UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





(Mark
One)





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





For the
fiscal year ended:June 30,
2009





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





For the
transition period from _____ to _____





Commission
file number:333-86347





JIANGBO
PHARMACEUTICALS, INC.


(Name of
small business issuer in its charter)





Florida
                
                65-1130026(State or other jurisdiction of incorporation or
                  organization)
                
                (IRS Employer Identification No.)





Middle Section, Longmao
Street, Area A, Laiyang Waixiangxing Industrial Park


Laiyang City, Yantai,
Shandong Province, People’s Republic of China 265200


(Address
of principle executive offices)





(0086)
535-7282997


(Issuer's
telephone number)





Securities
registered under Section 12(b) of the Exchange Act:


None





Securities
registered under Section 12(g) of the Exchange Act:


Common Stock, $0.001 Par
Value





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





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





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such report(s)), and (2) has been subject to such filing requirements
for the past 90 days. YesxNo  ̈





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





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




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





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based upon the closing sale price of the
registrant’s common stock on December 31, 2008 as reported on the OTC Bulletin
Board was approximately $18.2 million (4,844,009 shares at $3.75). Approximately
4,880,460 shares of common stock held by each officer and director and by each
person who owns 10% or more of the outstanding common stock have been excluded
because such persons may be deemed to be affiliates.





The
number of outstanding shares of the registrant’s common stock on September 24,
2009 was 11,142,046.









TABLE
OF CONTENTS





PART
      IItem
      1.
                  Description
      of Business
                  
                  3Item
      1A
                  Risk
      Factors
                  
                  17Item
      1B
                  Unresolved
      Staff Comments
                  
                  36Item
      2.
                  Description
      of Property
                  
                  36Item
      3.
                  Legal
      Proceedings
                  
                  37Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  
                  37PART
      IIItem
      5.
                  Market
      for Common Equity , Related Stockholder Matters and Issuer Purchases of
      Equity Securities
                  
                  38Item
      6.
                  Selected
      Financial Data
                  
                  39Item
      7.
                  Management's
      Discussion and Analysis or Plan of Operation
                  
                  40Item
      7A.
                  Quantitative
      and Qualitative Disclosures and Market Risk
                  
                  57Item
      8.
                  Financial
      Statement and Supplementary Data
                  
                  57Item
      9.
                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  
                  57Item
      9A.
                  Controls
      and Procedures
                  
                  57Item
      9B
                  Other
      Information
                  
                  60PART
      IIIItem 10. Directors, Executive
      Officers, Promoters and Control Persons; Compliance with Section 16(a) of
      the Exchange Act
                  
                  60Item 11. Executive
      Compensation
                  
                  65Item 12. Security Ownership of
      Certain Beneficial Owners and Management and Related Shareholder
      Matters
                  
                  69Item 13. Certain Relationships
      and Related Transactions, and Director Independence
                  
                  71Item 14. Principal Accountant
      Fees and Services
                  
                  73PART
      IVItem 15. Exhibits and Financial
      Statement Schedules
                  
                  74SIGNATURES
                  
                  77EXHIBIT INDEXFINANCIAL STATEMENTS AND
      SUPPLEMENTARY DATA




2





CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION





Certain
statements in this annual report on Form 10K contain or may contain
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived
utilizing numerous assumptions and other factors that could cause our actual
results to differ materially from those in the forward-looking statements. These
factors include, but are not limited to, economic, political and market
conditions and fluctuations, government and industry regulation, interest rate
risk, global competition, and other factors as relate to our doing business
within the People's Republic of China. Most of these factors are difficult to
predict accurately and are generally beyond our control. You should consider the
areas of risk described in connection with any forward-looking statements that
may be made herein. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report.
Readers should carefully review this annual report in its entirety, including
but not limited to our financial statements and the notes thereto and the risks
described in "Item 1. Description of Business—Risk Factors." Except for our
ongoing obligations to disclose material information under the Federal
securities laws, we undertake no obligation to release publicly any revisions to
any forward-looking statements, to report events or to report the occurrence of
unanticipated events.





When used
in this annual report, the terms the "Company," "Jiangbo," "JGBO," "we," "us,"
"our," and similar terms refer to Jiangbo Pharmaceuticals, Inc., a Florida
corporation, and our subsidiaries. The information which appears on our website
www.jiangbopharma.com is not part of this report.




PART I





ITEM
1. DESCRIPTION OF BUSINESS





Jiangbo
Pharmaceuticals, Inc. is a holding company incorporated in Florida with its
principal place of business in the People’s Republic of China (the “PRC”). We
operate, control and beneficially own the pharmaceutical business of Laiyang
Jiangbo. Laiyang Jiangbo researches, develops, manufactures, markets and sells
pharmaceutical products and health supplements in the PRC. From our inception in
2001 until our acquisition of Karmoya International Ltd. (“Karmoya”) in October
2007, we were a business development and marketing firm specializing in advising
and providing turn-key solutions for Chinese small and mid-sized companies
entering Western markets.





On July
27, 2008, our board of directors and the majority holders of our capital stock
approved a one-for-forty reverse stock split of our common stock. On August 29,
2008, we received confirmation from the Department of the State of Florida that
the Articles of Amendment to the Amended and Restated Articles of Incorporation
(“August 2008 Amended Articles of Incorporation”) to effect a reverse stock
split was duly filed and on September 3, 2008, the reverse stock split was
effectuated. Following the reverse stock split, the total number of shares of
our common stock outstanding was reduced from 412,986,078 shares to
approximately 10,325,000 shares and the maximum number of shares of common stock
that the Company is authorized to issue was also reduced from 900,000,000 to
22,500,000. Our financial statements have been retroactively adjusted to reflect
the reverse split. Additionally, all share representations are on a post-split
basis hereinafter.




Pursuant
to a Certificate of Amendment to our Amended and Restated Articles of
Incorporation filed with the Department of State of the State of Florida which
took effect as of April 16, 2009, our name was changed from "Genesis
Pharmaceuticals Enterprises, Inc." to "Jiangbo Pharmaceuticals, Inc." (the
"Corporate Name Change").  The Corporate Name Change was approved and
authorized by our Board of Directors as well as our holders of a majority of the
outstanding shares of voting stock by written consent.




3




As a
result of the Corporate Name Change, our stock symbol changed to "JGBO" with the
opening of trading on May 12, 2009 on the OTCBB.




Corporate
Structure





The
following diagram illustrates our current corporate structure:











CONTRACTUAL
ARRANGEMENTS WITH LAIYANG JIANGBO AND ITS SHAREHOLDERS





Our
relationships with Laiyang Jiangbo and its shareholders are governed by a series
of contractual arrangements primarily between two entities associated with our
wholly owned subsidiary Karmoya: (1) GJBT, Karmoya’s wholly foreign owned
enterprise in PRC, and (2) Laiyang Jiangbo, Karmoya’s operating company in PRC.
Under PRC laws, each of GJBT and Laiyang Jiangbo is an independent legal person
and neither of them is exposed to liabilities incurred by the other party. The
contractual arrangements constitute valid and binding obligations of the parties
of such agreements. Each of the contractual arrangements, as amended and
restated, and the rights and obligations of the parties thereto are enforceable
and valid in accordance with the laws of the PRC. Other than pursuant to the
contractual arrangements described below, Laiyang Jiangbo does not transfer any
other funds generated from its operations to any other member of the LJ Group.
On September 21, 2007, we entered into the following contractual arrangements
(collectively, the “LJ
Agreements”):





Consulting Services
Agreement. Pursuant to the exclusive consulting services agreement
between GJBT and Laiyang Jiangbo, GJBT has the exclusive right to provide to
Laiyang Jiangbo general consulting services related to pharmaceutical business
operations, as well as consulting services related to human resources and
technological research and development of pharmaceutical products and health
supplements (the “Services”). Under this
agreement, GJBT owns the intellectual property rights developed or discovered
through research and development while providing the Services for Laiyang
Jiangbo. Laiyang Jiangbo pays a quarterly consulting service fee in Chinese
Renminbi (“RMB”) to GJBT that is equal to
all of Laiyang Jiangbo's revenue for such quarter.




4





Operating Agreement.
Pursuant to the operating agreement among GJBT, Laiyang Jiangbo and the
shareholders of Laiyang Jiangbo who collectively hold 100% of the outstanding
shares of Laiyang Jiangbo (collectively, the “Laiyang Shareholders”), GJBT provides guidance
and instructions on Laiyang Jiangbo's daily operations, financial management and
employment issues. The Laiyang Shareholders must appoint the candidates
recommended by GJBT as members of Laiyang Jiangbo's board of directors. GJBT has
the right to appoint senior executives of Laiyang Jiangbo. In addition, GJBT
agrees to guarantee Laiyang Jiangbo's performance under any agreements or
arrangements relating to Laiyang Jiangbo's business arrangements with any third
party. Laiyang Jiangbo, in return, agrees to pledge its accounts receivable and
all of its assets to GJBT. Moreover, Laiyang Jiangbo agrees that without the
prior consent of GJBT, Laiyang Jiangbo will not engage in any transactions that
could materially affect the assets, liabilities, rights or operations of Laiyang
Jiangbo, including, but not limited to, 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. The term of this agreement is ten (10) years from September 21,
2007 unless early termination occurs in accordance with the provisions of the
agreement and may be extended only upon GJBT's written confirmation prior to the
expiration of the this agreement, with the extended term to be mutually agreed
upon by the parties.





Equity Pledge
Agreement. Pursuant to the equity pledge agreement among GJBT, Laiyang
Jiangbo and the Laiyang Shareholders, the Laiyang Shareholders pledged all of
their equity interests in Laiyang Jiangbo to GJBT to guarantee Laiyang Jiangbo's
performance of its obligations under the consulting services agreement. If
either Laiyang Jiangbo or any of the Laiyang Shareholders breaches its
respective contractual obligations, GJBT, as pledgee, will be entitled to
certain rights, including the right to sell the pledged equity interests. The
Laiyang Shareholders also granted GJBT an exclusive, irrevocable power of
attorney to take actions in the place and stead of the Laiyang Shareholders to
carry out the security provisions of the equity pledge agreement and take any
action and execute any instrument that GJBT may deem necessary or advisable to
accomplish the purposes of the equity pledge agreement. The Laiyang Shareholders
agreed, among other things, not to dispose of the pledged equity interests or
take any actions that would prejudice GJBT's interest. The equity pledge
agreement will expire two (2) years after Laiyang Jiangbo obligations under the
exclusive consulting services agreement have been fulfilled.





