicating developments to our board
of directors and U.S-based advisors, which could lead to deficiencies in our
internal accounting and public reporting, which in turn could negatively impact
investor perception of our company and our reported results of operations and
accounting.
 
 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 and will be quoted for trading on OTCBB and the
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.
  40
 
 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. The term of
the granted land use right is 50 years. We expect to obtain land use right
certificate after our full payment of the land use right fee, which is required
to be made by March 31, 2011. We intend to use this land for our future business
expansion, including, potentially, additional manufacturing space.
 
 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.
  41
  PART II
 
 Item
5.   Market For Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities Market Information.
 
 Our
common stock is 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”.  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 OTC Bulletin
Board.  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
                  
                  
                  Low2010
      by QuarterJuly
      1, 2009 - September 30, 2009
                  
                  $
                  -
                  
                  
                  
                  -October
      1, 2009 - December 31, 2009
                  
                  $
                  -
                  
                  
                  
                  -January,
      2010 - March 31, 2010
                  
                  $
                  2.10
                  
                  
                  $
                  2.10April
      1, 2010 – June 30, 2010
                  
                  $
                  2.22
                  
                  
                  $
                  2.102009
      by QuarterJuly
      1, 2008 - September 30, 2008
                  
                  $
                  -
                  
                  
                  
                  -October
      1, 2008 - December 31, 2008
                  
                  $
                  -
                  
                  
                  
                  -January,
      2009 - March 31, 2009
                  
                  $
                  -
                  
                  
                  
                  -April
      1, 2009 – June 30, 2009
                  
                  $
                  -
                  
                  
                  
                  -
 
 Holders
  As of
September 21, 2010, there were 16,500,000 shares of our common stock outstanding
held by approximately 46 stockholders of record.  The number of our
stockholders 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.
  42
  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 the
audited condensed consolidated financial statements of the Company for the
fiscal year ended June 30, 2010 and 2009, and should be read in conjunction with
such financial statements and related notes included in this 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.
 
 Overview
 
 We were
incorporated under the laws of the State of Nevada on January 9, 2008. Since
January 5, 2010, our business consists of the production, manufacturing and
distribution of herbal pharmaceuticals in the PRC which are based on traditional
Chinese medicine. We are based in the city of Yantai, Shandong Province,
China.
 
 Our
medicines are intended to address rheumatoid arthritis, viral infections,
gynecological diseases, cardio vascular issues and respiratory diseases. We have
obtained Drug Approval Numbers in China for 29 varieties of traditional Chinese
herbal medicines in 2004 and we currently produce 15 varieties of approved
traditional Chinese herbal medicines in seven delivery systems: tablets,
granules, capsules, syrup, concentrated powder, tincture and medicinal wine. Of
these 15 products, 8 are prescription drugs and 7 are
over-the-counter products.
 
 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 parent
company of Yantai Bohai Pharmaceuticals Group Co. Ltd., 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.
 
 Critical
Accounting Policies and Estimates
 
 Use
of Estimates
 
 In
preparing the condensed consolidated financial statements in conformity with US
GAAP, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the dates of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting periods.  These
accounts and estimates include, but are not limited to, the valuation of
accounts receivable, inventories, deferred income taxes,
derivative liabilities, and the estimation on useful lives of plant and
machinery.  Actual results could differ from those
estimates.
 
 Accounts
Receivable
 
 Accounts
receivable consists of amounts due from customers.  We extend
unsecured credit to our customers in the ordinary course of business but we seek
to 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, 2010
and 2009, no allowance for doubtful accounts was deemed necessary based on
management’s assessment.
 
 Revenue
recognition
 
 Revenue
represents the invoiced value of goods sold recognized upon the delivery of
goods to customers. Pursuant to the guidance of ASC Topic 605 and ASC Topic 36,
revenue is recognized when all of the following criteria are
met:
  43
  ·
              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 its
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 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 year ended June 30, 2010 and 2009, sales return rate is low and deemed
immaterial and accordingly, no provision for sales returns was
recorded.
 
 Inventories
 
 Inventories
are valued at the lower of cost or market with cost is determined using the
weighted average method. Finished goods inventories consist of raw materials,
direct labor and overhead associated with the manufacturing process. In
assessing the ultimate realization of inventories, the management makes
judgments as to future demand requirements compared to current or committed
inventory levels.  Our reserve requirements generally increase or
decrease due to management’s projected demand requirements, market conditions
and product life cycle changes.  As of June 30, 2010 and June 30,
2009, we did not make any allowance for slow-moving or defective
inventories.
 
 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. The cost of repairs and
maintenance is expensed 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 decreases in the value of fixed assets when events or
changes in circumstances reflect the fact that their recorded value may not be
recoverable.
 
 Included
in property and equipment was construction-in-progress which consisted of
factories and office buildings under construction and machinery pending
installation and includes the costs of construction, machinery and equipment,
and any interest charges arising from borrowings used to finance these assets
during the period of construction or installation. No provision for depreciation
is made on construction-in-progress until such time as the relevant assets are
completed and ready for their intended use. The principal annual rates are as
follows:
 
 Leasehold
      land and buildings
                
                30
      to 40 yearsMotor vehicles
                
                10
      yearsPlant
      and machinery
                
                10
      yearsOffice
      equipment
                
                5
      years
 
 Income
Taxes
 
 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 carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carry-forwards.  Deferred tax assets are reduced by a valuation
allowance to the extent management concludes it is more likely than not that the
assets will not be realized.  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 statements of income and comprehensive
income in the periods that includes the enactment date.
  44
  Recent
Accounting Pronouncements
 
 The following Accounting Standards Codification
(“ASC”)
Updates have been issued, or became effective, since the
beginning of the current year covered by these
financial statements:
 
 In June
2008, the FASB issued FASB ASC 260-10, “Determining Whether Instruments Granted
in Share- based Transactions are Participating Securities”. Under ASC 260-10,
unvested share-based payment awards that contain rights to receive
non-forfeitable dividends (whether paid or unpaid) are participating securities,
and should be included in the two-class method of computing EPS. The adoption of
ASC 260-10 beginning July 1, 2009 did not have a material impact on our
consolidated financial statements.
 
 In June
2009, the FASB issued ASC 810, “Amendments to FASB Interpretation No.46(R)”. ASC
810 amends FASB Interpretation No.46(R), “ Variable Interest Entities “ for
determining whether an entity is a variable interest entity (“VIE”) and requires
an enterprise to perform an analysis to determine whether the enterprise’s
variable interest or interests give it a controlling financial interest in a
VIE. Under ASC 810, an enterprise has a controlling financial interest when it
has a) the power to direct the activities of a VIE that most significantly
impact the entity’ s economic performance and b) the obligation to absorb losses
of the entity or the right to receive benefits from the entity that could
potentially be significant to the VIE. ASC 810 also requires an enterprise to
assess whether it has an implicit financial responsibility to ensure that a VIE
operates as designed when determining whether it has power to direct the
activities of the VIE that most significantly impact the entity’s economic
performance. ASC 810 also requires ongoing assessments of whether an enterprise
is the primary beneficiary of a VIE, requires enhanced disclosures and
eliminates the scope exclusion for qualifying special-purpose entities. ASC 810
is effective as of the beginning of each reporting entity’s first annual
reporting period that begins after November 15, 2009, for interim periods within
that first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. ASC 810 is effective for our
company in the first quarter of fiscal 2011. We are currently evaluating the
effect of ASC 810 on our consolidated financial statements.
 
 In August
2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value”,
which is codified as ASC 820, “Fair Value Measurements and
Disclosures”.  This Update provides amendments to ASC 820-10, Fair
Value Measurements and Disclosures – Overall, for the fair value measurement of
liabilities. This Update provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a
reporting entity is required to measure fair value using a valuation technique
that uses the quoted price of the identical liability when traded as an asset,
quoted prices for similar liabilities or similar liabilities when traded as
assets, or that is consistent with the principles of ASC 820. The amendments in
this Update also clarify that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents transfer
of the liability. The amendments in this Update also clarify that both a quoted
price in an active market for the identical liability at the measurement date
and the quoted price for the identical liability when traded as an asset in an
active market when no adjustments to the quoted price of the assets are required
are Level 1 fair value measurements. ASC 820 is effective for the first
reporting period (including interim periods) beginning after August 28, 2009.
The adoption of this Update did not have a significant impact to the Group’s
consolidated financial statements.
 
 In
December 2009, the FASB issued ASU No. 2009-17, “Improvements to Financial
Reporting by Enterprises Involved with Variable Interest Entities (“ASU
2009-17”)”. ASU 2009-17 amends the variable- interest entity guidance in FASB
ASC 810-10-05-8 to clarify the accounting treatment for legal entities in which
equity investors do not have sufficient equity at risk for the entity to finance
its activities without financial support. ASU 2009-17 shall be effective as of
the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009.  ASU 2009-17 is effective for our
company in the first quarter of fiscal 2011. We are currently evaluating the
effect of ASU 2009-17 on our consolidated financial statements.
  45
 
 In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers. 2) Activity in Level 3 fair value measurements. In
the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about
purchases, sales, issuances, and settlements (that is, on a gross basis rather
than as one net number). This update provides amendments to Subtopic 820-10 that
clarifies existing disclosures as follows: 1) Level of disaggregation. A
reporting entity should provide fair value measurement disclosures for each
class of assets and liabilities. A class is often a subset of assets or
liabilities within a line item in the statement of financial position. A
reporting entity needs to use judgment in determining the appropriate classes of
assets and liabilities. 2) Disclosures about inputs and valuation techniques. A
reporting entity should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value measurements that
fall in either Level 2 or Level 3. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements.  These disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim periods within those
fiscal years. We are currently evaluating the impact of this ASU; however, we do
not expect the adoption of this ASU to have a material impact on our
consolidated financial statements.
 
 In
February 2010, FASB issued ASU No. 2010-9 –Amendments to Certain Recognition and
Disclosure Requirements. This update addresses certain implementation issues
related to an entity’s requirement to perform and disclose subsequent-events
procedures, removes the requirement that public companies disclose the date of
their financial statements in both issued and revised financial statements.
According to the FASB, the revised statements include those that have been
changed to correct an error or conform to a retrospective application of U.S.
GAAP. The adoption of this ASU did not have a material impact on our
consolidated financial statements.
 
 In April
2010, the FASB issued ASU 2010-13, Compensation-Stock Compensation (Topic 718):
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security Trades - a
consensus of the FASB Emerging Issues Task Force.  The amendments in
this Update are effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2010.  Earlier
application is permitted.  We do not expect the provisions of ASU
2010-13 to have a material effect on our financial position, results of
operations or cash flows.
 
 In May
2010, the FASB issued ASU 2010-19, Foreign Currency (Topic 830): Foreign
Currency Issues: Multiple Foreign Currency Exchange Rates.  The
amendments in this Update are effective as of the announcement date of March 18,
2010.  The adoption of this update did not have a material effect on
our financial position, results of operations or cash flows.
 
 Operating Results
 
 The
following table sets forth key components of our results of operations for the
periods indicated:
  46
 
 For The Year EndedJune 30Percentage2010
                            
                            
                            2009
                            
                            
                            Increase
                            
                            
                            IncreaseNet
      revenues
                            
                            $
                            59,264,724
                            
                            
                            $
                            49,348,614
                            
                            
                            $
                            9,916,110
                            
                            
                            
                            20.1
                            %Cost
      of revenues
                            
                            
                            10,164,853
                            
                            
                            
                            7,975,267
                            
                            
                            
                            2,189,586
                            
                            
                            
                            27.5
                            %Gross
      profit
                            
                            
                            49,099,871
                            
                            
                            
                            41,373,347
                            
                            
                            
                            7,726,524
                            
                            
                            
                            18.7
                            %Selling,
      general, and administrative expenses
                            
                            
                            36,253,075
                            
                            
                            
                            31,347,139
                            
                            
                            
                            4,905,936
                            
                            
                            
                            15.7
                            %Income
      from operations
                            
                            
                            12,846,796
                            
                            
                            
                            10,026,208
                            
                            
                            
                            2,820,588
                            
                            
                            
                            28.1
                            %Total
      other income (expenses)
                            
                            
                            (385,315
                            )
                            
                            
                            (171,323
                            )
                            
                            
                            (213,992
                            )
                            
                            
                            124.9
                            %Income
      before provision for income taxes
                            
                            
                            12,461,481
                            
                            
                            
                            9,854,885
                            
                            
                            
                            2,606,596
                            
                            
                            
                            26.4
                            %Provision
      for income taxes
                            
                            
                            2,973,289
                            
                            
                            
                            1,906,985
                            
                            
                            
                            1,066,304
                            
                            
                            
                            55.9
                            %Net
      income
                            
                            $
                            9,488,192
                            
                            
                            $
                            7,947,900
                            
                            
                            $
                            1,540,292
                            
                            
                            
                            19.4
                            %
  For
      The Year EndedJune
      302010
                                              
                                              
                                              2009Net
      revenues
                                              
                                              
                                              100.0
                                              %
                                              
                                              
                                              100.0
                                              %Cost
      of revenues
                                              
                                              
                                              17.2
                                              %
                                              
                                              
                                              16.2
                                              %Gross
      profit
                                              
                                              
                                              82.8
                                              %
                                              
                                              
                                              83.8
                                              %Selling,
      general, and administrative expenses
                                              
                                              
                                              61.2
                                              %
                                              
                                              
                                              63.5
                                              %Income
      from operations
                                              
                                              
                                              21.7
                                              %
                                              
                                              
                                              20.3
                                              %Total
      other income(expenses)
                                              
                                              
                                              (0.7
                                              )%
                                              
                                              
                                              (0.3
                                              )%Income
      before provision for income taxes
                                              
                                              
                                              21.0
                                              %
                                              
                                              
                                              20.0
                                              %Provision
      for income taxes
                                              
                                              
                                              5.0
                                              %
                                              
                                              
                                              3.9
                                              %Net
      income
                                              
                                              
                                              16.0
                                              %
                                              
                                              
                                              16.1
                                              %
 
 Net
Revenues
 
 Net
revenues for the twelve months ended June 30, 2010 increased by approximately
$9,916,110, or 20.1%, to $59,264,724 as compared to $49,348,614 for the twelve
months ended June 30, 2009.  This increase was primarily due to increase in
revenue from three of our main products, Lung Nourishing Cream, Tongbi Capsules
and Tongbi Tablets, which together had over 50% of our total net revenue and all
of which are listed for coverage and reimbursement under national medical
insurance starting in December 2009.  The increase was also due to the
marketing strategy we implemented beginning in January 2010.
 