Option Agreement.
Pursuant to the option agreement among GJBT, Laiyang Jiangbo and the Laiyang
Shareholders, the Laiyang Shareholders irrevocably granted GJBT or its
designated person an exclusive option to purchase, to the extent permitted under
PRC law, all or part of the equity interests in Laiyang Jiangbo for the cost of
the initial contributions to the registered capital or the minimum amount of
consideration permitted by applicable PRC law. GJBT or its designated person has
sole discretion to decide when to exercise the option, whether in part or in
full. The term of this agreement is ten (10) years from September 21, 2007
unless early termination occurs in accordance with the provisions of the
agreement and may be extended only upon GJBT's written confirmation prior to the
expiration of the this agreement, with the extended term to be mutually agreed
upon by the parties.





Proxy Agreement.
Pursuant to the proxy agreement among GJBT and the Laiyang Shareholders, the
Laiyang Shareholders agreed to irrevocably grant and entrust all the rights to
exercise their voting power to the person(s) appointed by GJBT. GJBT may from
time to time establish and amend rules to govern how GJBT shall exercise the
powers granted to it by the Laiyang Shareholders, and GJBT shall take action
only in accordance with such rules. The Laiyang Shareholders shall not transfer
their equity interests in Laiyang Jiangbo to any individual or company (other
than GJBT or the individuals or entities designated by GJBT). The Laiyang
Shareholders acknowledged that they will continue to perform this agreement even
if one or more than one of them no longer hold the equity interests of Laiyang
Jiangbo. This agreement may not be terminated without the unanimous consent of
all of the parties, except that GJBT may terminate this agreement by giving
thirty (30) days prior written notice to the Laiyang Shareholders.





5




LAIYANG
JIANGBO PHARMACEUTICAL CO., LTD.





As
discussed above, our operations are conducted through Laiyang Jiangbo
Pharmaceutical Co., Ltd., (“Laiyang Jiangbo”) a limited liability company
headquartered in the PRC and organized under the laws of PRC (“Laiyang Jiangbo”). Laiyang Jiangbo was
organized on August 18, 2003, and its fiscal year end is June
30.





PRINCIPAL
PRODUCTS OR SERVICES





Laiyang
Jiangbo is engaged in research, development, production, marketing and sales of
pharmaceutical products. It is located in East China in an Economic Development
Zone in Laiyang City, Shandong province, and is one of the major pharmaceutical
companies in China producing tablets, capsules, granules, syrup and electuary
for both Western medical drugs and Chinese herbal-based medical drugs.
Approximately 35% of its current products are Chinese herbal-based drugs and 65%
are Western medical drugs. Laiyang Jiangbo has several Certificates of Good
Manufacturing Practices for Pharmaceutical Products (GMP Certificates) issued by
the Shandong State Drug Administration (SDA) and currently produces thirteen
types of drugs.





Laiyang
Jiangbo’s top four products in fiscal 2009 include Clarithromycin
sustained-release tablets, Itopride Hydrochloride granules, Baobaole Chewable
tablets and Radix Isatidis Disperable tablets and they accounted for
approximately 96% of the Company’s total revenue in fiscal 2009.





Drug
Development and Production





Development
and production of pharmaceutical products is Laiyang Jiangbo’s largest and most
profitable business. Its principal pharmaceutical products include:




Western
Pharmaceutical Products





Clarithromycin
sustained-release tablets





Clarithromycin
sustained-release tablets, Chinese Drug Approval Number H20052746, are
semi-synthetic antibiotics for curing Clarithromycin sensitive microorganism
infections. Laiyang Jiangbo is one of only two domestic Chinese pharmaceutical
companies that has the technology to manufacture and actively produce
and sell this drug. The Company’s sales of this drug were approximately RMB282.3
million (US $41.4 million) with gross margin over 71% in fiscal 2009, with
approximately 45% of the market share in China for this type of
drug.





Clarithromycin
is the second generation of macrolide antibiotic and replaces the older
generation of Erythromycin. Clarithromycin first entered the pharmaceutical
market in Ireland in 1989, and as of 2007, it is one of thirty medicines which
generate the greatest sales revenue all over the world. Chemically,
Clarithromycin has a wider antimicrobial spectrum and longer duration of acid
resistance. Its activity is 2 to 4 times better than Erythromycin, but the
toxicity is 2-12 times lower. The product was in its growth period in 2007 and
2008 and entered into its maturity in later part of fiscal 2008. The Company
anticipates the product will stay in the maturity period through fiscal 2011 and
gradually enters into its declining period starting in later part of fiscal year
2011. During the growth period, the product had an over 35 % annual sales
growth. The Company expects the annual sales for this product to remain
materially consistent with minimal growth in its maturity. Once Clarithromycin
reaches its declining period, the sale of this product may experience up to
10-15 % decline on an annual basis. Factors such as extended Chinese SFDA
approval time might extend this product’s life in its maturity as it will be
less likely for other similar products and new competitors to enter into the
market. If Clarithromycin is distributed in more Chinese provincial or national
drug reimbursement lists, it is likely that the market share for this product
will increase. In the event that the Chinese government imposes pricing control
on this product, the profit margin on this product may decrease and as a result,
the net profit generated from this product may decline accordingly.




6





Clarithromycin
sustained-release tablets utilize sustained-release technology, which requires a
high degree of production technology. Because of the high degree of technology
required to produce this product, PRC production requirements are very strict
and there are very few manufacturers who gain permission to produce this
product. Therefore, there is a significant barrier to entry in the PRC market.
Currently, our Clarithromycin sustained-release tablets are the one of the
leading products in the PRC domestic antibiotic sustained-release tablets
market. Our goal is to maintain our current market share for this
product.





Itopride
Hydrochloride granules





Itopride
Hydrochloride granules, Chinese Drug Approval Number H20050932, are a stomach
and intestinal drug for curing digestive system-related diseases. The Company’s
sales for this drug reached RMB 227.5 million (US $33.3 million) with gross
margin over 84% in the fiscal year 2009, and the Company has approximately
10-12% of the market share in China for this type of drug. This product is
widely regarded for its pharmacological properties, i.e., rapid absorption,
positive clinical effects, and few side effects. Based on clinical observation,
it has been shown that Itopride Hydrochloride granules can improve 95.1% of
gastrointestinal indigestion symptoms.





Itopride
Hydrochloride granules are the fourth generation of gastrointestinal double
dynamic medicines, which are used for curing most symptoms due to functional
indigestion. The older generations are Metoclopramide Paspertin, Domperidone and
Cisapride.





Itopride
Hydrochloride granules are SDA-approved and entered the PRC pharmaceutical
market in June 2005. Since 2005, Laiyang Jiangbo has seized the opportunity
presented by this product by rapidly establishing a domestic sales network and
developing the market for this product. The product was in its growth period in
2006 and 2007 and entered into its maturity in 2008. The Company anticipates the
product will stay in the maturity period through 2010 and gradually enters into
its declining period starting in fiscal year 2011. During the growth period, the
product had average 10 to 15 % annual sales growth. Once the product enters into
its maturity, the Company expects the sales for this product will remain flat
with minimal growth. As the product enters into its declining period, the
product sales may experience up to 20% decline on an annual
basis.  Factors such as extended Chinese SFDA approval time might
extend this product’s life in its maturity as it will be less likely for new
competitors to enter into the market. If Itopride Hydrochloride is distributed
in more Chinese provincial or national drug reimbursement lists, it is likely
that the market share for this product will increase. In the event that the
Chinese government imposes pricing control on this product, the profit margin on
this product may decrease and as a result, the net profit generated from this
product may decline accordingly.





The
Company currently faces the competition from two other famous stomach medicines,
namely Dompendone Tablets and Vitamin U Belladonna and Aluminum Capsules II. The
Company plans to continue utilizing its nationwide sales network in China to
strength its sales effort for this product and the goal is to maintain the
current market share and profit margin for this product.





Ciprofloxacin
Hydrochloride tablets





Ciprofloxacin
Hydrochloride tablets, Chinese Drug Approval Number H37022737, are an antibiotic
drug used to cure infection caused by bacteria. Although the Company generated
more than 50% of its revenue from this product in the fiscal year 2004, as other
companies entered into the production market, the Company began experiencing a
significant decrease in sales and profits from this product in the fiscal year
2007. The drug accounted for less than 1% of the Company’s revenue in the fiscal
year 2009. The drug is included in the recently announced China’s Essential Drug
List. As both the sales volume and profit are thin for this product, the Company
is not actively promoting this product and only continues to produce
Ciprofloxacin Hydrochloride tablets to support the Company’s product variety and
brand name.





7





Paracetamol
tablets





Paracetamol
tablets, Chinese Drug Approval Number H37022733, are a nonprescription analgesic
drug, mainly used for curing fever due to common flu or influenza. It is also
used for relief of aches and pains. The Company’s sales for this drug
was  less than 1% of the total revenue in the fiscal year 2009 .
Laiyang Jiangbo is authorized by the PRC Ministry of Health to be an appointed
producer of common antibiotics in Jiangsu Province, Guangdong Province, Zhejiang
Province, Fujian Province, Shandong Province and Guangxi Province. Paracetamol
tablets are one of PRC’s national A-level Medicare medicines. This product was
commercially launched in the Chinese market in July 2004. The drug is included
in the recently announced China’s Essential Drug List. As the sales volume and
profit both significantly decreased in recent years, the Company will only
produce this product under customers’ special requests.





Chinese
herbal-based Pharmaceutical Products





Baobaole
Chewable tablets





Baobaole
Chewable tablets, Chinese Drug Approval Number Z20060294 formally entered the
market in November 2007. Baobaole Chewable tablets are nonprescription over-the
counter drugs for gastric cavity aches. This drug stimulates the appetite and
promotes digestion. Baobaole is used to cure deficiencies in the spleen and
stomach, abdomen aches, loss of appetite, and loose bowels. Its effects are mild
and lasting. The drug has quickly gained its popularity in the market and the
sales for this drug has grown at a fast pace since its initial
introduction.





The
Company’s sales for Baobaole Chewable tablets was approximately RMB 205.9
million (US $30.2 million) with gross margin over 80% in the fiscal year 2009.
The product quickly went through its growth period in fiscal 2008 and 2009. The
Company anticipates the product will enter into its maturity period in the
fiscal year 2010 and approach its declining period in later part of the fiscal
year  2012. Once the product enters into its maturity, the Company
expects the sales for this product will have less than 5% annual growth. As the
product enters into its declining period, the product sales may experience up to
5-10 % decline on an annual basis and the profit margin may decrease up to 10%
during its declining period. Factors such as extended Chinese SFDA approval time
might extend this product’s life in its maturity as it will be less likely for
new competitors to enter into the market.





The
Company intend to strengthen its sales and marketing effort for this
product  and sustain the product’s sales growth.





Radix
Isatidis Disperable Tablet





Radix
Isatidis Disperable Tablets, Chinese Drug Approval Number Z20080142,
nonprescription Traditional Chinese Medicine, is used to cure virus influenza
and sour throat. It clears away heat, detoxifies and promote pharynx. Laiyang
Jiangbo is the only company that owns the product’s manufacturing technology in
China. The research study indicates Radix Isatidisthe’s ingredients included
Indole, hapoxanthineuraci, quina-alkaloids, amino acid, etc., have
anti-inflammation and anti-virus effects.  The Company’s sales for
this drug was approximately RMB 56.7 million (US $ 8.3 million) with gross
margin over 76% in 2009.




Compared
with similar existing Radix Isatidis products, Radix Isatidis Disperable Tablet
utilizes the new disperable tablet formula, which is convenient to take and fast
to dissolve. It is also easy to absorb and has high stability. The product was
first commercially launched in October 2008 and the market demand for this
product has continued to grow since. The Company anticipates the product sales
will continue to grow through the fiscal year 2013 and reach its maturity in the
year 2014. The Company plans to continue promoting this drug through advertising
and various promotional activities and believes that these activities will
strengthen the product and brand-name recognition, a major driver of the
historical popularity of the drug.




8





New
Compound Foliumisatidis Tablets





New Compound Foliumisatidis Tablet
addresses influenza symptoms and includes both westernchemical
ingredients and traditional Chinese herbs. This is a well known essential drug
for Chinese family. The Company owns this product as a result of the acquisition
of Shandong Hongrui Pharmaceutical Factory, which was completed in February
2009.





Laiyang
Pear Cough Syrup




Laiyang Pear Cough Syrup helps relieve
coughs arising from colds and other illnesses. Market feedback has shown that
children like its fresh pear taste. The Companyplans to promote Laiyang
Pear Couch Syrup through direct-to-consumer advertising, including television
commercial campaigns. We believe that these advertisements will strengthen our
brand loyalty, a major driver of the historical popularity of the drug. The
Company owns this product as a result of the acquisition of Shandong Hongrui
Pharmaceutical Factory, which was completed in February 2009.





Kang
Gu Sui Yan Pian





Kang Gu
Sui Yan Pian (osteomyelitis treatment tablets) is used to treat bone and bone
marrow inflammations.  It’s a 100% herb-based traditional Chinese
medicine. Most osteomyelitis patients currently use chemical drugs such as
antibiotics for treatment which may develop drug resistance if the chemical
drugs are taken over a long period of time. Chronic patients are also likely to
need surgery which is a less preferable treatment for patients in China. Laiyang
Jiangbos’ osteomyelitis tablets offer an alternative mild treatment and was
clinically tested to be effective in treating long term osteomyelitis problems.
Laiyang Jiangbo is the exclusive manufacturer of this product in China. The Companyownsthis product as a result of the
acquisition ofShandong
Hongrui Pharmaceutical Factory, which wascompleted in February
2009.





Gan
Mao Zhi Ke Ke Li





Gan Mao
Zhi Ke Ke Li, an antipyretic and antitussive granule that helps to relieve cold
and flu symptoms such as fever, headache, rhinocleisis, cough, throat pain and
phlegm. It is used in a large number of China's hospitals and clinics and is
popular with consumers. The drug is included in the recently announced China’s
Essential Drug List and more hospitals and clinics are expect to carry this
product, making it even more widely available to consumers and more consumers to be reimbursed for the cost
of purchasing this product. The Company owns this product as a result of
the acquisition of Shandong Hongrui Pharmaceutical Factory, which was completed
in February 2009.





Yi
Mu Cao Gao





Yi Mu Cao Gao , is used to treat
dysmenorrhoea, oligminorrhea and postpartum abdominal pain.The drug is
included in the recently announced China’s Essential Drug List and more
hospitals and clinics are expect to carry this product, making it even more
widely available to consumers and more consumers to be reimbursed for the cost
of purchasing this product. The Company owns this product as a result of
the acquisition of Shandong Hongrui Pharmaceutical Factory, which was completed
in February 2009.





Ban
Lan Gen Ke Li





Ban Lan
Gen Ke Li is an herbal-based traditional Chinese medicine used to cure viral
influenza. The drug is included in the recently announced China’s Essential Drug
List and more hospitals and clinics are expect to carry this product, making it
even more widely available to consumers and more consumers to be reimbursed for the cost
of purchasing this product. The Company owns this product as a result of
the acquisition of Shandong Hongrui Pharmaceutical Factory, which was completed
in February 2009.




9





Gan
Mao Zhi Ke Tang Jiang





Gan Mao
Zhi Ke Tang Jiang is a syrup that helps relieve cold and flu symptoms such as
fever, headache, rhinocleisis, cough, throat pain and phlegm. The drug is
included in the recently announced China’s Essential Drug List and more
hospitals and clinics are expect to carry this product, making it even more
widely available to consumers and more consumers to be reimbursed for the cost
of purchasing this product. The Company owns this product as a result of
the acquisition of Shandong Hongrui Pharmaceutical Factory, which was completed
in February 2009.





Other than the commercialized products
mentioned above, we have a portfolio of 15 approved over-the-counter Chinese
herb based pharmaceutical products that have not been commercially
launched.





RESEARCH
AND DEVELOPMENT





For the
fiscal year ended June 30, 2009, Laiyang Jiangbo spent approximately US $4.4
million or approximately 3.7% of its fiscal 2009 revenue on research and
development of products. For the fiscal year ended June 30, 2008, Laiyang
Jiangbo spent approximately US $3.2 million or approximately 3.3% of its fiscal
2008 revenue on research and development of various pharmaceutical
products.





Laiyang
Jiangbo places great emphasis on product research and development and maintains
strategic relationships with several research institutions in PRC developing new
drugs, such as Pharmaceutical Institute of Shandong University and the Institute
of Microbiology (Chinese Academy of Sciences)  . The Company currently
have two Cooperative Research and Development Agreements (the “ CRDAs”) with the
two research institutions and the following is a summary of the material terms
of each of the two CRDAs :





Pharmaceutical
Institute of Shandong University (the “University”) Cooperative Research and
Development Agreement





Laiyang
Jiangbo entered into a  three year CRDA with the University in
September 2007. The agreement provides that Laiyang Jiangbo will
pay  RMB 24,000,000 (approximately USD $3.5 million) plus various
expenses incurred by the University for servicing Laiyang Jiangbo to the
University annually and provide internship opportunities for students of the
University and in exchange the University agreed (i)  to provide
technical services, establish projects to develop new products with Laiyang
Jiangbo, (ii) to train technical personnel for Laiyang Jiangbo, and (iii)
actively apply for related scientific and technological funding with Laiyang
Jiangbo. Laiyang Jiangbo will have the primary ownership of the designated
research and development project results.





Institute
of Microbiology ( Chinese Academy of Sciences) (the “Institute”) Cooperative
Research and Development Agreement





Laiyang
Jiangbo entered into a five year CRDA with the Institute in November
2007.  The agreement provides that Laiyang Jiangbo will
pay  RMB 6,000,000 (approximately USD $879,000) to the Institute
annually and bear enterprise related responsibilities during
the  application process of various projects and  in
exchange the Institute agreed (i)  to give Laiyang Jiangbo the
priority to obtain the transferable technological achievement (ii) to train
related technical staff for Laiyang Jiangbo (iii) to provide technical support
and  solve problems encountered in Laiyang Jiangbo’s production
process within the scientific research scope.




10





Laiyang
Jiangbo has strategic relationships with many research institutions in PRC
developing new drugs with various other reputable research and development
institutes in China.  However, except for the two CRDAs mentioned
above, Laiyang Jiangbo have not entered into formal agreements with other
research institutions. The strategic relationships with various non-contracted
research institutions are primarily built and maintained by frequent visits and
correspondences with the research institutions to share knowledge and expertise
on topics such as technology, industrial standards and regulations and market
feasibility. These relationships help to ensure that Laiyang Jiangbo maintains a
continuing pipeline of high quality drugs into the future.





Other
than a number of potential R&D projects that are currently under evolution
and yet to be locked in, the Company currently has three products pending on PRC
SFDA approval in the pipeline for commercialization in China.




Drug Name
                  
                  Target Treatment/Drug Type
                  
                  StatusFelodipine Sustained
      Release Tablets
                  
                  Treat
      high blood pressure and arteriosclerosis/Western Drug
                  
                  (A)
      Expected approval date - secondquarter
      of fiscal year 2010Yuandu
      Hanbi Capsules
                  
                  Relieve
      arthritis pain /Traditional Chinese Medicine
                  
                  (A)
      Expected approval date -to
      be announcedBezoar
      Yijin Tablets
                  
                  Cures
      inflammations such as pharyngitis/Traditional Chinese
    Medicine
                  
                  (A)
      Expected approval date -To
      be announced.




(A)    
Subject to SFDA. Pending
administrative protection and approval.