 Net
revenues for the fourth quarter ended June 30, 2010 decreased by approximately
$173,000, or approximately 1%, compared to the fourth quarter ended June 30,
2009.  The decrease was due to the fact that some product orders were
put on hold by hospitals as a result of changes in bidding processes for
some state and local Chinese governments.  The national health
insurance reform started in 2009 at national levels and, as a result, some state
and local governments have tried to improve their overall new
policies.  Changes in local bidding processes were temporary and
should not have a material impact of our overall net revenues going
forward.
  47
 
 We
anticipate our overall net revenue will continue to increase due to a national
medical and health plan initiated by Chinese government in 2009, which plan will
eventually cover individual health insurance over 90% of China’s population by
2011 and includes traditional Chinese medicines for coverage and reimbursement
from hospitals and medical centers all over China.
 
 Cost
of Revenues
 
 Our cost
of revenues for the twelve months ended June 30, 2010 was $10,164,853 as
compared to $7,975,267 for the twelve months ended June 30, 2009, representing
an increase of $2,189,586, or 27.5%. The increase in cost of
revenues was mainly attributable to the increase in cost of raw material as
a result of increase of sales and five new products we introduced this fiscal
year as well as increase of cost of raw material itself this fiscal year
compared to last fiscal year.  Overall increase in cost of raw
material itself this fiscal year over last year was immaterial.
 
 Gross
Profit
 
 We
achieved gross profit of $49,099,871 for the twelve months ended June 30, 2010,
compared to $41,373,347 for the same fiscal in 2009, representing an increase of
$7,726,524, or 18.7%, over fiscal year 2009.  Our overall gross profit
margins as a percentage of revenue had been consistently maintained over the
past two years and they represented 82.8% and 83.80% for the twelve months ended
June 30, 2010 and 2009, respectively.
 
 Selling,
General and Administrative Expenses
 
 Our
operating expenses, consisting of selling, general and administrative expenses,
increased by $4,905,936 to $36,253,075, for the twelve months ended June 30,
2010 compared to $31,347,139 for the same fiscal year end in 2009.  This
increase was mainly attributable to an increase of advertising expense of
approximately $2,278,000 this fiscal year compared to the same fiscal year last
year.   We increased product promotion activities through various media,
especially through television advertising in different provinces within the PRC
for our new products as well as some major products that are eligible for
coverage and reimbursement under national medical insurance. The increase was
also due to increase on commission expense of approximately $2,673,000 this
fiscal year over last fiscal year as we continue to increase our sale volume and
expand sale personnel.
 
 Total
Other Income
(Expenses)
 
 Finance
and non-operating expense was $385,315 for the period ended June 30, 2010
compared to non-operating expenses of $171,323 from prior fiscal year, an
increase of expense of $213,992.  The increase was principally due to
non-cash income of $925,063 associated with a change in fair value of warrants
offset by amortization of deferred fees of $510,717 and interest charges of
$588,811 on convertible debt in connection with our private placement on January
5, 2010 as well as increase of $161,797 in interest charge for short term
loan.
 
 Provision
for Income Tax
 
 Our
provisions for income taxes for the twelve months ended June 30, 2010 and 2009
were $2,973,289 and $1,906,985, an increase of $1,066,304 or 55.9% from year to
year. The increase in income tax this fiscal year over prior fiscal year
was principally due to increase in income available for Chinese
tax.
 
 Net
Income
 
 We had a
net income of $9,488,192 for the twelve months ended June 30, 2010, as compared
to net income of $7,947,900 for the twelve months ended June 30, 2009, an
increase in net income of $1,540,292, or 19.4%.  The increase in net income
was primarily attributable to increase in total gross profit of
$7,726,524 and offset by increase in advertising expenses and other
operating expense of $5,119,929 and tax provision of $1,066,304 this fiscal year
compared to prior fiscal year.
  48
  
 Liquidity
and Capital Resources
 
 As of
June 30, 2010, we had cash and cash equivalents of $17,149,082 and restricted
cash of $576,019. The following table provides detailed information about our
net cash flow for financial statement periods presented in this
report:
 
 Summary of Cash Flow StatementsFor 
      the  years  endedJune 
      30,2010
                            
                            2009Net
      cash provided by (used in) operating activities
                            
                            $
                            13,214,620
                            
                            
                            $
                            (1,513,062
                            )Net
      cash provided by (used in)  investing activities
                            
                            
                            (7,360,781
                            )
                            
                            
                            (788,993
                            )Net
      cash provided by (used in) financing activities
                            
                            
                            8,756,059
                            
                            
                            
                            3,963,300Effect
      of foreign currency translation on cash and cash
    equivalents
                            
                            
                            45,018
                            
                            
                            
                            3,871Net
      (decrease) increase in cash and cash equivalent
                            
                            $
                            14,654,916
                            
                            
                            $
                            1,665,116
 
 Comparison
of Year Ended June 30, 2010 and 2009
 
 Net Cash Provided
(Used in) by Operating Activities.  Net cash provided in
operating activities totaled $13,214,620 for the year ended June 30, 2010 as to
net cash used in operating activities of $1,513,062 for the year ended June 30,
2009. The increase in net cash provided by operating activities was primarily
due to increases in accounts receivable, other receivables and prepayment,
decrease in accounts payable and other accrual liability, partially offset by
changes in fair value of warrants and inventory of raw materials during the year
ended June 30, 2010. We expect our cash flow from operating activities to
improve due to a national medical and health plan initiated by Chinese
government in 2009, which plan will eventually cover individual health insurance
over 90% of China’s population by 2011 and includes traditional Chinese
medicines for coverage and reimbursement from hospitals and medical centers all
over China.
 
 Net Cash Used In
Investing Activities.  Net cash used in investing activities was
$7,360,781for the
year ended June 30, 2010 and $788,993 for the year ended June 30, 2009.
 The increase in cash used in investing activities was due to our cash
payment of approximately $7.3 million for the purchase of leased land use rights
from the Shandong provincial government in January 2010 for approximately $14.3
million, which land we may use for potential future expansion of our
manufacturing operation.  Subsequent to June 30, 2010, we made an
additional payment under the contract to purchase such rights, and as of the
date of this Annual Report, we have a remaining payment of approximately $5.2
million which is due by March 31, 2011.
 
 Net Cash Provided
by Financing Activities. Net cash provided by financing activities
totaled $8,756,059for the year ended June
30, 2010 as compared to net cash provided in financing activities of $3,963,300
for the year ended June 30, 2009. The reason for the increase in cash provided
by financing activities was due to issue of convertible promissory notes in
January 5, 2010.  As of June 30, 2010, cash payments to placement agent and
other financing costs were $1,570,000.  The proceeds from short-term
borrowings and convertible promissory notes amounted to $6,575,000 and
$12,000,000 respectively and the repayment of borrowings amounted to $8,045,000
resulted in a net cash inflow by financing activities of
$8,756,059.
 
 Cash.As of June 30, 2010, we
had cash of $17,149,082 as compared to $2,494,166 as of June 30, 2009. This
increase was due primarily to $12,000,000 cash received from the private
placement in January this year and our overall improvement in cash provided in
operating activities.
  49
  Loan
Facilities
 
 We had a
total of $4,398,849 and $5,860,000 outstanding on loans and credit facilities as
of June 30, 2010 and 2009, respectively.  Total interest expense on
short-term loans for the year ended June 30, 2010 and 2009 amounted to $337,424
and $184,404, respectively. Bohai obtains short-term loan facilities from
financial institution in the PRC.
 
 Short-term
borrowings as of June 30, 2010 were as follows:
 
 Loan
      from
                                                        
                                                        
                                                        
                                                        Annualfinancial institution
                                                        
                                                        Loan period
                                                        
                                                        Interest rate
                                                        
                                                        Secured by
                                                        
                                                        AmountChina Construction
                                                        
                                                        From Feb 24, 2010
                                                        
                                                        
                                                        5.8410%
                                                        
                                                        Shandong Dai Xin Heavy
                                                        
                                                        $
                                                        3,524,954Bank
                                                        
                                                        to Feb 23, 2011
                                                        
                                                        
                                                        
                                                        
                                                        Industries Co. LtdYantai Laishan Rural
                                                        
                                                        From Sept 28, 2009
                                                        
                                                        
                                                        9.0270%
                                                        
                                                        Yantai Ka Wah Medical
                                                        
                                                        
                                                        587,492Credit Union
                                                        
                                                        to Sept 26, 2010
                                                        
                                                        
                                                        
                                                        
                                                        Equipment Co. LtdYantai Laishan Rural
                                                        
                                                        From Sept 28, 2009
                                                        
                                                        
                                                        6.9030%
                                                        
                                                        Bohai's machinery and
                                                        
                                                        
                                                        286,402Credit Union
                                                        
                                                        to Sept 26, 2010
                                                        
                                                        
                                                        
                                                        
                                                        vehicle$
                                                        4,398,849
 
 Short-term borrowings as of June 30, 2009 were as follows:
 
 Loan from
                                                                
                                                                
                                                                
                                                                Annualfinancial institution
                                                                
                                                                Loan period
                                                                
                                                                Interest rate
                                                                
                                                                Secured by
                                                                
                                                                AmountShanghai Pudong
                                                                
                                                                From Dec 12, 2008
                                                                
                                                                
                                                                6.6960%
                                                                
                                                                Haiyang Construction
                                                                
                                                                $
                                                                2,197,500Development Limited
                                                                
                                                                to Dec 11, 2009
                                                                
                                                                
                                                                
                                                                
                                                                Industry Training Centreand personal guaranteeby equity holdersYantai City
                                                                
                                                                From Jan 20, 2009
                                                                
                                                                
                                                                6.9030%
                                                                
                                                                Yantai Hai Pu Can End
                                                                
                                                                
                                                                1,318,500Commercial Bank
                                                                
                                                                to Jan 20, 2010
                                                                
                                                                
                                                                
                                                                
                                                                Making Co. LtdYantai Laishan Rural
                                                                
                                                                From Sep 27, 2008
                                                                
                                                                
                                                                9.3600%
                                                                
                                                                Yantai Ka Wah Medical
                                                                
                                                                
                                                                293,000Credit Union
                                                                
                                                                to Sep 26, 2009
                                                                
                                                                
                                                                
                                                                
                                                                Equipment Co. LtdYantai Laishan Rural
                                                                
                                                                From Sep 27, 2008
                                                                
                                                                
                                                                12.2400%
                                                                
                                                                Bohai's machinery
                                                                
                                                                
                                                                586,000Credit Union
                                                                
                                                                to Sep 26, 2009
                                                                
                                                                
                                                                
                                                                
                                                                and vehicleChina Construction
                                                                
                                                                From May 12, 2008
                                                                
                                                                
                                                                0.0000%
                                                                
                                                                Personal guarantee by
                                                                
                                                                
                                                                1,465,000Bank
                                                                
                                                                to Nov 11, 2009
                                                                
                                                                
                                                                
                                                                
                                                                equity holders$
                                                                5,860,000
 50




Obligations under Material Contracts





As of June 30, 2010,
we had commitments to purchase land use rights that we intend for our
future business expansion, including, potentially, additional manufacturing
space.  The total purchase price is approximately $14,320,100 (RMB
97,500,000).  As of June 30, 2010, we have prepaid for approximately
$7,343,700 (RMB 50,000,000), which is included in Prepayment for Land Use Right
on the consolidated balance sheets.  In addition, we paid
approximately $1,796,000 (RMB 12,160,000) in July 2010 and the remaining balance
of RMB 35,340,000 (approximately $5,180,400) is required to be paid before March
31, 2011.





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,
2010. 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
stockholder’s equity or that are not reflected in our condensed 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
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.


51





Credit
risk





Our
potential credit risk is mainly attributable to its 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 its 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 its 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.





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 Parker
Randall CF (H.K.) CPA Limited, our independent registered public accounting
firm, are set forth on pages F-1 through F-34 of this Annual
Report.





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





Effective
January 29, 2010, upon the approval of our board of directors, we dismissed John
Kinross-Kennedy as our independent registered public accountant.





During
the prior fiscal years ended May 31, 2009 and 2008, John Kinross-Kennedy’s
reports on the financial statements of our company contained no adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle.





During
the fiscal years ended May 31, 2009 and 2008 and subsequent period through
January 29, 2010, there were no disagreements (as defined in Item 304(a)(1)(iv)
of Regulation S-K) between us and John Kinross-Kennedy on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
John Kinross-Kennedy, would have caused him to make reference thereto in his
report on financial statements for such years.





During
the fiscal years ended May 31, 2009 and 2008 and subsequent period through
January 29, 2010, there were no reportable events as defined in Regulation S-K
Item 304(a)(1)(v).





On
January 29, 2010, upon the approval of our board of directors, Parker Randall CF
(H.K.) CPA Limited (the “Parker Randall”) was appointed as our independent
registered public accounting firm.  During our prior fiscal years
ended May 31, 2009 and 2008 and subsequent period through January 31,2010, we
did not consult with Parker Randall regarding any of the matters or events set
forth in Item 304(a)(2)(i) and Item 304(a)(2)(ii) of Regulation
S-K.





52





Item
9A.  Controls and Procedures.





Evaluation
of Disclosure Controls and Procedures





As of the
end of the period covered by this Annual Report, our President and Chief
Executive Officer and our Chief Financial Officer (the “Certifying Officers”),
conducted evaluations of our disclosure controls and procedures.  As
defined under Sections 13a–15(e) and 15d–15(e) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), the term “disclosure controls and
procedures” means controls and other procedures of an issuer that are designed
to ensure that information required to be disclosed by the issuer in the reports
that it 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 the Certifying Officers, to allow timely decisions regarding required
disclosures.





Based on
this evaluation, the Certifying Officers have 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.





During
our fourth fiscal quarter ended June 30, 2010, in response to comments we
received from the staff of the SEC, we restated our financial statements and
related Management’s Discussion and Analysis of Financial Conditions of
Operations for the period ended March 31, 2010, which restatements are more
fully described in our Quarterly Report on Form 10-Q/A filed with the SEC on
August 12, 2010.





In light
of such restatements, the Certifying Officers and our board of directors are
assessing the effect of such restatements on our internal control over financial
reporting and its disclosure controls and procedures.





A
material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.  A significant deficiency is a deficiency,
or a combination of deficiencies, in internal control over financial reporting
that is less severe than a material weakness: yet important enough to merit
attention by those responsible for oversight of the company’s
financial reporting.





The
Certifying Officers assessed the effectiveness of our internal control over
financial reporting as of June 30, 2010.  Management identified a
significant deficiency related to the following:





1.           Lack of internal audit
functions–Although
we maintain certain internal audit functions, the scope and effectiveness goals
of internal audit function have not been identified.  Due to this
weakness, we may be ineffective in timely prevention or detection of errors in
the recording of accounting transactions, which may have a material impact on
our financial statements.





The
Certifying Officers assessed the effectiveness of our internal control over
financial reporting as of July 23, 2010. Management identified a
material weakness related to the following:





1.           Equity instruments–There was a material weakness in the process related to evaluating
certain debt and equity transactions and the accounting treatment for these
non-frequent transactions.  We have restated our consolidated
financial statements for the period ended March 31, 2010 and for the year ended
March 31, 2010 as a result of accounting treatment for our 8% Convertible Notes
which were issued in a private placement on January 5, 2010.





In order
to correct the foregoing deficiencies, we have taken the following remediation
measures:





53





1.           We
expect to establish our internal audit department functions by providing audit
staffs and internal audit trainings.  In July 2010, we appointed three
independent directors and believe the roles of the independent directors and
their respective functions will continue to strengthen our internal control
oversight.





2.           We
retained an independent consultant firm, Kingery and Crouse CPAs, to evaluate
the accounting for our equity and debt transactions, most notably with respect
to the embedded derivative liability treatment for our convertible notes and
warrants.





3.           We
have retained an outside accounting and consulting firm, SG CPA Limited, to
assist us with our Sarbanes-Oxley implementation program.





We
believe that the foregoing steps will remediate the significant deficiency and
material weakness identified above, and we will continue to monitor the
effectiveness of these steps and make any changes that our management deems
appropriate.





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, 2010 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.





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). The term of the granted land use right
is 50 years. As of June 30, 2010, we have paid approximately RMB 50,000,000
(approximately $7,343,700), which is included in Prepayment for Land Use Right
on the accompanying consolidated balance sheets.  In addition, we paid
approximately $1,796,000 (RMB 12,160,000) in July 2010 and the remaining balance
of RMB 35,340,000 (approximately $5,180,400) is required to be paid before March
31, 2011.  We intend to use this land for our future business
expansion, including, potentially, additional manufacturing
space.





54





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 September 15,
2010.  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 stockholders at our annual meeting of stockholders 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 Yantai Bohai Pharmaceuticals Group Co., Ltd., a
PRC company and our operating subsidiary.





Name
                    
                    Age
                    
                    Position/Director ClassHongwei
      Qu
                    
                    35
                    
                    President,
      Chief Executive Officer and Chairman of the Board of Directors (Class
      1)Gene
      Hsiao
                    
                    47
                    
                    Chief
      Financial OfficerNing
      Tang
                    
                    50
                    
                    Vice
      President – OperationsHongbin
      Shan
                    
                    41
                    
                    Vice
      President – Sales and MarketingChunhong
      Jiang
                    
                    45
                    
                    Secretary
      and TreasurerChengde
      Wang
                    
                    62
                    
                    Director
      (Class 1)Louis
      A. Bevilacqua, Esq.
                    
                    41
                    
                    Director
      (Class 2)Adam
      Wasserman
                    
                    46
                    
                    Director
      (Class 3)





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 Yantai Hongwei 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.





Gene Hsiao.  Mr.
Hsiao was appointed as our Chief Financial Officer in June 2010.  Mr.
Hsiao has over 15 years of experience in corporate finance and
management.  Prior to his appointment with us, Mr. Hsiao served as
Chief Financial Officer for China Advanced Construction Materials Group Inc.
(Nasdaq:CADC) from 2008 to 2010, where he was responsible for all U.S. affairs
as well as corporate finance functions in China.  From 2000 to 2008,
he served as Controller of Milligan and Company, LLC, where he managed the
overall accounting and financial reporting functions as well as the company’s
internal control processes.  From 1997 to 1999, he served as Finance
Manager for J&J Snack Foods Corporation (Nasdaq:JJSF), where he was
responsible for financial reporting and SEC schedule
preparation.  From 1995 to 1997, he served as Accounting Supervisor of
RCN Corporation (Nasdaq:RCNI) and as the Senior Operation Analyst at ARAMARK
Corporation from 1992 to 1995.  Mr. received his B.S. degree from
Drexel University in Philadelphia.





55





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 Yantai Xiangyu
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 Yantai Rongchang 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 our 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 Yantai University 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 Yantai Furao 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.





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 Guang Anmen
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.





Louis A. Bevilacqua, Esq.
became an independent director of our company on July 12, 2010.  From
October 2008 to present, Mr. Bevilacqua has been a partner in the Corporate and
Securities Group at the law firm of Pillsbury Winthrop Shaw Pittman LLP and is
resident in the firm’s Washington, DC office.  Prior to joining
Pillsbury, Mr. Bevilacqua was a partner in the Business and Finance Group at the
law firm of Thelen LLP during the period from January 2003 through October
2008.  Mr. Bevilacqua has broad experience in public offerings and
private placements of securities, Exchange Act compliance, angel and venture
capital financings, other areas of equity and debt financing and mergers,
acquisitions and other business combinations, including “roll up” and “reverse
acquisition” transactions.  Mr. Bevilacqua is a leader of Pillsbury’s
China Capital Markets practice and has significant experience representing
China-based middle market public companies.  Mr. Bevilacqua obtained
his JD from Fordham University School of Law in 1994, where he became a member
of the Order of the Coif, and he obtained his undergraduate degree from Fordham
University, where he graduated with honors.





56





Adam Wasserman became an
independent director of our company on July 12, 2010.  Mr. Wasserman
has served as the chief financial officer of Gold Horse International, Inc.
(OTCBB:GHII) since July 2007, chief financial officer of Emerald Acquisition
Corporation (PINK:PEAR) since June 2010 and as a director of China Direct
Industries, Inc. (NASDAQ:CDII) since January 2010.  Since November
1999, Mr. Wasserman has been CEO of CFO Oncall, Inc., a Weston, Florida-based
provider of consulting and accounting services specializing in SEC reporting,
financial reporting, budgeting and planning, mergers and acquisitions, audit
preparation services, accounting department supervision, and internal
controls.  Mr. Wasserman has previously served as the chief financial
officer of Explorations Group Inc. (January 2002 until December 2005), Colmena
Corp. (May 2003 until June 2004), China Wind Systems, Inc. (November 2007 to
December 2008), Genesis Pharmaceuticals Enterprises, Inc. (October 2001 until
October 2007), and other companies, all client companies of CFO Oncall,
Inc.  From June 1991 to November 1999, he was Senior Audit Manager at
American Express Tax and Business Services, in Fort Lauderdale, Florida where
his responsibilities included supervising, training and evaluating senior staff
members, work paper review, auditing, maintaining positive client relations,
preparation of tax returns and preparation of financial statements and the
related footnotes. From September 1986 to May 1991, he was employed by Deloitte
& Touche, LLP.  During his employment, his significant assignments
included audits of public (SEC reporting) and private companies, tax preparation
and planning, management consulting, systems design, staff instruction, and
recruiting.  Mr. Wasserman holds a Bachelor of Science in Accounting
from the State University of New York at Albany.  He is a CPA (New
York) and a member of The American Institute of Certified Public Accountants and
is a director, treasurer and executive board member of Gold Coast Venture
Capital Association.





Audit,
Nominating, Compensation Committees and Director Independence





Although
our board of directors is comprised of a majority of “independent” directors (as
defined under the Nasdaq Marketplace rules), our board of directors presently
does not have standing audit, nominating or compensation committees and the
entire board is performing the functions normally associated with an audit,
nominating and compensation committee.  We expect that we will seek to
form audit and other board committees in a manner consistent with
exchange-listed companies at such time as we apply for a listing on an
exchange.





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.  Louis A. Bevilacqua is the director designated by Euro
Pacific Capital.





Communication
with our Directors





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





Board
of Directors’ Meetings





During
our fiscal year ending June 30, 2010, we did not hold any meetings of the board
of directors, although our board of directors did act by unanimous written
consent.





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 stockholders”) to file reports of
ownership and changes in ownership with the SEC. Officers, directors and ten
percent stockholders 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 stockholders 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, 2010
conversion rate of RMB 6.7909 to $1.00.





57





SUMMARY COMPENSATION TABLENameand Principal
                                Position
                              
                              Fiscal
                                Year
                              
                              Salary
                                ($)
                              
                              
                              Bonus
                                ($)
                              
                              
                              Stock
                                Awards
                                ($)
                              
                              
                              Option
                                Awards
                                ($)
                              
                              
                              Non-Equity
                                Incentive Plan
                                Compensation
                                ($)
                              
                              
                              Change in
                                Pension Value
                                and
                                Nonqualified
                                Deferred
                                Compensation
                                Earnings
                                ($)
                              
                              
                              All Other
                                Compensation
                                ($)
                              
                              
                              Total
                                ($)Hongwei
      Qu
                              
                              2010
                              
                              $
                              35,105
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              $
                              35,105Chief
      Executive Officer
                              
                              2009
                              
                              $
                              14,644
                              
                              
                              $
                              4,911
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              $
                              19,555Gene
      Hsiao
                              
                              2010
                              
                              $
                              9,000
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              $
                              9,000Chief
      Financial Officer
                              
                              2009
                              
                              $
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              $
                              -





Employment
Agreements





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





On June
4, 2010, we entered into an employment agreement with Gene Hsiao, our Chief
Financial Office (the “Hsiao Agreement”).  The Hsiao Agreement
provides for with an initial term of three (3) years and an annual base
compensation of $120,000.  Pursuant to the Hsiao Agreement, Mr. Hsiao
will be eligible for an annual bonus, if any, as may be determined by the
Company and for customary benefits generally available to all of the Company’s
officers, and may earn up to 120,000 shares of the Company’s common stock, which
shall vest on a yearly basis at a rate of 40,000 shares each year provided that
he is employed by the Company.





We may
terminate the Hsiao agreement without cause and Mr. Hsiao may resign upon 30
days advance written notice. We may immediately terminate the Hsiao agreement
for Cause (as defined in the agreement). Upon the termination of the Hsiao
agreement for any reason, Mr. Hsiao will continue to receive payment of any base
salary earned but unpaid through the date of termination and any other payment
or benefit to which he is entitled under the applicable terms of any applicable
company arrangements. If Mr. Hsiao is terminated during the term of the
employment agreement other than for Cause (as defined in the Hsiao agreement),
Mr. Hsiao is entitled to a lump sum severance payment equal to 3 months of
his base compensation. The Hsiao agreement will terminate prior to its scheduled
expiration date in the event of Mr. Hsiao’s death or disability.




The Hsiao
agreement also includes a 1 year non-competition and non-solicitation and
confidentiality covenants. Under the terms of this agreement, he is also
entitled to 2 weeks paid vacations and expense reimbursement.





Director
Compensation





DIRECTOR
COMPENSATION




Name (a)
                
                Fees
                  Earned
                  or Paid
                  in Cash
                  ($)(1)
                
                
                Stock
                  Awards
                  ($)
                
                
                Option
                  Awards
                  ($)
                
                
                Non-Equity
                  Incentive Plan
                  Compensation
                  ($)
                
                
                Non-Qualified
                  Deferred
                  Compensation
                  Earnings
                  ($)
                
                
                All Other
                  Compensation
                  ($)
                
                
                Total ($)Hongwei
      Qu
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Chengde
      Wang*
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Louis
      A. Bevilacqua*
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Adam
      Wasserman*
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -





*
            Director
      was appointed in July 2010, after the conclusion of our fiscal year ended
      June 30, 2010.





58





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.