DISTRIBUTION METHODS OF THE PRODUCTS
OR SERVICES AND OUR CUSTOMERS





Laiyang
Jiangbo has a well-established sales network across China. It has a distribution
network covering over 29 provinces and regions in the PRC. Currently, Laiyang
Jiangbo has approximately 1,000 distribution agents and salespeople throughout
the PRC. Laiyang Jiangbo will continue to establish more representative offices
and engage additional distribution agents in order to strengthen its
distribution network.





Laiyang
Jiangbo recognizes the importance of branding as well as packaging. All of
Laiyang Jiangbo’s products bear a uniform brand but have specialized designs to
differentiate the different categories of Laiyang Jiangbo's
products.





Laiyang
Jiangbo conducts promotional marketing activities to publicize and enhance its
image as well as to reinforce the recognition of its brand name
including:




1.
                publishing advertisements and
      articles in national as well as specialized and provincial newspapers,
      magazines, and in other media, including the
    Internet;
  11
  2.
                participating in national
      meetings, seminars, symposiums, exhibitions for pharmaceutical and other
      related industries;
 
 3.
                organizing cooperative
      promotional activities with distributors;
  and
 
 4.
                sending direct mail to major
      physician offices and
laboratories.


CUSTOMERS





Currently,
Laiyang Jiangbo has over1,200 terminal clients. Terminal clients are hospitals
and medical institutions which purchase large supplies of pharmaceutical drugs
as well as over the counter retail pharmacies. Laiyang Jiangbo is also
authorized by the PRC Ministry of Health as an appointed Medicare medication
supplier in six provinces, namely Jiangsu Province, Shandong Province, Zhejiang
Province, Fujian Province, Guangdong Province and Guangxi Province.





For
the fiscal years ended June 30, 2009, 2008 and 2007, five customers accounted
for approximately 25.6%, 18.1% and 33.3%, respectively, of Laiyang Jiangbo’s
sales. These five customers represented 31.4% and 11.8% of Laiyang Jiangbo’s
total accounts receivable as of June 30, 2009 and 2008,
respectively.





COMPETITION




As a
pharmaceutical manufacturing and distribution company in PRC, we believe that we
are well positioned to compete in the fast-developing Chinese pharmaceutical
market with our strong brand, diverse product portfolio, established sales and
marketing network and favorable cost structure. We believe that competition and
leadership in our industry are based on managerial and technological expertise,
and the ability to identify and exploit commercially viable products. Other
factors affecting our competitive position include time to market, patent
position, product efficacy, safety, convenience, reliability, availability and
pricing. Our competitors in the industry typically would have number of popular
pharmaceutical products, strong financial position and a large market share in
the industry. Laiyang Jiangbo is able to compete with these competitors because
of our favorable geographic position, strong financial position, unique
products, extensive sales network, and lower prices.





Our major
competitors in China on individual product basis are Jiangsu Hengrui
Pharmaceuticals (Clarithromycin sustained release tablets), Xi'an Yangsen (
Itopride Hydrochloride Granules) and Jiangzhong Pharmaceuticals (Baobaole
Chewable tablets), respectively. We are able to compete with Jiangsu Hengrui
Pharmaceuticals because of our extensive sales network as well as flexible
and favorable incentive policy. Compared with Motihium of Xi'an Yangsen, a
gastro dynamic only drug, our Itopride Hydrochloride Granules has
better efficacy due to its gastro-intestinal dynamic characteristic, higher
security and less side effects. Referring to Children Jiangwei Xiaoshi
Tablets of Jiangzhong Pharmaceutcials, our Baobaole Chewable tablet is able
to significantly stimulate appetite and fundamentally nurse children's
gastro-intestinal system. Also, it is very convenient for children to take.
As such, we believe we have competitive advantages for those
products.





SOURCES
AND AVAILABILITY OF RAW MATERIALS AND THE PRINCIPAL SUPPLIERS




Laiyang
Jiangbo designs, creates prototypes and manufactures its products at its
manufacturing facilities located in Laiyang City, Shandong province. We require
a supply of quality raw materials to manufacture our products. Historically, we
have not had difficulty obtaining raw materials from suppliers. Currently, we
rely on numerous suppliers to deliver our required raw materials. the prices for
these raw materials are subject to market forces largely beyond our control,
including energy costs, organic chemical prices, market demand, and freight
costs. The prices for these raw materials have varied significantly in the past
and may vary significantly in the future.




12





INTELLECTUAL
PROPERTY





Laiyang
Jiangbo relies on a combination of trademarks copyright and trade secret
protection laws in the PRC and other jurisdictions, as well as confidentiality
procedures and contractual provisions to protect its intellectual property and
brand. We consider our packaging designs, service marks, trademarks, trade
secrets, patents and similar intellectual property as part of our core
competence that is critical to our success.  Laiyang Jiangbo has been
issued design patents in the PRC for drug packaging and drug containers,
each valid for 10 years, and it intends to apply for more patents to protect its
core technologies. Laiyang Jiangbo also enters into confidentiality, non-compete
and invention assignment agreements with its employees and consultants and
nondisclosure agreements with third parties. “Jiangbo” and a certain circular
design affiliated with our brand are our registered trademarks in the
PRC.





Pharmaceutical
companies are at times involved in litigation based on allegations of
infringement or other violations of intellectual property rights. Furthermore,
the application of laws governing intellectual property rights in the PRC and
abroad is uncertain and evolving and could involve substantial risks to
us.





GOVERNMENT
REGULATION





General
Regulations related to the pharmaceutical industry in the PRC




The Drug
Administration Law of the PRC governs Laiyang Jiangbo and its products. The
State Food & Drug Administration of the PRC regulates and implements PRC
drug laws. As a developer, producer and distributor of medicinal products, we
are subject to regulation and oversight by the SFDA and its provincial and local
branches. The Law of the PRC on the Administration of Pharmaceuticals provides
the basic legal framework for the administration of the production and sale of
pharmaceuticals in China and covers the manufacturing, distributing, packaging,
pricing and advertising of pharmaceutical products. Its implementing regulations
set forth detailed rules with respect to the administration of pharmaceuticals
in China. We are also subject to other PRC laws and regulations that are
applicable to business operators, manufacturers and distributors in
general.





Registration and
Approval of Medicine. A medicine must be registered and approved by
the SFDA before it can be manufactured. The registration and approval process
requires the manufacturer to submit to the SFDA a registration application
containing detailed information concerning the efficacy and quality of the
medicine and the manufacturing process and the production facilities the
manufacturer expects to use. To obtain the SFDA registration and approval
necessary for commencing production, the manufacturer is also required to
conduct pre-clinical trials, apply to the SFDA for permission to conduct
clinical trials, and, after clinical trials are completed, file clinical
data with the SFDA for approval. Our pharmaceutical products are approved by the
SFDA and are being sold both as prescription and over-the-counter
medicines.




New
Medicine. If a medicine is approved by the SFDA as a new medicine,
the SFDA will issue a new medicine certificate to the manufacturer and impose a
monitoring period which shall be calculated starting from the day of approval
for manufacturing of the new medicine and may not exceed five years. The length
of the monitoring period is specified in the new medicine certificate. During
the monitoring period, the SFDA will monitor the safety of the new medicine, and
will neither accept new medicine certificate applications for an identical
medicine by another pharmaceutical company, nor approve the production or import
of an identical medicine by other pharmaceutical companies. For new medicines
approved prior to September 2002, the monitoring period could be longer than
five years. As a result of these regulations, the holder of a new medicine
certificate effectively has the exclusive right to manufacture the new medicine
during the monitoring period.




13




Provisional
National Production Standard. In connection with the SFDA’s approval
of a new medicine, the SFDA will normally direct the manufacturer to produce the
medicine according to a provisional national production standard, or a
provisional standard. A provisional standard is valid for two years, during
which the SFDA closely monitors the production process and quality consistency
of the medicine to develop a national final production standard for the
medicine, or a final standard. Three months before the expiration of the
two-year period, the manufacturer is required to apply to the SFDA to convert
the provisional standard to a final standard. Upon approval, the SFDA will
publish the final standard for the production of this medicine. In practice, the
approval for conversion to a final standard is a time-consuming process.
However, during the SFDA’s review period, the manufacturer may continue to
produce the medicine according to the provisional standard.




Transitional
Period. Prior to the latter of
(1) the expiration of a new medicine’s monitoring period or (2) the
date when the SFDA grants a final standard for a new medicine after the
expiration of the provisional standard, the SFDA will not accept applications
for an identical medicine nor will it approve the production of an identical
medicine by other pharmaceutical companies. Accordingly, the manufacturer will
continue to have an exclusive production right for the new medicine during this
transitional period.




Continuing SFDA
Regulation. Pharmaceutical manufacturers in China are subject to
continuing regulation by the SFDA. If the labeling or manufacturing process of
an approved medicine is significantly modified, a new pre-market approval or
pre-market approval supplement will be required by the SFDA. A pharmaceutical
manufacturer is subject to periodic inspection and safety monitoring by the SFDA
to determine compliance with regulatory requirements. The SFDA has a variety of
enforcement actions available to enforce its regulations and rules, including
fines and injunctions, recall or seizure of products, the imposition of
operating restrictions, partial suspension or complete shutdown of production
and criminal prosecution.




Pharmaceutical
Product Manufacturing




Permits and
Licenses for Pharmaceutical Manufacturers. A pharmaceutical
manufacturer must obtain a pharmaceutical manufacturing permit from the SFDA’s
relevant provincial branch. This permit is valid for five years and is renewable
upon its expiration. Each of our manufacturing facilities has a pharmaceutical
manufacturing permit. We do not anticipate any difficulty in renewing our
pharmaceutical manufacturing permits upon expiration.




Good
Manufacturing Practice. A pharmaceutical
manufacturer must meet Good Manufacturing Practice standards, or GMP standards,
for each of its production facilities in China in respect of each form of
pharmaceutical products it produces. GMP standards include staff qualifications,
production premises and facilities, equipment, raw materials, environmental
hygiene, production management, quality control and customer complaint
administration. If a manufacturer meets the GMP standards, the SFDA will issue
to the manufacturer a Good Manufacturing Practice certificate, or a GMP
certificate, with a five-year validity period. However, for a newly established
pharmaceutical manufacturer that meets the GMP standards, the SFDA will issue a
GMP certificate with only a one-year validity period. We have obtained a GMP
certificate for all of our production facilities covering all of the products
that we produce.