On July
6, 2010, Adam Wasserman and Louis A. Bevilacqua entered into independent
director and indemnification agreements with the Company, and on January
11, 2010, Chengde Wang entered into such agreements with the Company, each of
which became effective on July 12, 2010 with their appointments to the
Company’s board of directors and the Company’s execution thereof.  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.
Wasserman received 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;





(iii)           Mr.
Bevilacqua received a $14,000 annual director’s fee and, subject to certain
conditions, a five year non-qualified option to purchase 20,000 shares of
restricted common stock of the Company at a price equal to $2.00 per share with
cashless exercise feature; and





(iv)           Mr.
Wang received a $22,000 annual director’s fee.





Item
12.  Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.





The table
sets forth below certain information regarding the beneficial ownership of our
common stock as of September 15, 2010, based on 16,500,000 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 stockholders 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 stockholders, 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 September 15, 2010, 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
                      
                      
                      
                      54.19
                      %Hongwei
      Qu (4)
                      
                      
                      8,942,471
                      
                      
                      
                      54.19
                      %Gene
      Hsiao (5)
                      
                      
                      —
                      
                      
                      
                      —Louis
      A. Bevilacqua, Esq. (6)
                      
                      
                      —
                      
                      
                      
                      —Adam
      Wasserman (7)
                      
                      
                      —
                      
                      
                      
                      —All
      Executive Officers and Directors as a group
                      
                      
                      8,942,471
                      
                      
                      
                      54.19
                      %


59
  (1)
              Based
      on 16,500,000 shares of common stock issued and outstanding as of
      September 15, 2010.


(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)
            Mr.
      Hsiao is our Chief Financial Officer.  Pursuant to his
      employment agreement with us, Mr. Hsiao is entitled to be granted up to an
      aggregate of 120,000 shares of our common stock, vesting in three annual
      installments of 40,000 beginning June 4, 2011, provided he is then
      employed by our company.


(6)
            Mr.
      Bevilacqua is a director of our company.  Pursuant to his
      independent director agreement with us, Mr. Bevilacqua is expected to
      receive, effective October 13, 2010, and provided he is still serving with
      our company, a five year non-qualified option to purchase 20,000 shares of
      restricted common stock of the Company at a price equal to $2.00 per share
      with cashless exercise feature.


(7)
            Mr.
      Wasserman is a director of our company.  Pursuant to his
      independent director agreement with us, Mr. Wasserman is expected to
      receive, effective October 13, 2010, and provided he is still serving with
      our company, a five year non-qualified option to purchase 20,000 shares of
      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.





Reorganization
Related Transactions





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.





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.





60





Guarantee
for the loans with banks by Mr. Qu





Mr. Qu,
our President, Chief Executive Officer and Chairman, is providing a guaranty for
Bohai’s loans with Pudong Development Bank Qingdao Branch in a total amount of
$2.2 million, or RMB 15 million.





Loans
to Mr. Qu





As of
September 30, 2009, Bohai extended a loan of $1,465,000 to Mr.
Qu.  The loan was unsecured, interest bearing at 3.93% per annum and
has no fixed term of repayment.  The loan was repaid on December 10,
2009.





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 John Kinross-Kennedy and Parker Randall CF (H.K.) CPA
Limited (the “Parker Randall”)during the fiscal years ended June 30, 2010 and
June 30, 2009 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, 2010
                  
                  
                  June, 2009Audit
      Fees
                  
                  $
                  40,000
                  
                  
                  $
                  27,300Audit
      Related Fees
                  
                  
                  6,000
                  
                  
                  
                  -Tax
      Fees
                  
                  
                  -
                  
                  
                  
                  -All
      Other Fees
                  
                  
                  -
                  
                  
                  
                  -TOTAL
                  
                  $
                  46,000
                  
                  
                  $
                  27,300




61





Part
IV





Item
15.  Exhibits





Exhibit No.
                      
                      Description2.1
                      
                      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)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)21.1
                      
                      Subsidiaries
      of the Registrant (6)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
                      
                      Unofficial
      English translation of Land-Use Right Purchase Agreement dated January 18,
      2010.
+





*
            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.





62





(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 3.1 to the Company’s Current Report on Form 8-K,
      filed on February 4, 2010


(6)
            Incorporated
      by reference to Exhibit 21.1 to the Company’s Registration Statement of
      Form S-1 (File Number 333-165149), filed on March 2,
  2010.








63





BOHAI
PHARMACEUTICALS GROUP, INC. AND SUBSIDIARIES





INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS





Page(s)Report
      of Independent Registered Public Accounting Firm
                          F-2Consolidated
      Financial Statements:Consolidated
      Balance Sheets as of June 30, 2010 and 2009
                          F-3Consolidated
      Statements of Income and Comprehensive Income
                            for
      the years ended June 2010 and 2009
                          F-4Consolidated
      Statements of Changes in Stockholders’ Equity
                            for
      the years ended June 2010 and 2009
                          F-5Consolidated
      Statements of Cash Flows as of June 30, 2010 and 2009
                          F-6Notes
      to Consolidated Financial Statements
                          F-7-F-28




F-1





REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of Bohai Pharmaceuticals Group,
Inc.





We have
audited the accompanying consolidated balance sheets of Bohai Pharmaceuticals
Group, Inc. and Subsidiaries as of June 30, 2010 and the related statements of
income, changes in stockholders’ equity and cash flow for the years ended June
30, 2010 and 2009. 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 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Bohai Pharmaceuticals Group,
Inc. and Subsidiaries as of June 30, 2010 and 2009, and the results of their
operations and their cash flow for the years ended June 30, 2010 and 2009, in
conformity with accounting principles generally accepted in the United States of
America.





s/
      Parker Randall CF (H.K.) CPA LimitedParker
      Randall CF (H.K.) CPA Limited Certified Public AccountantHong
      KongSeptember
      28, 2010




F-2




BOHAI
PHARMACEUTICALS GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


AS
OF JUNE 30, 2010 AND 2009





As of
                      
                      
                      As ofJune 30,
                      
                      
                      June 30,Notes
                      
                      
                      2010
                      
                      
                      2009ASSETSCurrent
      assetsCash
      and cash equivalents
                      
                      
                      
                      
                      $
                      17,149,082
                      
                      
                      $
                      2,494,166Restricted
      cash
                      
                      
                      
                      
                      
                      576,019
                      
                      
                      
                      -Accounts
      receivable
                      
                      
                      
                      
                      
                      10,409,527
                      
                      
                      
                      11,070,129Other
      receivables and prepayments
                      
                      4
                      
                      
                      
                      1,449,590
                      
                      
                      
                      3,493,800Amount
      due from equity holder
                      
                      5
                      
                      
                      
                      40,160
                      
                      
                      
                      1,465,000Inventories
                      
                      6
                      
                      
                      
                      748,422
                      
                      
                      
                      307,834Total
      current assets
                      
                      
                      
                      
                      
                      30,372,801
                      
                      
                      
                      18,830,929Non-current
      assetsProperty,
      plant and equipment, net
                      
                      8
                      
                      
                      
                      7,895,042
                      
                      
                      
                      8,149,279Prepayment
      for land use right
                      
                      
                      
                      
                      
                      7,343,654
                      
                      
                      
                      -Intangible
      assets
                      
                      7
                      
                      
                      
                      17,342,772
                      
                      
                      
                      17,298,720Deferred
      fees on convertible notes
                      
                      14
                      
                      
                      
                      1,562,617
                      
                      
                      
                      -Total
      non-current assets
                      
                      
                      
                      
                      
                      34,144,085
                      
                      
                      
                      25,447,999TOTAL
      ASSETS
                      
                      
                      
                      
                      $
                      64,516,886
                      
                      
                      $
                      44,278,928LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesShort-term
      borrowings
                      
                      9
                      
                      
                      $
                      4,398,849
                      
                      
                      $
                      5,860,000Accounts
      payable
                      
                      
                      
                      
                      
                      741,621
                      
                      
                      
                      971,208Other
      accrued liabilities
                      
                      12
                      
                      
                      
                      2,984,988
                      
                      
                      
                      2,835,672Income
      taxes payable
                      
                      17
                      
                      
                      
                      700,326
                      
                      
                      
                      677,666Total
      current liabilities
                      
                      
                      
                      
                      
                      8,825,784
                      
                      
                      
                      10,344,546Non-current
      liabilitiesDerivative
      liabilities - investor and agent warrants
                      
                      13
                      
                      
                      
                      5,481,928
                      
                      
                      
                      -Convertible
      note, net of discount
                      
                      13
                      
                      
                      
                      124,820
                      
                      
                      
                      -Total
      non-current liabilities
                      
                      
                      
                      
                      
                      5,606,748
                      
                      
                      
                      -TOTAL
      LIABILITIES
                      
                      
                      
                      
                      
                      14,432,532
                      
                      
                      
                      10,344,546STOCKHOLDERS'
      EQUITYCommon
      stock, $0.001 par value, 150,000,000 shares authorized,
      16,500,000 and 13,163,000 shares issued and outstanding as of
      June 30, 2010 and 2009,
                        respectively
                      
                      10
                      
                      
                      
                      16,500
                      
                      
                      
                      13,163Additional
      paid-in capital
                      
                      10
                      
                      
                      
                      15,317,621
                      
                      
                      
                      8,794,838Accumulated
      other comprehensive income
                      
                      
                      
                      
                      
                      626,584
                      
                      
                      
                      490,931Statutory
      reserves
                      
                      20
                      
                      
                      
                      2,201,817
                      
                      
                      
                      2,201,811Retained
      earnings
                      
                      
                      
                      
                      
                      31,921,832
                      
                      
                      
                      22,433,640Total
      stockholders' equity
                      
                      
                      
                      
                      
                      50,084,354
                      
                      
                      
                      33,934,383TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                      
                      
                      
                      
                      $
                      64,516,886
                      
                      
                      $
                      44,278,928





See
accompanying notes to the consolidated financial statements





F-3




BOHAI
PHARMACEUTICALS GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF INCOME AND COMPREHENSIVE INCOME


FOR
THE YEARS ENDED JUNE 30, 2010 AND 2009





For The Year EndedJune 30,Notes
                  
                  
                  2010
                  
                  
                  2009Net
      revenues
                  
                  
                  
                  
                  $
                  59,264,724
                  
                  
                  $
                  49,348,614Cost
      of revenues
                  
                  
                  
                  
                  
                  10,164,853
                  
                  
                  
                  7,975,267Gross
      profit
                  
                  
                  
                  
                  
                  49,099,871
                  
                  
                  
                  41,373,347Selling,
      general and administrative expenses
                  
                  15
                  
                  
                  
                  36,253,075
                  
                  
                  
                  31,347,139Income
      from operations
                  
                  
                  
                  
                  
                  12,846,796
                  
                  
                  
                  10,026,208Other
      incomes (expenses)Other
      income
                  
                  
                  
                  
                  
                  152,330
                  
                  
                  
                  49,447Amortization
      of deferred financing fees
                  
                  
                  
                  
                  
                  (510,717
                  )
                  
                  
                  -Interest
      expenses
                  
                  16
                  
                  
                  
                  (926,235
                  )
                  
                  
                  (184,404
                  )Other
      expense
                  
                  
                  
                  
                  
                  (25,756
                  )
                  
                  
                  (36,366
                  )Change
      in fair value of derivative liabilities
                  
                  
                  
                  
                  
                  925,063
                  
                  
                  
                  -Total
      other income (expenses)
                  
                  
                  
                  
                  
                  (385,315
                  )
                  
                  
                  (171,323
                  )Income
      before provision for income taxes
                  
                  
                  
                  
                  
                  12,461,481
                  
                  
                  
                  9,854,885Provision
      for income taxes
                  
                  17
                  
                  
                  
                  (2,973,289
                  )
                  
                  
                  (1,906,985
                  )Net
      income
                  
                  
                  
                  
                  $
                  9,488,192
                  
                  
                  $
                  7,947,900Comprehensive
      income:Net
      income
                  
                  
                  
                  
                  $
                  9,488,192
                  
                  
                  $
                  7,947,900Other
      comprehensive incomeUnrealized
      foreign currency translation gain
                  
                  
                  
                  
                  
                  135,653
                  
                  
                  
                  106,233Comprehensive
      income
                  
                  
                  
                  
                  $
                  9,623,845
                  
                  
                  $
                  8,054,133Earnings
      per common shareBasic
                  
                  
                  
                  
                  $
                  0.64
                  
                  
                  $
                  0.60Diluted
                  
                  
                  
                  
                  $
                  0.57
                  
                  
                  $
                  0.60Weighted
      average common shares outstandingBasic
                  
                  
                  
                  
                  
                  14,722,055
                  
                  
                  
                  13,162,500Diluted
                  
                  
                  
                  
                  
                  17,569,315
                  
                  
                  
                  13,162,500





See
accompanying notes to the consolidated financial statements





F-4




BOHAI
PHARMACEUTICALS GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


FOR
THE YEARS ENDED JUNE 30, 2010 AND 2009





AccumulatedCommon
      Stock
                        
                        
                        Additional
                        
                        
                        otherShares
                        
                        
                        
                        
                        
                        Paid-in
                        
                        
                        comprehensive
                        
                        
                        Statutory
                        
                        
                        Retainedoutstanding
                        
                        
                        Amount
                        
                        
                        Capital
                        
                        
                        income
                        
                        
                        reserves
                        
                        
                        earnings
                        
                        
                        TotalBalance
      at June 30, 2008
                        
                        
                        13,162,500
                        
                        
                        $
                        13,163
                        
                        
                        $
                        8,794,838
                        
                        
                        $
                        384,698
                        
                        
                        $
                        1,464,861
                        
                        
                        $
                        15,222,690
                        
                        
                        $
                        25,880,250Net
      income for the year
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        736,950
                        
                        
                        
                        7,210,950
                        
                        
                        
                        7,947,900Foreign
      currency translation adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        106,233
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        106,233Balance
      at June 30, 2009
                        
                        
                        13,162,500
                        
                        
                        
                        13,163
                        
                        
                        
                        8,794,838
                        
                        
                        
                        490,931
                        
                        
                        
                        2,201,811
                        
                        
                        
                        22,433,640
                        
                        
                        
                        33,934,383Recapitalization
                        
                        
                        3,087,500
                        
                        
                        
                        3,088
                        
                        
                        
                        419,366
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        422,454Beneficial
      conversion feature on convertible notes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        6,175,462
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        6,175,462Conversion
      of convertible notes on additional paid-in capital
    adjustments
                        
                        
                        250,000
                        
                        
                        
                        250
                        
                        
                        
                        (250
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Conversion
      of convertible notes credits on carrying amount and deferred
      fees
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (71,795
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (71,795
                        )Net
      income for the year
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        6
                        
                        
                        
                        9,488,192
                        
                        
                        
                        9,488,198Foreign
      currency translation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        135,653
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        135,653Balance,
      June 30, 2010
                        
                        
                        16,500,000
                        
                        
                        $
                        16,500
                        
                        
                        $
                        15,317,621
                        
                        
                        $
                        626,584
                        
                        
                        $
                        2,201,817
                        
                        
                        $
                        31,921,832
                        
                        
                        $
                        50,084,354





See
accompanying notes to the consolidated financial statements





F-5




BOHAI
PHARMACEUTICALS GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF CASH FLOWS


FOR
THE YEARS ENDED JUNE 30, 2010 AND 2009





For The Year EndedJune 302010
                
                
                2009Cash
      flows from operating activitiesNet
      income
                
                $
                9,488,192
                
                
                $
                7,947,900Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
                
                
                310,551
                
                
                
                302,762Loss
      on disposals of property, plant and equipment
                
                
                10,589
                
                
                
                31,630Amortization
      of deferred fees on convertible notes
                
                
                510,716
                
                
                
                -Interest
      expense on convertible notes
                
                
                132,146
                
                
                
                -Change
      in fair value of warrants
                
                
                (925,063
                )
                
                
                -Changes
      in assets and liabilities(Increase)/decrease
      in accounts receivable
                
                
                685,854
                
                
                
                (2,151,920
                )(Increase)/decrease
      in other receivables and prepayments
                
                
                1,994,621
                
                
                
                (2,436,718
                )(Increase)/decrease
      in inventories
                
                
                (437,998
                )
                
                
                741,357(Decrease)/increase
      in amount due from equity holder
                
                
                1,462,700
                
                
                
                (1,465,000
                )(Decrease)/increase
      in accounts payable
                
                
                (231,107
                )
                
                
                (2,094,181
                )(Decrease)/increase
      in other payable
                
                
                (99,884
                )
                
                
                -(Decrease)/increase
      in accrued liabilities
                
                
                292,454
                
                
                
                (2,468,368
                )(Decrease)/increase
      in income taxes payable
                
                
                20,849
                
                
                
                79,476Net
      cash (used in)/provided by operating activities
                
                
                13,214,620
                
                
                
                (1,513,062
                )Cash
      flows from investing activitiesPurchases
      of property, plant and equipment
                
                
                (47,279
                )
                
                
                (803,643
                )Proceeds
      from disposals of property, plant and equipment
                
                
                -
                
                
                
                14,650Purchase
      of leased land use rights
                
                
                (7,313,502
                )
                
                
                -Net
      cash used in investing activities
                
                
                (7,360,781
                )
                
                
                (788,993
                )Cash
      flows from financing activitiesCash
      fees on placement agent and other financing costs
                
                
                (1,570,000
                )
                
                
                -Proceeds
      of convertible promissory notes
                
                
                12,000,000
                
                
                
                -Proceeds
      of borrowings
                
                
                6,574,838
                
                
                
                5,860,000Repayment
      of borrowings
                
                
                (8,044,852
                )
                
                
                (1,896,700
                )Advanced
      to related party
                
                
                (51,926
                )
                
                
                -Advanced
      from related party
                
                
                11,980
                
                
                
                -Restricted
      cash
                
                
                (163,981
                )
                
                
                -Net
      cash provided by financing activities
                
                
                8,756,059
                
                
                
                3,963,300Effect
      of foreign currency translation on cash and cash
    equivalents
                
                
                45,018
                
                
                
                3,871Net
      increase in cash and cash equivalents
                
                
                14,654,916
                
                
                
                1,665,116Cash
      and cash equivalents at beginning of year
                
                
                2,494,166
                
                
                
                829,050Cash
      and cash equivalents at end of year
                
                $
                17,149,082
                
                
                $
                2,494,166Cash
      paid during the year forInterest
      paid
                
                $
                342,517
                
                
                $
                288,307Income
      taxes paid
                
                $
                2,952,441
                
                
                $
                1,829,969Supplemental
      cash flow information:Interest
      paid on convertible notes
                
                $
                226,667
                
                
                $
                -Placement
      agent warrants issued
                
                $
                582,454
                
                
                $
                -





See
accompanying notes to the consolidated financial statements





F-6




BOHAI
PHARMACEUTICALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEAR ENDED JUNE 30, 2010 AND 2009





1.          ORGANIZATION
AND PRINCIPAL ACTIVITIES





Bohai
Pharmaceuticals Group, Inc. (the “Company”) (formerly known as Link Resources,
Inc.) was incorporated under the laws of the State of Nevada on January 9,
2008.  Until January 5, 2010, its principal office was located in
Calgary, Alberta, Canada.  The Company was a public “shell“ company in
the exploration stage since its formation and had not yet realized any revenues
from its planned operations.





Pursuant
to a Share Exchange Agreement, dated January 5, 2010 (the “Share Exchange
Agreement” and the transactions contemplated thereby, the “Share Exchange”), the
Company acquired Chance High International Limited, a British Virgin Islands
company (“Chance High”) from Chance High’s shareholders (the “Chance High
Shareholders”) and, as a result, acquired Chance High’s indirect, controlled
affiliate, Yantai Bohai Pharmaceuticals Group Co., Ltd. (“Bohai”), a Chinese
company engaged the production, manufacturing and distribution in the People ‘ s
Republic  of China (“China” or the “PRC”) 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 (the “Closing Date”).  On the Closing Date,
pursuant to the terms of the Share Exchange Agreement, the Company 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 the Company.  In
exchange, the Company issued to Chance High Shareholders an aggregate of
13,162,500 newly issued shares of common stock, par value $0.001 per share (the
“Common Stock”).  In addition, pursuant to the terms of the Share
Exchange Agreement, Anthony Zaradic, the former President and Chief Executive
Officer of the Company, cancelled a total of 1,500,000 shares of Common
Stock.





Chance
High owns 100% of the issued and outstanding capital stock of the Yantai
Shencaojishi Pharmaceuticals Co., Ltd. (“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,
including Mr. Hongwei Qu, currently the Company’s Chairman, Chief Executive
Officer and President (“Qu”), pursuant to which 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. Chance High, WFOE and Bohai are referred to herein collectively as the
“Company” or “we”, “us” or “our”.





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 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.





On
January 29, 2010, the Company entered into an Agreement and Plan of Merger, the
sole purpose of which was to effect a change of the Company’s corporate name
from Link Resources Inc. to Bohai Pharmaceuticals Group, Inc.





2.          BASIS
OF PREPARATION





The
Company maintains its general ledger and journals with the accrued method
accounting for financial reporting purposes.  Accounting policies
adopted by the Company conform to generally accepted accounting principles in
the United States of America (“US GAAP“) and have been consistently applied in
the presentation of financial statements, which are compiled on the accrual
basis of accounting.





This
basis of accounting differs in certain material respects from that used for the
preparation of the books of account of the Company, which are prepared in
accordance with the accounting principles and the relevant financial regulations
applicable to enterprises with limited liabilities established in the PRC (“PRC
GAAP”), the accounting standards used in the places of their
domicile.  The accompanying financial statements reflect necessary
adjustments not recorded in the books of account of the Company to present them
in conformity with US GAAP.





F-7




The
consolidated financial statements as of and for the year ended June 30, 2010
reflect all adjustments which, in  the opinion of management, are
necessary to present fairly the financial position, results of operations and
cash flows for the period presented in accordance with the accounting principles
generally accepted in the United States of America. All adjustments are of a
normal recurring nature.





The Share
Exchange was accounted for as a reverse recapitalization effected as of January
5, 2010. Although the Company legally acquired Chance High and its controlled
subsidiary Bohai, for accounting purposes, Chance High and Bohai are considered
to be the accounting acquirers and Link Resources, Inc. as the accounting
acquiree. As a result, the historical consolidated financial statements for
periods prior to January 5, 2010 are those of Chance High and Bohai and the
operating results, financial position and cash flows of the Company (formerly
known as Link Resources, Inc.) are consolidated only from its acquisition on
January 5, 2010.  As the transaction between Link Resources, Inc. and
Chance High and its subsidiaries is treated as reverse acquisition, no goodwill
was recorded.  Intercompany transactions and balances are eliminated
in consolidation.





3.          SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Basis
of Presentation and Consolidation





The
Company has adopted FAS ASC 810-10-15-14 and also FIN 46R, 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 have direct
ability to made decision on all operation activities of the voting right of the
VIE. The Company controls Bohai through the VIE Agreements described in Note 1
and accordingly it is consolidated for all periods presented.





The
Operating Agreement provided that Bohai, as operating company, which is wholly
foreign owned under control of Chance High that empowers to WFOE the direct
ability to make decisions on all the operation activities of the voting right of
Bohai.





Under
Consultant Service Agreement entered between WFOE and Bohai on December 7, 2009,
Bohai agreed to pay all of its net income to WOFE quarterly as a consultant fee.
Accordingly, WOFE has the right to receive the expected residual returns of
Bohai.





Under  above  mentioned  contractual  arrangement,  the  Company
qualifies as the primary beneficiary of such controlling financial interest in
Bohai as operating under FASB ASC230-10-45 and FASB Interpretation No. 46R
“Consolidation of Variable Interest Entities “ (“FIN 46R “), an Interpretation
of Accounting Research Bulletin No. 51. The result of subsidiaries or variable
interest entities acquired prior to date of Share Exchange Agreement on January
5, 2010 entered are included in the consolidated financial
statement.





As of
June 30, 2010, the particulars of the Company’s subsidiaries and VIEs are as
follows:





NameofCompany
                                      
                                      Placeof
                                        incorporation
                                      
                                      Dateof
                                        incorporation
                                      
                                      Attributable
                                        equityinterest
                                      
                                      
                                      Issued Capital
                                        (US Dollars)Chance
      High International Limited
                                      
                                      British
      Virgin Islands
                                      
                                      July
      2, 2009
                                      
                                      100%
                                      
                                      
                                      $
                                      50,000Yantai
      Shencaojishi Pharmaceuticals Co., Ltd.
                                      
                                      People’s
      Republic
                                        of
      China
                                      
                                      November
      25, 2009
                                      
                                      100%
                                      
                                      
                                      $
                                      9,500,000Yantai
      Bohai Pharmaceuticals Group Co., Ltd.
                                      
                                      People’s
      Republic
                                        of
      China
                                      
                                      July
      8, 2004
                                      
                                      *
                                      
                                      
                                      $
                                      2,918,000
                                        (RMB20,000,000
                                      )





* The
Company has indirect controlling interest of Bohai under the VIE Agreements
entered on December 7, 2009, which are described in Note 1
above.





F-8




Initial
measurement of VIE: the Company initially measures the assets, liabilities, and
non-controlling interests of the VIEs at their carrying amount at the date of
the acquisition.





Accounting
after initial measurement of VIE: subsequent accounting for the assets,
liabilities, and non- controlling interest of a consolidated variable interest
entity are accounted for as if the entity were consolidated based on voting
interests and 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 (referred as “Primary Beneficiary” or
      “PB”); and





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





Economic and PoliticalRisks





The
Company’s operations are conducted solely in the PRC.  There are
significant risks associated with doing business in the PRC, among others,
political, economic, legal and foreign currency exchange risks. The Group’s
results may be adversely affected by changes in the 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.





UseofEstimates





In
preparing the consolidated financial statements in conformity with US GAAP,
management makes estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the dates of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting periods.  These accounts
and estimates include, but are not limited to, the valuation of accounts
receivable, inventories, deferred income taxes, the estimation on useful lives
of plant and machinery, and the fair value of derivative
liabilities.  Actual results could differ from those
estimates.





Fair Value Measurements and
Fair Value of Financial Instruments





The
Company adopted the guidance of Accounting Standards Codification (“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 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. The Company
uses Level 3 inputs to value its derivative liabilities.





F-9




The
following table reflects gains and losses for fiscal 2010 for all financial
assets and liabilities categorized as Level 3 as of June 30, 2010.





Liabilities:Balance
      of derivative liabilities as of July 1, 2009
                      
                      $
                      -Initial
      fair value of derivative liabilities
                      
                      
                      6,406,991Change
      the in fair value of derivative liabilities
                      
                      
                      (925,063
                      )Balance
      of derivative liabilities as of June 30, 2010
                      
                      $
                      5,481,928





Estimating
fair values 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. In addition, valuation techniques are sensitive to changes in
the trading market price of our common stock and its estimated volatility.
Because derivative financial instruments are initially and subsequently carried
at fair values, our income may include significant charges or credits as these
estimates and assumptions change.