Pharmaceutical
Distribution. A distributor of pharmaceutical products in China must
obtain a pharmaceutical distribution permit from the relevant provincial or
local SFDA branches. The distribution permit is granted if the relevant SFDA
provincial branch receives satisfactory inspection results of the distributor’s
facilities, warehouse, hygiene environment, quality control systems, personnel
and equipment. A pharmaceutical distribution permit is valid for five
years.





Restrictions on
Foreign Ownership of Pharmaceutical Wholesale and Retail Businesses in
China. Chinese regulations on
foreign investment currently permit foreign companies to establish or invest in
wholly foreign-owned companies or joint ventures that engage in wholesale or
retail sales of pharmaceuticals in China.





14




Good Supply
Practice Standards. The SFDA applies Good
Supply Practice standards, or GSP standards, to all pharmaceutical wholesale and
retail distributors to ensure the quality of distribution in China. The
currently applicable GSP standards require pharmaceutical distributors to
implement controls on the distribution of medicine, including standards
regarding staff qualifications, distribution premises, warehouses, inspection
equipment and facilities, management and quality control. A certificate for GSP
standards, or GSP certificate, is valid for five years, except for a newly
established pharmaceutical distribution company, for which the GSP certificate
is valid for only one year.




Price
Controls. The retail prices of prescription and over-the-counter
medicines that are included in the national medicine catalog are subject to
price controls administered by the Price Control Office under the National
Development and Reform Commission, or the NDRC, and provincial price control
authorities, either in the form of fixed prices or price ceilings. The controls
over the retail price of a medicine effectively set the limits for the wholesale
price of that medicine. From time to time, the NDRC publishes and updates a
national list of medicines that are subject to price control. Fixed prices and
price ceilings on medicines are determined based on profit margins that the
NDRC deems reasonable, the type and quality of the medicine, its production
costs, the prices of substitute medicines and the extent of the manufacturer’s
compliance with the applicable GMP standards. The NDRC directly regulates the
price of some of the medicines on the list, and delegates the power to
provincial price control authorities to regulate the remainder on the list. For
those medicines under the authority of provincial price control authorities,
each provincial price control authority regulates medicines manufactured by
manufacturers registered in that province. Provincial price control authorities
have the discretion to authorize price adjustments based on the local conditions
and the level of local economic development. Only the manufacturer of a medicine
may apply for an increase in the retail price of the medicine and it must apply
either to the NDRC, if the price of the medicine is nationally regulated, or to
the provincial price control authorities in the province where it is registered,
if the price of the medicine is provincially regulated. For a provincially
regulated medicine, when provincial price control authorities approve an
application, they will file the new approved price with the NDRC for
confirmation and thereafter the newly approved price will become binding and
enforceable across China.




Tendering
Requirement for Hospital Purchases of Medicines. Provincial and
municipal government agencies such as provincial or municipal health departments
also operate a mandatory tendering process for purchases by state-owned
hospitals of a medicine included in provincial medicine catalogs. These
government agencies organize a tendering process once every year in their
province or city and typically invite manufacturers of provincial catalog
medicines that are on the hospitals’ formularies and are in demand by these
hospitals to participate in the tendering process. A government-approved
committee consisting of physicians, experts and officials is delegated by these
government agencies the power to review bids and select one or more medicines
for the treatment of a particular medical condition. The selection is based on a
number of factors, including bid price, quality and manufacturer’s reputation
and service. The bidding price of a winning medicine will become the price
required for purchases of that medicine by all state-owned hospitals in that
province or city. The tendering requirement was first introduced in 2001 and has
since been implemented across China. We understand that the level of present
implementation of the tendering requirement varies among different provinces in
China.




15




Reimbursement
under the National Medical Insurance Program. As of the end of 2006,
approximately 157.4 million people were enrolled into the National Medical
Insurance Program. The Ministry of Labor and Social Security, together with
other government authorities, determines which medicines are to be included in
or removed from the national medicine catalog for the National Medical Insurance
Program, and under which tier a medicine should fall, both of which affect the
amounts reimbursable to program participants for their purchases of those
medicines. These determinations are based on a number of factors, including
price and efficacy. A National Medical Insurance Program participant can be
reimbursed for the full cost of a Tier 1 medicine and 80 to 90% of the cost of a
Tier 2 medicine. Although it is designated as a national program, the
implementation of the National Medical Insurance Program is delegated to various
provincial governments, each of which has established its own medicine catalog.
A provincial government must include all Tier 1 medicines listed in the national
medicine catalog in its provincial medicine catalog, but may use its discretion
based on its own selection criteria to add other medicines to, or exclude Tier 2
medicines listed in the national medicine catalog from, its provincial medicine
catalog, so long as the combined numbers of the medicines added and excluded do
not exceed 15% of the number of the Tier 2 medicines listed in the national
catalog. In addition, provincial governments may use their discretion to upgrade
a nationally classified Tier 2 medicine to Tier 1 in their provincial medicine
catalogs, but may not downgrade a nationally classified Tier 1 medicine to Tier
2. The total amount of reimbursement for the cost of prescription and
over-the-counter medicines, in addition to other medical expenses, for an
individual program participant in a calendar year is capped at the amount in
that participant’s individual account. The amount in a participant’s account
varies, depending upon the amount of contributions from the participant and his
or her employer. Generally, program participants who are from relatively
wealthier eastern parts of China and relatively wealthier metropolitan centers
have greater amounts in their individual accounts than those from less developed
provinces.





Circular
106 Compliance and Approval





On May
31, 2007, the PRC State Administration of Foreign Exchange (“SAFE”) issued an official notice known as
"Circular 106," which requires the owners of any Chinese companies to obtain
SAFE’s approval before establishing any offshore holding company structure for
foreign financing as well as subsequent acquisition matters in
China.





In early
September 2007, the three owners of 100% of the equity in Laiyang Jiangbo, Cao
Wubo, Xun Guihong and Zhang Yihua, submitted their application to SAFE. On
September 19, 2007, SAFE approved their application, permitting these Chinese
citizens to establish an offshore company, Karmoya International Ltd., as a
“special purpose vehicle” for any foreign ownership and capital raising
activities by Laiyang Jiangbo.





After
SAFE’s approval, Cao Wubo, Xun Guihong and Zhang Yihua became the majority
owners of Karmoya International Ltd. on September 20, 2007.





COSTS
AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS





Laiyang
Jiangbo complies with the Environmental Protection Law of China as well as the
applicable local regulations. In addition to statutory and regulatory
compliance, we actively ensure the environmental sustainability of our
operations. The cost for PRC environmental regulation compliance in u/ the past
three fiscal years has been immaterial and mainly for the wastewater treatment
in connection with its production facilities. Penalties would be levied upon us
if we fail to adhere to and maintain certain standards. Such failure has not
occurred in the past, and we generally do not anticipate that it will occur in
the future, but no assurance can be given in this regard.





EMPLOYEES





Laiyang
Jiangbo currently has 1,539 employees, including 114 administrative staff, 425
production crew, 440 full-time salespersons and 560 part-time salespersons.
Approximately 200 of these employees are represented by Laiyang City Jiangbo
Pharmaceuticals Union, which is governed by the City of Laiyang. Laiyang Jiangbo
has not experienced a work stoppage since inception and does not anticipate any
work stoppage in the foreseeable future. Management believes that its relations
with its employees and the union are good.





CORPORATE
INFORMATION





Laiyang
Jiangbo’s principal executive offices are located at 25 Haihe Road, Laiyang
Development Zone, Yantai, Shandong Province, PRC 265200.




16





ITEM 1A. RISK
FACTORS





Investing
in our securities involves a great deal of risk. Careful consideration should be
made of the following factors as well as other information included in this
prospectus before deciding to purchase our common stock. You should pay
particular attention to the fact that we conduct all of our operations in China
and are governed by a legal and regulatory environment that in some respects
differs significantly from the environment that may prevail in other countries.
Our business, financial condition or results of operations could be affected
materially and adversely by any or all of these risks.





THE
FOLLOWING MATTERS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS, FINANCIAL OR
OTHERWISE. REFERENCE TO THIS CAUTIONARY STATEMENT IN THE CONTEXT OF A
FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED TO BE A STATEMENT THAT
ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR
STATEMENTS.





Risks Relating to Our
Business





Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.





We have a
limited operating history. Laiyang Jiangbo commenced operations in 2003 and
first achieved profitability in the fiscal year ended June 30, 2005.
Accordingly, you should consider our future prospects in light of the risks and
uncertainties experienced by early stage companies in evolving industries such
as the pharmaceutical industry in China. Some of these risks and uncertainties
relate to our ability to:




.
              maintain our market position in
      the pharmaceuticals business in
China;
 
 .
              offer new and innovative products
      to attract and retain a larger customer
  base;
 
 .
              attract additional customers and
      increase spending per
customer;
 
 .
              increase awareness of our brand
      and continue to develop user and customer
  loyalty;
 
 .
              respond to competitive market
      conditions;
 
 .
              respond to changes in our
      regulatory environment;
 
 .
              manage risks associated with
      intellectual property
rights;
 
 .
              maintain effective control of our
      costs and expenses;
 
 .
              raise sufficient capital to
      sustain and expand our
business;
 
 .
              attract, retain and motivate
      qualified personnel; and
 
 .
              upgrade our technology to support
      additional research and development of new
  products.




If we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected




17





We
may need additional financing to execute our business plan.





The
revenues from the production and sale of pharmaceutical products and the
projected revenues from these products may not be adequate to support our
expansion and product development programs. We may need substantial additional
funds to build our new production facilities, pursue further research and
development, obtain regulatory approvals, market our products, and file,
prosecute, defend and enforce our intellectual property rights. We will seek
additional funds through public or private equity or debt financing, strategic
transactions and/or from other sources. We could enter into collaborative
arrangements for the development of particular products that would lead to our
relinquishing some or all rights to the related technology or
products.





There are
no assurances that future funding will be available on favorable terms or at
all. If additional funding is not obtained, we will need to reduce, defer or
cancel development programs, planned initiatives or overhead expenditures, to
the extent necessary. The failure to fund our capital requirements would have a
material adverse effect on our business, financial condition and results of
operations.





Our
success depends on collaborative partners, licensees and other third parties
over whom we have limited control.





Due to
the complexity of the process of developing pharmaceuticals, our core business
depends on arrangements with pharmaceutical institutes, corporate and academic
collaborators, licensors, licensees and others for the research, development,
clinical testing, technology rights, manufacturing, marketing and
commercialization of our products. We have several research collaborations. Our
license agreements could obligate us to diligently bring potential products to
market, make milestone payments and royalties that, in some instances, could be
substantial, and incur the costs of filing and prosecuting patent applications.
There are no assurances that we will be able to establish or maintain
collaborations that are important to our business on favorable terms, or at
all.





A number
of risks arise from our dependence on collaborative agreements with third
parties. Product development and commercialization efforts could be adversely
affected if any collaborative partner:




.
              terminates or suspends its
      agreement with us
 
 .
              causes
    delays
 
 .
              fails to timely develop or
      manufacture in adequate quantities a substance needed in order to conduct
      clinical trials
 
 .
              fails to adequately perform
      clinical trials
 
 .
              determines not to develop,
      manufacture or commercialize a product to which it has rights
      or
 
 .
              otherwise fails to meet its
      contractual
obligations.





Our
collaborative partners could pursue other technologies or develop alternative
products that could compete with the products we are developing.




18





The
profitability of our products will depend in part on our ability to protect
proprietary rights and operate without infringing the proprietary rights of
others.





The
profitability of our products will depend in part on our ability to obtain and
maintain patents and licenses and preserve trade secrets, and the period our
intellectual property remains exclusive. We must also operate without infringing
the proprietary rights of third parties and without third parties circumventing
our rights. The patent positions of pharmaceutical enterprises, including ours,
are uncertain and involve complex legal and factual questions for which
important legal principles are largely unresolved. The pharmaceutical patent
situation outside the US is uncertain, is currently undergoing review and
revision in many countries, and may not protect our intellectual property rights
to the same extent as the laws of the US. Because patent applications are
maintained in secrecy in some cases, we cannot be certain that we or our
licensors are the first creators of inventions described in our pending patent
applications or patents or the first to file patent applications for such
inventions.





Most of
our drug products have been approved by the PRC's Food and Drug Administration
(SFDA) but have not received patent protection. For instance, Clarithromycin
sustained-release tablets, one of our most profitable products, are produced by
other companies in China. If any other company were to obtain patent protection
for Clarithromycin sustained-release tablets in China, or for any of our other
drug products, it would have a material adverse effect on our
revenue.





Other
companies may independently develop similar products and design around any
patented products we develop. We cannot assure you that:




.
              any of our patent applications
      will result in the issuance of
patents;
 
 .
              we will develop additional
      patentable products;
 
 .
              the patents we have been issued
      will provide us with any competitive
  advantages;
 
 .
              the patents of others will not
      impede our ability to do business;
or
 
 .
              third parties will not be able to
      circumvent our
patents.





A number
of pharmaceutical, research, and academic companies and institutions have
developed technologies, filed patent applications or received patents on
technologies that may relate to our business. If these technologies,
applications or patents conflict with ours, the scope of our current or future
patents could be limited or our patent applications could be denied. Our
business may be adversely affected if competitors independently develop
competing technologies, especially if we do not obtain, or obtain only narrow,
patent protection. If patents that cover our activities are issued to other
companies, we may not be able to obtain licenses at a reasonable cost, or at
all; develop our technology; or introduce, manufacture or sell the products we
have planned.





Patent
litigation is becoming widespread in the pharmaceutical industry. Such
litigation may affect our efforts to form collaborations, to conduct research or
development, to conduct clinical testing or to manufacture or market any
products under development. There are no assurances that our patents would be
held valid or enforceable by a court or that a competitor's technology or
product would be found to infringe our patents in the event of patent
litigation. Our business could be materially affected by an adverse outcome to
such litigation. Similarly, we may need to participate in interference
proceedings declared by the U.S. Patent and Trademark Office or equivalent
international authorities to determine priority of invention. We could incur
substantial costs and devote significant management resources to defend our
patent position or to seek a declaration that another company's patents are
invalid.





Much of
our know-how and technology may not be patentable, though it may constitute
trade secrets. There are no assurances that we will be able to meaningfully
protect our trade secrets. We cannot assure you that any of our existing
confidentiality agreements with employees, consultants, advisors or
collaborators will provide meaningful protection for our trade secrets, know-how
or other proprietary information in the event of any unauthorized use or
disclosure. Collaborators, advisors or consultants may dispute the ownership of
proprietary rights to our technology, for example by asserting that they
developed the technology independently.




19





We
may encounter difficulties in manufacturing our products.





Before
our products can be profitable, they must be produced in commercial quantities
in a cost-effective manufacturing process that complies with regulatory
requirements, including GMP, production and quality control regulations. If we
cannot arrange for or maintain commercial-scale manufacturing on acceptable
terms, or if there are delays or difficulties in the manufacturing process, we
may not be able to conduct clinical trials, obtain regulatory approval or meet
demand for our products. Production of our products could require raw materials
which are scarce or which can be obtained only from a limited number of sources.
If we are unable to obtain adequate supplies of such raw materials, the
development, regulatory approval and marketing of our products could be
delayed.





We
could need more clinical trials or take more time to complete our clinical
trials than we have planned.





Clinical
trials vary in design by factors including dosage, end points, length, and
controls. We may need to conduct a series of trials to demonstrate the safety
and efficacy of our products. The results of these trials may not demonstrate
safety or efficacy sufficiently for regulatory authorities to approve our
products. Further, the actual schedules for our clinical trials could vary
dramatically from the forecasted schedules due to factors including changes in
trial design, conflicts with the schedules of participating clinicians and
clinical institutions, and changes affecting product supplies for clinical
trials.





We rely
on collaborators, including academic institutions, governmental agencies and
clinical research organizations, to conduct, supervise, monitor and design some
or all aspects of clinical trials involving our products. Since these trials
depend on governmental participation and funding, we have less control over
their timing and design than trials we sponsor. Delays in or failure to commence
or complete any planned clinical trials could delay the ultimate timelines for
our product releases. Such delays could reduce investors' confidence in our
ability to develop products, likely causing our share price to
decrease.





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





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





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




.
              the commercialization of our
      products could be adversely
affected;
 
 .
              any competitive advantages of the
      products could be diminished;
and
 
 .
              revenues or collaborative
      milestones from the products could be reduced or
      delayed.




20




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.





Competitors
may develop and market pharmaceutical products that are less expensive, more
effective or safer, making our products obsolete or uncompetitive.





Some of
our competitors and potential competitors have greater product development
capabilities and financial, scientific, marketing and human resources than we
do. Technological competition from pharmaceutical companies is intense and is
expected to increase. Other companies have developed technologies that could be
the basis for competitive products. Some of these products have an entirely
different approach or means of accomplishing the desired curative effect than
products we are developing. Alternative products may be developed that are more
effective, work faster and are less costly than our products. Competitors may
succeed in developing products earlier than us, obtaining approvals and
clearances for such products more rapidly than us, or developing products that
are more effective than ours. In addition, other forms of treatment may be
competitive with our products. Over time, our technology or products may become
obsolete or uncompetitive.





Our
products may not gain market acceptance.





Our
products may not gain market acceptance in the pharmaceutical community. The
degree of market acceptance of any product depends on a number of factors,
including establishment and demonstration of clinical efficacy and safety,
cost-effectiveness, clinical advantages over alternative products, and marketing
and distribution support for the products. Limited information regarding these
factors is available in connection with our products or products that may
compete with ours.





To
directly market and distribute our pharmaceutical products, we or our
collaborators require a marketing and sales force with appropriate technical
expertise and supporting distribution capabilities. We may not be able to
further establish sales, marketing and distribution capabilities or enter into
arrangements with third parties on acceptable terms. If we or our partners
cannot successfully market and sell our products, our ability to generate
revenue will be limited.





Our
revenue is highly concentrated on four of our products




Our top
four products, which include Clarithromycin sustained-release tablets, Itopride
Hydrochloride granules, Baobaole Chewable tablets and Radix Isatidis Disperable
tablets generated approximately 96.4% of our total revenues in 2009 and 95.9% of
our total revenues in 2008. We expect that these four products will continue to
account for a majority of our sales in the near future. Because of our
dependence on a few products, any disruption in, or compromise of, our
manufacturing operations, sales operations or distribution channels, relating to
any of these products could result in our failure to meet shipping and delivery
deadlines or meet quality standards, which in turn could result in the
cancellation of purchase orders, refusal to accept deliveries or a reduction in
purchase prices, any of which could have a material adverse effect on our
financial condition and results of operations.




21





Our
operations and the use of our products could subject us to damages relating to
injuries or accidental contamination.





Our
research and development processes involve the controlled use of hazardous
materials. We are subject to PRC national, provincial and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and waste products. The risk of accidental contamination or
injury from handling and disposing of such materials cannot be completely
eliminated. In the event of an accident involving hazardous materials, we could
be held liable for resulting damages. We are not insured with respect to this
liability. Such liability could exceed our resources. In the future we could
incur significant costs to comply with environmental laws and
regulations.





If
we were successfully sued for product liability, we could face substantial
liabilities that may exceed our resources.





We may be
held liable if any product we develop, or any product which is made using our
technologies, causes injury or is found unsuitable during product testing,
manufacturing, marketing, sale or use. These risks are inherent in the
development of agricultural and pharmaceutical products. We currently do not
have product liability insurance. We are not insured with respect to this
liability. If we choose to obtain product liability insurance but cannot obtain
sufficient insurance coverage at an acceptable cost or otherwise protect against
potential product liability claims, the commercialization of products that we
develop may be prevented or inhibited. If we are sued for any injury caused by
our products, our liability could exceed our total assets.





We
have limited business insurance coverage.