The
potential credit risk to the company is mainly attributable to its accounts
receivable and bank balances. The Company has 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 bank balances are
on deposit with financial institutions with high-credit quality. Accordingly,
the Company does not consider that it is subject to significant credit
risk.





The
Company’s interest rate risk is primarily attributable to its borrowings, all of
which have fixed interest rates. The Company does not use interest rate swaps to
hedge its exposure to interest rate risk.





Cash and Cash
Equivalents





The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.  The
Company maintains bank accounts in the PRC and restricted cash accounts in the
United States of America. The restricted cash accounts were created for dividend
payments of Convertible Note holders and payments of investor relation
activities in the US.





Concentrations of Credit
Risk





Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and trade accounts receivable. Substantially
all of the Company’s cash is maintained with state-owned banks within the PRC,
and no deposits are covered by insurance. The Company has not experienced any
losses in such accounts and believes it is not exposed to any risks on its cash
in bank accounts. A significant portion of the Company’s sales are credit sales
which are primarily to customers whose ability to pay is dependent upon the
industry economics prevailing in these areas; however, concentrations of credit
risk with respect to trade accounts receivables is limited due to generally
short payment terms.  The Company also performs ongoing credit
evaluations of its customers to help further reduce credit risk.





At June
30, 2010 and 2009, the Company’s cash balances by geographic area were as
follows:





June 30, 2010
                  
                  
                  June 30, 2009Country:United
      States
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  2,440
                  
                  
                  
                  0.1
                  %China
                  
                  
                  1,7149,082
                  
                  
                  
                  100.0
                  %
                  
                  
                  2,491,726
                  
                  
                  
                  99.9
                  %Total
      cash and cash equivalents
                  
                  $
                  17,149,082
                  
                  
                  
                  100.0
                  %
                  
                  $
                  2,494,166
                  
                  
                  
                  100.0
                  %




F-10





Accounts
Receivable





Accounts
receivable consists of amounts due from customers. The Company extends unsecured
credit to its customers in the ordinary course of business but mitigates 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, 2010 and 2009, no allowance for
doubtful accounts was deemed necessary based on management’s
assessment.





Inventories





Inventories
are valued at the lower of cost or market with cost is determined using the
weighted average method. Finished goods inventories consist of raw materials,
direct labor and overhead associated with the manufacturing process. In
assessing the ultimate realization of inventories, the management makes
judgments as to future demand requirements compared to current or committed
inventory levels.  The Company’s reserve requirements generally
increase/decrease due to management projected demand requirements, market
conditions and product life cycle changes.  As of June 30, 2010 and
June 30, 2009, the Company did not make any allowance for slow-moving or
defective inventories





Intangible
Assets





Intangible
assets consist of “Pharmaceutical Formulas”, which were acquired with indefinite
useful lives are measured initially at cost and not subject to amortization
shall be tested for impairment annually or more frequently if there is
indication of impairment. If the carrying amount exceeds fair value, an
impairment loss should be recognized. Subsequently reversal of a recognized
impairment loss is prohibited. There was no material impairment of the
intangible assets as of June 30, 2010 and 2009.





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. The cost of repairs and
maintenance is expensed 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. The Company
examines the possibility of decreases in the value of fixed assets when events
or changes in circumstances reflect the fact that their recorded value may not
be recoverable.





Included
in property and equipment was construction-in-progress which consisted of
factories and office buildings under construction and machinery pending
installation and includes the costs of construction, machinery and equipment,
and any interest charges arising from borrowings used to finance these assets
during the period of construction or installation. No provision for depreciation
is made on construction-in-progress until such time as the relevant assets are
completed and ready for their intended use. The principal annual rates are as
follows:





Leasehold
      land and buildings
                
                30
      to 40 yearsMotor
      vehicles
                
                10
      yearsPlant
      and machinery
                
                10
      yearsOffice
      equipment
                
                5
      years




Accounting
for the Impairment of Long-Lived Assets


The
Company uses ASC Topic 360, which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. The Company periodically
evaluates the carrying value of long-lived assets to be held and used in
accordance with ASC Topic 360. ASC Topic 360 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets’ carrying amounts. In that event, a loss is
recognized based on the amount by which the carrying amount exceeds the fair
market value of the long-lived assets. Loss on long-lived assets to be disposed
of is determined in a similar manner, except that fair market values are reduced
for the cost of disposal. Based on its review, the Company believes that, as of
June 30, 2010 and June 30, 2009, there
were no significant impairments of its long-lived asset.





F-11




ForeignCurrencyTranslation





The
reporting currency of the Company is the U.S. dollar. The Company maintains its
consolidated financial statements in the functional currency. The functional
currency of the Company is the Chinese Renminbi (RMB). For the 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 unified exchange rate at the end of the
period, and equity is translated at historical exchange rates. As a result,
amounts relating to assets and liabilities reported on the statements of cash
flows may not necessarily agree with the changes in the corresponding balances
on the balance sheets.  Translation adjustments resulting from the
process of translating the local currency financial statements into U.S. dollars
are included in determining comprehensive income.   Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchanges rates prevailing at the dates of the
transaction. 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 does not enter any material transaction in foreign currencies and,
accordingly, transaction gains or losses have not had, and are not expected to
have, a material effect on the results of operations of the
Company.





Assets
and liabilities are translated at the exchange rates at the balance sheet dates
and revenue and expenses are translated at the average exchange rates using the
following exchange rates:





June 30, 2010
                  
                  
                  June 30, 2009Year
      end US$: RMB exchange rate
                  
                  
                  6.80860
                  
                  
                  
                  6.88480Average
      periodic US$: RMB exchange rate
                  
                  
                  6.83667
                  
                  
                  
                  6.84819





RMB is
not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US
dollar at the rates used in translation.





RevenueRecognition





Revenue
represents the invoiced value of goods sold recognized upon the delivery of
goods to customers. 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.





TheCompany accounts for sales
returns by establishing an accrual in an amount equal to its estimate of sales
recorded for which the related products are expected to be returned. The Company
determines the estimate of the sales return accrual primarily based on
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 year ended June 30, 2010 and 2009, sales return rate is low and deemed
immaterial and accordingly, no provision for sales returns was
recorded.





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 the Company’s revenues.





F-12




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 financial statements
of the cost of employee and director services received in exchange for an award
of equity instruments over the period the employee or director is required to
perform the services in exchange for the award (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. The Company records 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 as expense when incurred and included in
operating expenses. Research and development costs totaled $440,931 and $293,000
for the year ended June 30, 2010 and 2009, respectively.





Shipping
costs





Shipping
costs are included in selling expense and totaled $525,611 and $516,770 the
years ended June 30, 2010 and 2009, respectively.





Advertising and
Promotion





Advertising
and promotion is expensed as incurred. Advertising and promotion expenses were
included in operating expenses and amounted to $13,237,648 and $10,959,424 for
the years ended June 30, 2010 and 2009, respectively.





Income
Taxes





The
Company is governed by the Income Tax Law of the People’s Republic of China and
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
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets are
reduced by a valuation allowance to the extent management concludes it is more
likely than not that the assets will not be realized. 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 statements of income
and comprehensive income in the periods that includes the enactment
date.





Comprehensive
Income





Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, all
items that are required to be recognized under current accounting standards as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other financial
statements. The Company’s current components of other comprehensive income are
the foreign currency translation adjustment.





F-13





Commitments and
Contingencies





Liabilities
for loss contingencies arising from claims, assessments, litigation, fines and
penalties and other sources are recorded when it is probable that a liability
has been incurred and the amount of the assessment can be reasonably
estimated.





Earnings Per
Share





The
Company reports basic 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 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 in
periods for which they have an anti-dilutive effect. Stock options for which the
exercise price exceeds the average market price over the period are
anti-dilutive and, accordingly, are excluded from the calculation.  At
June 30, 2010, the Company had 2,847,260 common stock equivalents from
convertible notes that could potentially dilute future earnings per share.
Warrants to purchase 6,600,000 shares of common stock were outstanding during
the year ended June 30, 2010, but were excluded from the computation of diluted
earnings per share as their effect would have been anti-dilutive.





Recent Accounting
Pronouncements





The
following Accounting Standards Codification (“ASC”) Updates have been issued, or
became effective, since the beginning of the current year covered by these
financial statements:





In June
2008, the FASB issued FASB ASC 260-10, “Determining Whether Instruments Granted
in Share- based Transactions are Participating Securities”. Under ASC 260-10,
unvested share-based payment awards that contain rights to receive
non-forfeitable dividends (whether paid or unpaid) are participating securities,
and should be included in the two-class method of computing EPS. The adoption of
ASC 260-10 beginning July 1, 2009 did not have a material impact on the
Company’s consolidated financial statements.





In June
2009, the FASB issued ASC 810, “Amendments to FASB Interpretation No.46(R)”. ASC
810 amends FASB Interpretation No.46(R), “Variable Interest Entities” for
determining whether an entity is a variable interest entity (“VIE”) and requires
an enterprise to perform an analysis to determine whether the enterprise’s
variable interest or interests give it a controlling financial interest in a
VIE. Under ASC 810, an enterprise has a controlling financial interest when it
has a) the power to direct the activities of a VIE that most significantly
impact the entity’s economic performance and b) the obligation to absorb losses
of the entity or the right to receive benefits from the entity that could
potentially be significant to the VIE. ASC 810 also requires an enterprise to
assess whether it has an implicit financial responsibility to ensure that a VIE
operates as designed when determining whether it has power to direct the
activities of the VIE that most significantly impact the entity’s economic
performance. ASC 810 also requires ongoing assessments of whether an enterprise
is the primary beneficiary of a VIE, requires enhanced disclosures and
eliminates the scope exclusion for qualifying special-purpose entities. ASC 810
is effective as of the beginning of each reporting entity’ s first annual
reporting period that begins after November 15, 2009, for interim periods within
that first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. ASC 810 is effective for the
Company in the first quarter of fiscal 2011. The Company is currently evaluating
the effect of ASC 810 on its consolidated financial statements.





In August
2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value”,
which is codified as ASC 820, “Fair Value Measurements and Disclosures”. This
Update provides amendments to ASC 820-10, Fair Value Measurements and
Disclosures – Overall, for the fair value measurement of liabilities. This
Update provides clarification that in circumstances in which a quoted price in
an active market for the identical liability is not available, a reporting
entity is required to measure fair value using a valuation technique that uses
the quoted price of the identical liability when traded as an asset, quoted
prices for similar liabilities or similar liabilities when traded as assets, or
that is consistent with the principles of ASC 820. The amendments in this Update
also clarify that when estimating the fair value of a liability, a reporting
entity is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents transfer of the
liability. The amendments in this Update also clarify that both a quoted price
in an active market for the identical liability at the measurement date and the
quoted price for the identical liability when traded as an asset in an active
market when no adjustments to the quoted price of the assets are required are
Level 1 fair value measurements. ASC 820 is effective for the first reporting
period (including interim periods) beginning after August 28, 2009. The adoption
of this Update did not have a significant impact to the Group’s consolidated
financial statements.





F-14




In
December 2009, the FASB issued ASU No. 2009-17, “Improvements to Financial
Reporting by Enterprises Involved with Variable Interest Entities (“ASU
2009-17”)”. ASU 2009-17 amends the variable- interest entity guidance in FASB
ASC 810-10-05-8 to clarify the accounting treatment for legal entities in which
equity investors do not have sufficient equity at risk for the entity to finance
its activities without financial support. ASU 2009-17 shall be effective as of
the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009. ASU 2009-17 is effective for the Company in the
first quarter of fiscal 2011. The Company is currently evaluating the effect of
ASU 2009-17 on its consolidated financial statements.





In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers. 2) Activity in Level 3 fair value measurements. In
the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about
purchases, sales, issuances, and settlements (that is, on a gross basis rather
than as one net number). This update provides amendments to Subtopic 820-10 that
clarifies existing disclosures as follows: 1) Level of disaggregation. A
reporting entity should provide fair value measurement disclosures for each
class of assets and liabilities. A class is often a subset of assets or
liabilities within a line item in the statement of financial position. A
reporting entity needs to use judgment in determining the appropriate classes of
assets and liabilities. 2) Disclosures about inputs and valuation techniques. A
reporting entity should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value measurements that
fall in either Level 2 or Level 3. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. These disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company is currently evaluating the impact of this ASU; however, the
Company does not expect the adoption of this ASU to have a material impact on
its consolidated financial statements.





In
February 2010, FASB issued ASU No. 2010-9 – Amendments to Certain Recognition
and Disclosure Requirements. This update addresses certain implementation issues
related to an entity’s requirement to perform and disclose subsequent-events
procedures, removes the requirement that public companies disclose the date of
their financial statements in both issued and revised financial statements.
According to the FASB, the revised statements include those that have been
changed to correct an error or conform to a retrospective application of U.S.
GAAP. The adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.





In April
2010, the FASB issued ASU 2010-13, Compensation-Stock Compensation (Topic 718):
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security Trades - a
consensus of the FASB Emerging Issues Task Force.  The amendments in
this Update are effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2010.  Earlier
application is permitted.  The Company does not expect the provisions
of ASU 2010-13 to have a material effect on the financial position, results of
operations or cash flows of the Company.





In May
2010, the FASB issued ASU 2010-19, Foreign Currency (Topic 830): Foreign
Currency Issues: Multiple Foreign Currency Exchange Rates.  The
amendments in this Update are effective as of the announcement date of March 18,
2010. The adoption of this update did not have a material effect on the
financial position, results of operations or cash flows of the
Company.