The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have any
business liability or disruption insurance coverage for our operations in China.
Any business disruption, litigation or natural disaster may result in our
incurring substantial costs and the diversion of our resources.





Our
business depends substantially on the continuing efforts of our executive
officers and our ability to maintain a skilled labor force, and our business may
be severely disrupted if we lose their services.





Our
future success depends substantially on the continued services of our executive
officers, especially Wubo Cao our chief executive officer and the chairman of
our board. We do not maintain key man life insurance on any of our executive
officers. If one or more of our executive officers are unable or unwilling to
continue in their present 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
success depends on attracting and retaining qualified personnel.





We depend
on a core management and scientific team. The loss of any of these individuals
could prevent us from achieving our business objective of commercializing our
product candidates. Our future success will depend in large part on our
continued ability to attract and retain other highly qualified scientific,
technical and management personnel, as well as personnel with expertise in
clinical testing and government regulation. We face competition for personnel
from other companies, universities, public and private research institutions,
government entities and other organizations. If our recruitment and retention
efforts are unsuccessful, our business operations could suffer.




22





We
may not be able to manage the expansion of our operations effectively, which may
have an adverse effect on our business and results of operations.





The
revenues from the production and sale of our current product offerings and the
projected revenues from these products may not be adequate to support our
expansion and product development programs. We will need substantial additional
funds to expand our production facilities, pursue research and development,
obtain regulatory approvals; file, prosecute, defend and enforce our
intellectual property rights and market our products. We will seek additional
funds through public or private equity or debt financing, strategic transactions
and/or from other sources. We could enter into collaborative arrangements for
the development of particular products that would lead to our relinquishing some
or all rights to the related technology or products. There are no assurances
that future funding will be available on favorable terms or at all. If
additional funding is not obtained, we will need to reduce, defer or cancel
development programs, planned initiatives or overhead expenditures, to the
extent necessary. The failure to fund our capital requirements would have a
material adverse effect on our business, financial condition and results of
operations.





Risks Related to Our
Corporate Structure





PRC
laws and regulations governing our businesses and the validity of certain of our
contractual arrangements are uncertain. If we are found to be in violation, we
could be subject to sanctions. In addition, changes in such PRC laws and
regulations may materially and adversely affect our business.





There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of our contractual
arrangements with our affiliated Chinese entity, Laiyang Jiangbo, and its
shareholders. We are considered a foreign person or foreign invested enterprise
under PRC law. As a result, we are subject to PRC law limitations on foreign
ownership of Chinese companies. These laws and regulations are relatively new
and may be subject to change, and their official interpretation and enforcement
may involve substantial uncertainty. The effectiveness of newly enacted laws,
regulations or amendments may be delayed, resulting in detrimental reliance by
foreign investors. New laws and regulations that affect existing and proposed
future businesses may also be applied retroactively.





The PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our businesses. We
cannot assure you that our current ownership and operating structure would not
be found in violation of any current or future PRC laws or regulations. As a
result, we may be subject to sanctions, including fines, and could be required
to restructure our operations or cease to provide certain services. Any of these
or similar actions could significantly disrupt our business operations or
restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.





The PRC
government restricts foreign investment in pharmaceutical businesses in China.
Accordingly, we operate our business in China through Laiyang Jiangbo. Laiyang
Jiangbo holds the licenses and approvals necessary to operate our pharmaceutical
business in China. We have contractual arrangements with Laiyang Jiangbo and its
shareholders that allow us to substantially control Laiyang Jiangbo. We cannot
assure you, however, that we will be able to enforce these
contracts.




23





Although
we believe we comply with current PRC regulations, we cannot assure you that the
PRC government would agree that these operating arrangements comply with PRC
licensing, registration or other regulatory requirements, with existing policies
or with requirements or policies that may be adopted in the future. If the PRC
government determines that we do not comply with applicable law, it could revoke
our business and operating licenses, require us to discontinue or restrict our
operations, restrict our right to collect revenues, require us to restructure
our operations, impose additional conditions or requirements with which we may
not be able to comply, impose restrictions on our business operations or on our
customers, or take other regulatory or enforcement actions against us that could
be harmful to our business.





We
may be adversely affected by complexity, uncertainties and changes in PRC
regulation of pharmaceutical business and companies, including limitations on
our ability to own key assets.





The PRC
government regulates the pharmaceutical industry including foreign ownership of,
and the licensing and permit requirements pertaining to, companies in the
pharmaceutical industry. These laws and regulations are relatively new and
evolving, and their interpretation and enforcement involve significant
uncertainty. As a result, in certain circumstances it may be difficult to
determine what actions or omissions may be deemed to be a violation of
applicable laws and regulations. Issues, risks and uncertainties relating to PRC
government regulation of the pharmaceutical industry include the
following:




.
              we only have contractual control
      over Laiyang Jiangbo. We do not own it due to the restriction of foreign
      investment in Chinese businesses;
and
 
 .
              uncertainties relating to the
      regulation of the pharmaceutical business in China, including evolving
      licensing practices, means that permits, licenses or operations at our
      company may be subject to challenge. This may disrupt our business, or
      subject us to sanctions, requirements to increase capital or other
      conditions or enforcement, or compromise enforceability of related
      contractual arrangements, or have other harmful effects on
      us.





The
interpretation and application of existing PRC laws, regulations and policies
and possible new laws, regulations or policies have created substantial
uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, pharmaceutical businesses in China,
including our business.





Our
contractual arrangements with Laiyang Jiangbo and its shareholders may not be as
effective in providing control over these entities as direct
ownership.





Since the law
of the PRC limits foreign equity ownership in pharmaceutical companies in China,
we operate our business through Laiyang Jiangbo. We have no equity ownership
interest in Laiyang Jiangbo and rely on contractual arrangements to control and
operate such business. These contractual arrangements may not be effective
in providing control over Laiyang Jiangbo as direct ownership. For example,
Laiyang Jiangbo could fail to take actions required for our business despite its
contractual obligation to do so. If Laiyang Jiangbo fails to perform under its
agreements with us, we may have to incur substantial costs and resources to
enforce such arrangements and may have to rely on legal remedies under the
law of the PRC, which may not be effective. In addition, we cannot assure you
that Laiyang Jiangbo's shareholders would always act in our best
interests.





The
chairman of the board of directors of Laiyang Jiangbo has potential conflicts of
interest with us, which may adversely affect our business.





Mr. Cao
Wubo, our Chairman and Chief Executive Officer, is also the Chairman of the
Board of Directors and General Manager of Laiyang Jiangbo. Conflicts of
interests between his duties to our company and Laiyang Jiangbo may arise. As
Mr. Cao is a director and executive officer of our company, he has a duty of
loyalty and care to us under Florida law when there are any potential conflicts
of interests between our company and Laiyang Jiangbo. We cannot assure you,
however, that when conflicts of interest arise, Mr. Cao will act completely in
our interests or that conflicts of interests will be resolved in our favor. In
addition, Mr. Cao could violate his legal duties by diverting business
opportunities from us to others. If we cannot resolve any conflicts of interest
between us and Mr. Cao, we would have to rely on legal proceedings, which could
result in the disruption of our business.




24





Risks Related to Doing
Business in China





Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may subject our PRC resident shareholders to
personal liability, limit our ability to acquire PRC companies or to inject
capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute profits to us or otherwise materially adversely affect
us.





In
October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued
the Notice on Relevant Issues in the Foreign Exchange Control over Financing and
Return Investment Through Special Purpose Companies by Residents Inside China,
generally referred to as Circular 75, which required PRC residents to register
with the competent local SAFE branch before establishing or acquiring control
over an offshore special purpose company, or SPV, for the purpose of engaging in
an equity financing outside of China on the strength of domestic PRC assets
originally held by those residents. 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 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, a retroactive SAFE registration was required
to have been completed before March 31, 2006; this date was subsequently
extended indefinitely by Notice 106, which also required that the registrant
establish that all foreign exchange transactions undertaken by the SPV and its
affiliates were in compliance with applicable laws and regulations. Failure to
comply with the requirements 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.





We
believe our shareholders who are PRC residents, as defined in Circular 75, have
registered with the relevant branch of SAFE, as currently required, in
connection with their equity interests in us and our acquisitions of equity
interests in our PRC subsidiaries. However, we cannot provide any assurances
that their existing registrations have fully complied with, or that they have
made all necessary amendments to their registration to fully comply with, all
applicable registrations or approvals required by Circular 75. Moreover, because
of uncertainty over how Circular 75 will be interpreted and implemented, and how
or whether SAFE will apply it to us, we cannot predict how it will affect our
business operations or future strategies. For example, our present and
prospective PRC subsidiaries’ ability to conduct foreign exchange activities,
such as the remittance of dividends and foreign currency-denominated borrowings,
may be subject to compliance with Circular 75 by our PRC resident beneficial
holders. In addition, such PRC residents may not always be able to complete the
necessary registration procedures required by Circular 75. We also have little
control over either our present or prospective direct or indirect shareholders
or the outcome of such registration procedures. A failure by our PRC resident
beneficial holders or future PRC resident shareholders to comply with Circular
75, if SAFE requires it, could subject these PRC resident beneficial holders to
fines or legal sanctions, restrict our overseas or cross-border investment
activities, limit our subsidiaries’ ability to make distributions or pay
dividends or affect our ownership structure, which could adversely affect our
business and prospects.




25





If
the PRC enacts regulations which forbid or restrict foreign investment, our
ability to grow may be severely impaired.





We intend
to expand our business in areas relating to our present business. We may also
expand by making acquisitions of companies in related industries. Many of the
rules and regulations that we would face are not explicitly communicated, and we
may be subject to rules that would affect our ability to grow, either internally
or through acquisition of other Chinese or foreign companies. There are also
substantial uncertainties regarding the proper interpretation of current laws
and regulations of the PRC. New laws or regulations that forbid foreign
investment could severely impair our businesses and prospects. Additionally, if
the relevant authorities find us in violation of PRC laws or regulations, they
would have broad discretion in dealing with such a violation, including, without
limitation:




·
              levying
    fines;
 
 ·
              revoking our business and other
      licenses; and
 
 ·
              requiring that we restructure our
      ownership or
operations.