F-15





4.          OTHER
RECEIVABLES AND PREPAYMENTS





Other
receivables and prepayments consist of the following:








As of
                        June 30, 2010
                      
                      
                      As of
                        June 30, 2009Prepayment
      for advertising and promotion
                      
                      $
                      1,198,484
                      
                      
                      $
                      1,736,025Loan
      to a third party
                      
                      
                      -
                      
                      
                      
                      1,465,000Prepayment
      for director and officer insurance
                      
                      
                      29,792
                      
                      
                      
                      -Other
      receivables
                      
                      
                      221,314
                      
                      
                      
                      292,775
                      *Total
      other receivable s and prepayments
                      
                      $
                      1,449,590
                      
                      
                      $
                      3,493,800





*           Inter-company
balance of June 30, 2009 has been reclassified in order to conform with current
period’s presentation.





Loan to a
third party is un-secured with interest bearing at 5.31% per annum. The loan was
repaid during fiscal year ended June 30, 2010.





5.          AMOUNT
DUE FROM EQUITY HOLDER





Amount
due from equity holder consists of the following:





As of
                  
                  
                  As ofJune 30,
                  
                  
                  June 30,2010
                  
                  
                  2009Mr.
      Hongwei Qu
                  
                  $
                  40,160
                  
                  
                  $
                  1,465,000




The
amount due from an equity holder as of June 30, 2010 is unsecured, non-interest
bearing. The balance of $40,160 was repaid in July 2010.  The amount
due from an equity holder as of June 30, 2009 is unsecured with interest bearing
at 3.93% per annum was repaid during fiscal year ended June 30,
2010.





6.          INVENTORIES





Inventories consist of
the following:





As of
                    June 30, 2010
                  
                  
                  As of
                    June 30, 2009Raw
      materials
                  
                  $
                  445,693
                  
                  
                  $
                  250,405Finished
      goods
                  
                  
                  302,729
                  
                  
                  
                  57,429Total
      inventories
                  
                  $
                  748,422
                  
                  
                  $
                  307,834




F-16





7.           INTANGIBLE
ASSETS





Intangible
assets consist of the following:





As of
                  June 30,2010
                
                
                As of
                  June 30,2009Pharmaceuticals
      formulas, at cost
                
                $
                17,342,772
                
                
                $
                17,298,720





8.           PROPERTY,
PLANT AND EQUIPMENT, NET





Property,
plant and equipment consisted of the following:





As of
                                  June 30,
                                  2010
                                
                                
                                As of
                                  June 30,
                                  2009CostLeasehold
      land and buildings
                                
                                $
                                7,629,498
                                
                                
                                $
                                7,447,211Plant
      and equipment
                                
                                
                                1,234,994
                                
                                
                                
                                1,156,557Office
      equipment
                                
                                
                                85,174
                                
                                
                                
                                74,700Construction
      in progress
                                
                                
                                -
                                
                                
                                
                                236,597Motor
      vehicles
                                
                                
                                414,622
                                
                                
                                
                                389,075Total
                                
                                
                                9,364,288
                                
                                
                                
                                9,304,140Less:
      accumulated depreciation
                                
                                
                                1,469,246
                                
                                
                                
                                1,154,861Property,
      plant and equipment, net
                                
                                $
                                7,895,042
                                
                                
                                $
                                8,149,279





Depreciation
expense for the year ended June 30, 2010 and 2009 were $310,551 and $302,762
respectively.





As of
June 30, 2010 and 2009, the Company has pledged plant and machinery having a
carrying amount of $534,102 and $562,331, respectively to secure a bank loan to
the Bohai.





9.          SHORT-TERM
BORROWINGS





Bohai
obtained several short-term loan facilities from financial institution in the
PRC.  Short-term borrowings as of June 30, 2010 are consisted, of the
following:





Loan from financial
                                  institution
                                
                                Loan period
                                
                                Annual
                                  interestrate
                                
                                
                                Secured by
                                
                                AmountChina
      Construction Bank
                                
                                February
      24, 2010 to February 23, 2011
                                
                                5.8410%
                                
                                
                                Shandong
      Dai Xin Heavy Industries Co. Ltd.
                                
                                $
                                3,524,954Yantai
      Laishan RuralCredit
      Union
                                
                                September
      28, 2009 to September 26, 2010
                                
                                9.0270%
                                
                                
                                Yantai
      Ka Wah Medical Equipment Co. Ltd
                                
                                $
                                587,492Yantai
      Laishan RuralCredit
      Union
                                
                                September 28, 2009 to September 26,
      2010
                                
                                6.9030%
                                
                                
                                Bohai’smachineryand
      vehicle
                                
                                $
                                286,402TOTAL
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                4,398,849




F-17





Short-term borrowings
as of June 30, 2009 are consisted, of the following:





Loan from financial
                                  institution
                                
                                Loan period
                                
                                Annual
                                  interestrate
                                
                                
                                Secured by
                                
                                AmountShanghai
      PudongDevelopment
      Limited
                                
                                December
      12, 2008 to December 11, 2009
                                
                                6.6960%
                                
                                
                                Haiyang
      Construction Industry Training Centre and personal guarantee by equity
      holders
                                
                                $
                                2,197,500Yantai
      City Commercial Bank
                                
                                January
      20, 2009 to January 20, 2010
                                
                                6.9030%
                                
                                
                                Yantai
      Hai Pu Can End Making Co. Ltd.
                                
                                $
                                1,318,500Yantai
      Laishan Rural Credit Union
                                
                                September
      27, 2008 to September 26, 2009
                                
                                9.3600%
                                
                                
                                Yantai
      Ka Wah Medical Equipment Co. Ltd.
                                
                                $
                                293,000Yantai
      Laishan Rural Credit Union
                                
                                September
      27, 2008 to September 26, 2009
                                
                                12.2400%
                                
                                
                                Bohai’s
      machinery and vehicle
                                
                                $
                                586,000China
      Construction Bank
                                
                                May 12, 2008 to November 11,
      2009
                                
                                0.0000%
                                
                                
                                Personal guarantee by equity
      holders
                                
                                $
                                1,465,000TOTAL
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                5,860,000





10.       COMMON
STOCK





The
Company is authorized to issue 150 million shares of common stock, par value
$0.001 per share.  Holders of common stock are entitled to one vote
for each share held of record on each matter submitted to a vote of
shareholders.  Holders of common stock do not have a cumulative voting
right, which means that the holders of more than one half of the Company’s
outstanding shares of common stock, subject to the rights of the holders of
preferred stock, can elect all of our directors, if they choose to do
so.  In this event, the holders of the remaining shares of common
stock would not be able to elect any directors.  Subject to the prior
rights of any class or series of preferred stock which may from time to time be
outstanding, if any, holders of common stock are entitled to receive ratably,
dividends when, as, and if declared by the Company’s Board of Directors out of
funds legally available for that purpose and, upon our liquidation, dissolution,
or winding up, are entitled to share ratably in all assets remaining after
payment of liabilities and payment of accrued dividends and liquidation
preferences on the preferred stock, if any.  Holders of common stock
have no preemptive rights and have no rights to convert their common stock into
any other securities.  The outstanding common stock is duly authorized
and validly issued, fully-paid, and non-assessable.  Except as
required or permitted by law or the Company’s charter documents, all stockholder
action is taken by the vote of a majority of the outstanding shares of common
stock present at a meeting of stockholders at which a quorum consisting of a
majority of the outstanding shares of common stock is present in person or by
proxy.





On
December 17, 2009, prior to the reverse re-capitalization on January 5, 2010,
the Company issued 687,500 shares to Cawston Enterprises Limited and 450,000
shares to Regeneration Capital Group, LLC and its affiliates for consulting
services rendered to the Company.  As described in Note 2, for
accounting purposes, Chance High is deemed to have acquired the Company as of
January 5, 2010.  The fair value of these shares was accounted for by
the Company prior to its acquisition by Chance High and is not reflected in
these consolidated financial statements.





On
January 5, 2010, pursuant to the terms of the Share Exchange Agreement described
in Note 2, the Company 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 the Company.  In exchange, the Company issued to Chance High
Shareholders an aggregate of 13,162,500 newly issued shares of common stock, par
value $0.001 per share. In addition, pursuant to the terms of the Share Exchange
Agreement, Anthony Zaradic, the former President and Chief Executive Officer of
the Company, cancelled a total of 1,500,000 shares of Common Stock.





On April
1, 2010, Notes with an aggregate face amount of $500,000 were converted into
250,000 shares of Common Stock.





F-18





11.       EARNINGS
PER SHARE





Basic
earnings per share are 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 dilutive potential common shares outstanding during the
period using the if-converted method for the convertible notes and the treasury
stock method for warrants.  The following table sets forth the
computation of basic and diluted net income per common share:





As of
                  
                  
                  As ofJune 30,
                  
                  
                  June 30,2010
                  
                  
                  2009Net
      income from continuing operating available common
      stockholders
                  
                  $
                  9,488,192
                  
                  
                  $
                  7,947,900Effective
      Interest charge on convertible note
                  
                  
                  588,811
                  
                  
                  
                  -Net
      income for diluted earnings per common share
                  
                  $
                  10,077,003
                  
                  
                  $
                  7,947,900





As of
                  
                  
                  As ofJune 30,
                  
                  
                  June 30,2010
                  
                  
                  2009Basic
      weighted average common stocks outstanding
                  
                  
                  14,722,055
                  
                  
                  
                  13,162,500Effect
      of dilutive securities:Warrants
      - incremental shares based on  assumed proceeds &
      re-purchases
                  
                  
                  -
                  
                  
                  
                  -Common
      shares if converted form Convertible Debt
                  
                  
                  2,847,260
                  
                  
                  
                  -Diluted
      weighted average for common stocks outstanding
                  
                  
                  17,569,315
                  
                  
                  
                  13,162,500





Warrants
to purchase 6,600,000 shares of common stock were outstanding during the year
ended June 30, 2010, but were excluded from the computation of diluted earnings
per share as their effect would have been anti-dilutive.





For the
year ended June 30, 2009, there were no common stock equivalents outstanding;
therefore the amounts reported for basic and dilutive earning per share were the
same.





12.       OTHER
ACCRUED LIABILITIES





Other
accrued liabilities as of June 30, 2010 and 2009 are consisted of the
following:





As of
                        
                        
                        As ofJune 30,
                        
                        
                        June 30,2010
                        
                        
                        2009Accrued
      selling expenses
                        
                        $
                        1,542,280
                        
                        
                        $
                        1,677,026Accrued
      staff costs
                        
                        
                        221,810
                        
                        
                        
                        173,130Value
      added tax payable
                        
                        
                        686,478
                        
                        
                        
                        709,688Other
      taxes payable
                        
                        
                        78,370
                        
                        
                        
                        77,374Other
      accrued expenses
                        
                        
                        456,051
                        
                        
                        
                        198,454Total
      Other accrued liabilities
                        
                        $
                        2,984,988
                        
                        
                        $
                        2,835,672





*           Inter-company
balance of June 30, 2009 has been reclassified in order to conform with current
period’s presentation.





F-19




13.          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”), the
Company 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 (each, an “Investor Warrant”
and 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 Notes
bear interest at 8% per annum, payable quarterly in arrears on the last day of
each fiscal quarter of the Company. 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, par value
$0.001 per share, at a conversion price of $2.00 per share, subject to
adjustment as set forth in the Note. The 128 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, in the event the Company
issues or sells 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.





Effective
as of June 30, 2010, the Company entered into an Amendment and Agreement with
the Investors, pursuant to which the Company and the Investors agreed to make
certain amendments to the Notes and the Warrants.  Pursuant to the
Amendment, 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, the Company 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.  This Amendment did
not change the Company’s accounting for the Notes and the Warrants described
below.





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
the Company 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
the Company’s Common Stock that have been placed in escrow by the Company’s
principal stockholder. The shares in escrow will be returned to the principal
stockholder when 50% of the aggregate face amount of the Notes has been
converted or, if later, when the Notes are repaid.


F-20





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 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,
2010, $576,019 remained in escrow and is included in restricted
cash.





The
Company also entered into a Registration Rights Agreement with the Investors.
The Company 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 did not incur any registration
delay payments.





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 the Company to make complex and subjective judgments. The
Company estimated the value of its enterprise as of January 5, 2010 based on a
review of the enterprise value derived from the use of market and income
valuation approaches. The Company 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 the Company. The income approach was based on
applying discount rates to estimated future net income. The estimated enterprise
value was then allocated to the Company’s existing outstanding Common Stock, the
Notes and the Warrants using the 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
the Company.





Based on
the allocation of the estimated enterprise value, the Company 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 the
Company.  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.


F-21





Accounting
for Convertible Notes





At
January 5, 2010 and June 30, 2010, 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.
On March 31, 2010, an initial trade of 500 shares of the Common Stock occurred
in the market, the only trading activity during that period. The Notes can be
exercised only in whole but not in part and through March 31, 2010 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 128 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 stockholders’ 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 815-40-15-7I provides that
the embedded conversion options are not considered to be indexed only to the
Company’s 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 the Company 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 the Company 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..





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





Because
the Company’s functional currency is the Renminbi but the Warrants are
denominated in U.S. Dollars, the Warrants are not considered to be indexed only
to the Company’s 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 exercise price of the Warrants would be
reduced if the Company issued securities at a lower exercise or conversion
price. In accordance with ASC 815-10-S99-4, the Warrants (including the
Placement Agent Warrants) are accounted for at fair value, with changes in their
fair value charged or credited to income each period.


F-22





At
January 5, 2010, the Investor Warrants were valued at $5,824,538, as described
above. At June 30, 2010, the Investor Warrants were re-valued at $4,983,571
using a binomial model, based on the closing market price on that date of $2.21,
a term equal to the remaining life of the Warrants, an expected dividend yield
of 0%, a risk-free interest rate of 0.81% 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 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.





The
Placement Agent Warrants were initially valued at $582,454, as described above..
The cost of these instruments, together with the cash fees paid to the placement
agents and the other fees and expenses paid by the Company, 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, 2010, the Placement Agent Warrants were re-valued at
$498,357, based on the closing market price on that date of $2.21, a term equal
to the remaining life of the Warrants, an expected dividend yield of 0%, a
risk-free interest rate of 0.81% and estimated volatility of 65%. 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 the value of the Investor and Placement Agent Warrants
between January 5, 2010 and June 30, 2010 of $925,063 has been credited to
income.





The
following table summarizes all of the Company’s
warrants outstanding as of June 30, 2010:





Warrant
                    Shares
                  
                  
                  Exercisable
                    Shares
                  
                  
                  Exercise Price per
                    Common Stock RangeBalance,
      June 30, 2009
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Granted
      or vested during the year ended June 30,
    2010
                  
                  
                  6,600,000
                  
                  
                  
                  6,000,000
                  
                  
                  $
                  2.40Exercised
      during the year ended June 30, 2010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Expired
      during the year ended June 30, 2010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Balance,
      June 30, 2010
                  
                  
                  6,600,000
                  
                  
                  
                  6,000,000
                  
                  
                  $
                  2.40





The
following table summarizes the weighted average remaining contractual life and
exercise price of the Company’s outstanding warrants.




Warrants OutstandingNumber
                                  
                                  
                                  Weighted
                                  
                                  
                                  Weighted AverageOutstanding
                                  
                                  
                                  Average
                                  
                                  
                                  Exercise Price ofNumber
                                  
                                  
                                  Currently
                                  
                                  
                                  Remaining
                                  
                                  
                                  WarrantsExercise
                                  
                                  
                                  Outstanding
                                  
                                  
                                  Exercisable
                                  
                                  
                                  Contractual Life
                                  
                                  
                                  currentlyPrice
                                  
                                  
                                  at June 30, 2010
                                  
                                  
                                  at June 30, 2010
                                  
                                  
                                  (Years)
                                  
                                  
                                  exercisable$
                                  2.40
                                  
                                  
                                  
                                  6,600,000
                                  
                                  
                                  
                                  6,000,000
                                  
                                  
                                  
                                  2.52
                                  
                                  
                                  $
                                  2.40





Convertible
Notes





The
Investor Warrants were initially recorded at their fair value of $5,824,538 and
the remainder of the $12,000,000 gross proceeds received from the Investors of
$6,175,463 was allocated to the Notes. Based on the proceeds allocated to the
Notes, the Notes are convertible into Common Stock at an effective conversion
price of approximately $1.03 per share. Because the effective conversion price
is less than the fair value of the Common Stock at the time the Notes were
issued, the Company recognized a beneficial conversion feature, which was
limited to the amount of proceeds allocated to the Notes of $6,175,463. The
Notes were initially recorded at a carrying value of zero and are being
amortized, together with interest accruing on the Notes, to their maturity value
over the period to maturity, at an effective interest rate of approximately 540%
per annum. Interest expense for the year ended June 30, 2010 was $588,811. On
April 1, 2010, Notes with an aggregate face amount of $500,000 were converted
into 250,000 shares of Common Stock. After allocating of interest credit of
$7,326 to equity resulting from 250,000 converted shares and payment of cash
interest due on March 31, 2010 and June 30, 2010 of $456,667, the amortized cost
carrying value of the Notes at June 30, 2010 was $124,820.


F-23





Escrowed
Shares





As of
January 5, 2010 and at June 30, 2010, the Company’ s principal stockholder 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). The fair value of
this obligation is not considered to be material as the probability of such
events occurring is currently considered to be minimal. Accordingly, at January
5, 2010 and June 30, 2010, no liability for this obligation has been
recognized.





14.           DEFERRED
FEES ON CONVERTIBLE NOTES





The
Company incurred total placement fees of $2,152,454 in connection with our
private placement of Convertible Notes (see Note 13) 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.





As of
                            
                            
                            As ofJune 30,
                            
                            
                            June 30,2010
                            
                            
                            2009Deferred
      fees, beginning balance on January 5, 2010
                            
                            $
                            2,152,454
                            
                            
                            $
                            -Transferred
      to equity on conversion
                            
                            
                            (79,120
                            )
                            
                            
                            -Amortization
      of deferred fees
                            
                            
                            (510,717
                            )
                            
                            
                            -Deferred
      fee, ending balance
                            
                            $
                            1,562,617
                            
                            
                            $
                            -





15.          SELLING,
GENERAL AND ADMINISTRATIVE EXPENSE





Selling,
general and administrative expenses for the years ended June 30, 2010 and 2009
are consisted, of the followings:





Year ended
                        
                        
                        Year endedJune 30,
                        
                        
                        June 30,2010
                        
                        
                        2009Accommodation
                        
                        $
                        4,215,298
                        
                        
                        $
                        5,151,876Advertising
      and promotion
                        
                        
                        13,237,648
                        
                        
                        
                        10,959,424Audit
      fee
                        
                        
                        40,073
                        
                        
                        
                        8,937Commissions
                        
                        
                        4,092,716
                        
                        
                        
                        1,419,478Conferences
                        
                        
                        4,010,143
                        
                        
                        
                        5,089,283Depreciation
                        
                        
                        37,726
                        
                        
                        
                        20,514Staff
      costs
                        
                        
                        2,034,566
                        
                        
                        
                        1,536,496Travel
                        
                        
                        2,264,489
                        
                        
                        
                        2,755,259Research
      and development cost
                        
                        
                        440,931
                        
                        
                        
                        293,000Other
      operating expenses
                        
                        
                        5,879,485
                        
                        
                        
                        4,112,872Total
      selling, general and administrative expense
                        
                        $
                        36,253,075
                        
                        
                        $
                        31,347,139


F-24





16.          INTEREST
EXPENSES





Year ended
                          
                          
                          Year endedJune 30,
                          
                          
                          June 30,2010
                          
                          
                          2009Interest
      on short-term bank borrowings wholly repayable within one
    year
                          
                          $
                          337,424
                          
                          
                          $
                          184,404Effective
      interest charge on Convertible Notes
                          
                          
                          588,811
                          
                          
                          
                          -Total
      interest expenses
                          
                          $
                          926,235
                          
                          
                          $
                          184,404





17.           INCOME
TAXES





For the
years ended June 30, 2010 and 2009, income tax expense consisted of the
following:





Year
      ended
                      
                      
                      Year
      endedJune
      30,
                      
                      
                      June
      30,2010
                      
                      
                      2009Current
      taxesUnited
      States
                      
                      $
                      -
                      
                      
                      $
                      -PRC
                      
                      
                      2,973,289
                      
                      
                      
                      1,906,985Deferred
      taxesUnited
      States
                      
                      
                      (308,406
                      )
                      
                      
                      (15,411
                      )PRC
                      
                      
                      -
                      
                      
                      
                      -Change
      in valuation allowance
                      
                      
                      308,406
                      
                      
                      
                      15,411Total
      income tax expenses
                      
                      $
                      2,973,289
                      
                      
                      $
                      1,906,985





As of
June 30, 2010, the Company incurred $907,077 of net operating losses carry
forwards available for federal tax purposes that may be used to offset future
taxable income and will begin to expire in 2029, if unutilized. The Company has
provided for a full valuation allowance against the deferred tax assets of
$308,406 on the expected future tax benefits from the net operating loss carry
forwards as the management believes it is more likely than not that these assets
will not be realized in the future.


F-25





PRC Tax





PRC’s
legislative body, the National People’s Congress, adopted the unified Enterprise
Income Tax (“EIT”) Law on March 16, 2007. This new tax law replaces the existing
separate income tax laws for domestic enterprises and foreign-invested
enterprises and became effective on January 1, 2008. Under the new tax law, a
unified income tax rate is set at 25% for both domestic enterprises and
foreign-invested enterprises. However, there will be a transition period for
enterprises, whether foreign-invested or domestic, that are currently receiving
preferential tax treatments granted by relevant tax authorities. Enterprises
that are subject to an enterprise income tax rate lower than 25% may continue to
enjoy the lower rate and will transit into the new rate over a five year period
beginning on the effective date of the EIT Law. Enterprises that are currently
entitled to exemptions for a fixed term may continue to enjoy such treatment
until the exemption term expires. Preferential tax treatments may continue to be
granted to industries and projects that qualify for such preferential treatments
under the new law.





United States
Tax





The
Company is subject to income tax in the United States. No provision for income
tax in the United States has been made as the Company had no taxable income for
the year ended June 30, 2010. The statutory tax rate is 34%.





The table
below summarizes the differences between the U.S. statutory federal rate and the
Company’s effective tax rate and as follows for the years ended June 30, 2010
and 2009:





Year
      ended
                                
                                
                                Year
      endedJune
      30,
                                
                                
                                June
      30,2010
                                
                                
                                2009United
      States Tax at statutory rate
                                
                                $
                                4,236,906
                                
                                
                                $
                                3,350,661Foreign
      tax rate difference
                                
                                
                                (1,199,091
                                )
                                
                                
                                (891,019
                                )Net
      operating loss carry forward
                                
                                
                                292,995
                                
                                
                                
                                15,411Additional
      income tax expense resulted from prior year’s tax
    assessment
                                
                                
                                81,567
                                
                                
                                
                                -Permanent
      difference
                                
                                
                                (439,088
                                )
                                
                                
                                (568,068
                                )Income
      tax expense
                                
                                $
                                2,973,289
                                
                                
                                $
                                1,906,985





The
Company’s deferred tax assets as of June 30, 2010 and 2009 are as
follows:





June 30,2010
                  
                  
                  2009Deferred
      tax asset:Net
      operating loss carry forward
                  
                  $
                  308,406
                  
                  
                  $
                  15,411Total
      gross deferred tax asset
                  
                  
                  308,406
                  
                  
                  
                  15,411Less:
      valuation allowance
                  
                  
                  (308,406
                  )
                  
                  
                  (15,411
                  )Net
      deferred tax asset
                  
                  $
                  -
                  
                  
                  $
                  -





During
2010, the valuation allowance increased by approximately $292,995.





VAT





Certain
of the Company’s revenues (including sales revenue) are subject to output VAT
generally calculated at 6%, 13% and 17% of the selling price. Input credit
relating to input VAT paid on purchase can be used to offset the output
VAT.


F-26





Year ended
                      June 30,
                      2010
                    
                    
                    Year ended
                      June 30,
                      2009Net
      value added tax expenses
                    
                    $
                    8,674,186
                    
                    
                    $
                    7,443,011





18.           COMMITMENTS
AND CONTINGENCIES





As of
June 30, 2010, the Company has commitments to purchase land use right for future
factory expansion. The purchase price is approximately $14,320,100 (RMB
97,500,000). As of June 30, 2010, the Company has prepaid for approximately
$7,343,700 (RMB 50,000,000), which is included in Prepayment for Land Use Right
on the consolidated balance sheets, the remaining balance of $6,976,400 (RMB
47,500,000) as of June 30, 2010 will be paid by March 31, 2011.





There are
no other foreseeable material commitments
or contingencies as of June 30, 2010 and 2009.





19.           SIGNIFICANT
CONCENTRATIONS





(a)           Customer Concentrations





The
Company does not have concentrations of business with each customer constituting
greater than 10% of the Company’s gross sales for the years ended June 30, 2010
and 2009.








The
Company has not experienced any significant difficulty in collecting its
accounts receivable in the past and is not aware of any financial difficulties
being experienced by its major customers.





(b)           Supplier Concentrations





The
Company has the following concentrations of business with each supplier
constituting greater than 10% of the Company’s purchase:





Year ended
                            June 30,
                            2010
                          
                          
                          Year ended
                            June 30,
                            2009Shandong
      Yantai Medicine Procurement and Supply Station
                          
                          
                          13.5
                          %
                          
                          
                          *Anhui
      DeChang Pharmaceutical Co. Ltd.
                          
                          
                          11.9
                          %
                          
                          
                          15.2
                          %Yantai
      Tianyifeng Science and Technology Development Co., Ltd.
                          
                          
                          *
                          
                          
                          
                          10.8
                          %*           Constitutes
      less than 10% of the Company’s purchase.





20.           STATUTORY
RESERVES





According
to the laws and regulations in the PRC, the Company is 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.


F-27


The
Company in PRC is required to allocate at least 10% of its 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.  The Company had satisfied statutory
reserve requirement in the first quarter of the fiscal year 2010.





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





21.          RECLASSIFICATION





Certain
comparative figures have been reclassified in order to conform with the current
period’s presentation.





22.          SUBSEQUENT
EVENTS





The
Company has performed an evaluation of subsequent events through the date of
these financial statements are 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,
2010.





Bohai
      Pharmaceuticals Group, Inc.By:
              /s/ Hongwei QuName:
      Hongwei QuTile:
      President and Chief Executive Officer(Principal
      Executive Officer)By:
              /s/ Gene HsiaoName:
      Gene HsiaoTile:
      Chief Financial Officer(Principal
      Financial Officer)





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 QuHongwei
      Qu
                          
                          Chief
      Executive Officer and Chairman
                          
                          September
      28, 2010/s/ Chengde Wang
                          
                          Director
                          
                          September
      28, 2010Chengde
      Wang/s/ Louis A. Bevilacqua,
    Esq.
                          
                          Director
                          
                          September
      28, 2010Louis
      A. Bevilacqua, Esq./s/
      Adam Wasserman
                          
                          Director
                          
                          September
      28, 2010Adam
      Wasserman