Any
deterioration of political relations between the United States and the PRC could
impair our operations and your investment in us.





The
relationship between the United States and the PRC is subject to sudden
fluctuation and periodic tension. Changes in political conditions in the PRC and
changes in the state of Sino-U.S. relations are difficult to predict and could
adversely affect our operations or cause potential acquisition candidates or
their goods and services to become less attractive. Such a change could lead to
a decline in our profitability. Any weakening of relations between the United
States and the PRC could have a material adverse effect on our operations and
your investment in us, particularly in our efforts to raise capital to expand
our other business activities.





Adverse
changes in economic and political policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
adversely affect our business.





Substantially
all of our business operations are conducted in China. Accordingly, our results
of operations, financial condition and prospects are subject to a significant
degree to economic, political and legal developments in China. China's economy
differs from the economies of most developed countries in many respects,
including with respect to:




·
              the amount of government
      involvement;
 
 ·
              level of
      development;
 
 ·
              growth
    rate;
 
 ·
              control of foreign exchange;
      and
 
 ·
              allocation of
      resources.




26




While the
PRC economy has experienced significant growth in the past 20 years, growth has
been uneven across different regions and among various economic sectors of
China. The PRC government has implemented various measures to encourage economic
development and guide the allocation of resources. Some of these measures
benefit the overall PRC economy, but may also have a negative effect on us. For
example, our financial condition and results of operations may be adversely
affected by government control over capital investments or changes in tax
regulations that are applicable to us. Since early 2004, the PRC government has
implemented certain measures to control the pace of economic growth. Such
measures may cause a decrease in the level of economic activity in China, which
in turn could adversely affect our results of operations and financial
condition.





Price
controls may affect both our revenues and net income.





The laws
of the PRC provide for the government to fix and adjust prices. Although we are
not presently subject to price controls in connection with the sale of our
products, it is possible that price controls may be imposed in the future. To
the extent that we are subject to price control, our revenue, gross profit,
gross margin and net income will be affected since the revenue we derive from
our sales will be limited and, unless there is also price control on the
products that we purchase from our suppliers, we may face no limitation on our
costs. Further, if price controls affect both our revenue and our costs, our
ability to be profitable and the extent of our profitability will be effectively
subject to determination by the applicable regulatory authorities in the
PRC.





Our
operations may not develop in the same way or at the same rate as might be
expected if the PRC economy were similar to the market-oriented economies of
OECD member countries.





The
economy of the PRC has historically been a nationalistic, “planned economy,”
meaning it functions and produces according to governmental plans and pre-set
targets or quotas. In certain aspects, the PRC’s economy has been making a
transition to a more market-oriented economy, although the government imposes
price controls on certain products and in certain industries. However, we cannot
predict the future direction of these economic reforms or the effects these
measures may have. The economy of the PRC also differs from the economies of
most countries belonging to the Organization for Economic Cooperation and
Development (the “OECD”), an international group of member countries sharing a
commitment to democratic government and market economy. For
instance:




·
              the level of state-owned
      enterprises in the PRC, as well as the level of governmental control over
      the allocation of resources is greater than in most of the countries
      belonging to the OECD;
 
 ·
              the level of capital reinvestment
      is lower in the PRC than in other countries that are members of the
      OECD;
 
 ·
              the government of the PRC has a
      greater involvement in general in the economy and the economic structure
      of industries within the PRC than other countries belonging to the
      OECD;
 
 ·
              the government of the PRC imposes
      price controls on certain products and our products may become subject to
      additional price controls;
and
 
 ·
              the PRC has various impediments
      in place that make it difficult for foreign firms to obtain local
      currency, as opposed to other countries belonging to the OECD where
      exchange of currencies is generally free from
      restriction.





As a
result of these differences, our business may not develop in the same way or at
the same rate as might be expected if the economy of the PRC were similar to
those of the OECD member countries.




27





Because
some of our officers and directors reside outside of the United States, it may
be difficult for you to enforce your rights against them or enforce United
States court judgments against them in the PRC.





Most of
our executive officers and directors reside in the PRC and a substantial portion
of our assets are located in the PRC. It may therefore be difficult for United
States investors to enforce their legal rights, to effect service of process
upon our directors or officers or to enforce judgments of United States courts
predicated upon civil liabilities and criminal penalties of our directors and
officers under federal securities laws. Further, it is unclear if extradition
treaties now in effect between the United States and the PRC would permit
effective enforcement of criminal penalties of the federal securities
laws.





We
may have limited legal recourse under Chinese law if disputes arise under
contracts with third parties.





Almost
all of our agreements with our employees and third parties, including our
supplier and customers, are governed by the laws of the PRC. The legal system in
the PRC is a civil law system based on written statutes. Unlike common law
systems, such as we have in the United States, it is a system in which decided
legal cases have little precedential value. The government of the PRC 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. The resolution of these matters
may be subject to the exercise of considerable discretion by agencies of the
PRC, 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 Chinese law 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.





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.





Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.





We are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are not
subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices occur from time-to-time in the PRC. We can make
no assurance, however, 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 and other consequences that may have a material adverse effect on our
business, financial condition and results of operations.




28





A
downturn in the economy of the PRC may slow our growth and
profitability.





The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. There can be no assurance that growth of the Chinese economy
will be steady or that any downturn will not have a negative effect on our
business especially if it results in either a decreased use of products such as
ours or in pressure on us to lower our prices. The Chinese economy has been
transitioning from a planned economy to a more market-oriented economy. Although
in recent years the Chinese government has implemented measures emphasizing
the utilization of market forces for economic reform, the reduction of state
ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of the productive
assets in China is still owned by the Chinese government. The continued control
of these assets and other aspects of the national economy by the
Chinese government could materially and adversely affect our business. 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.





Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and the level
of pharmaceutical investments and expenditures in China, which in turn
could lead to a reduction in demand for our products and consequently have a
material adverse effect on our businesses.





Downturns
in the economies of the U.S. and Europe may affect the PRC economy which could
reduce the demand for our products.





The rapid
growth of the PRC economy in recent years has been partially related to the U.S.
and European countries’ demand for goods made in and exported from the PRC. The
downturns in the U.S. and European economies may reduce the demand for goods
exported by the PRC which could eventually affect the PRC economy as overseas
orders decrease. The downturn in the PRC economy may in turn negatively impact
the demand for our products.





If
certain tax exemptions within the PRC regarding withholding taxes are removed,
we may be required to deduct corporate withholding taxes from any dividends we
may pay in the future.





Under the
PRC’s current tax laws, regulations and rulings, companies are exempt from
paying withholding taxes with respect dividends paid to stockholders outside of
the PRC. However, if the foregoing exemption is removed, we may be required to
deduct certain amounts from any dividends we may pay to our
stockholders.





Laiyang
Jiangbo is subject to restrictions on making payments to us.





We are a
holding company incorporated in the State of Florida and do not have any assets
or conduct any business operations other than our investments in our affiliated
entity in China, Laiyang Jiangbo. As a result of our holding company structure,
we rely entirely on payments from Laiyang Jiangbo under our contractual
arrangements. The operating agreement signed between our 100 % own subsidiary,
Genesis Jiangbo (Laiyang) Biotech Technologies Co., Ltd (“GJBT”) and Laiyang
Jiangbo provides that Laiyang Jiangbo agrees to accept advices regarding
corporate policy advise by GJBT in connection with Laiyang Jiangbo’s daily
operations and financial management. Thus, Laiyang Jiangbo is obligated to
accept our request to repatriate funds from Laiyang Jiangbo. However, as
the  PRC government  imposes controls on the conversion of
RMB into foreign currencies and the remittance of currencies out of China. We
may experience difficulties in completing the administrative procedures
necessary to obtain and remit foreign currency.




29





Pursuant
to the Foreign Exchange Control Regulations of the PRC issued by the State
Council which came into effect on April 1, 1996, and the Regulations on the
Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which
came into effect on July 1, 1996, regarding foreign exchange control, conversion
of RMB into foreign exchange by Foreign Investment Enterprises, or FIE’s, for
use on current account items, including the distribution of dividends and
profits to foreign investors, is permissible.  FIEs are permitted to
convert their after-tax dividends and profits to foreign exchange and remit such
foreign exchange to their foreign exchange bank accounts in the PRC. Conversion
of RMB into foreign currencies for capital account items, including direct
investment, loans, and security investment, is still subject to certain
restrictions. On January 14, 1997, the State Council amended the Foreign
Exchange Control Regulations and added, among other things, an important
provision, which provides that the PRC government shall not impose restrictions
on recurring international payments and transfers under current account
items.  These rules are subject to change.





Enterprises
in the PRC (including FIEs) which require foreign exchange for transactions
relating to current account items, may, without approval of the State
Administration of Foreign Exchange, or SAFE, effect payment from their foreign
exchange account or convert and pay at the designated foreign exchange banks by
providing valid receipts and proofs. Convertibility of foreign exchange in
respect of capital account items, such as direct investment and capital
contribution, is still subject to certain restrictions, and prior approval from
the SAFE or its relevant branches must be sought.





Our
company is a FIE to which the Foreign Exchange Control Regulations are
applicable.  There can be no assurance that we will be able to obtain
sufficient foreign exchange to pay dividends or satisfy other foreign exchange
requirements in the future.





See
“Government control of currency conversion may affect the value of your
investment.” Furthermore, if our affiliated entity in China incurs debt on its
own in the future, the instruments governing the debt may restrict its ability
to make payments. If we are unable to receive all of the revenues from our
operations through these contractual or dividend arrangements, we may be unable
to pay dividends on our ordinary shares.





Uncertainties
with respect to the PRC legal system could adversely affect us.





We
conduct our business primarily through our affiliated Chinese entity, Laiyang
Jiangbo. Our operations in China are governed by PRC laws and regulations. We
are generally subject to laws and regulations applicable to foreign investments
in China and, in particular, laws applicable to wholly foreign-owned
enterprises. The PRC legal system is based on written statutes. Prior court
decisions may be cited for reference but have limited precedential
value.





Since
1979, PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the PRC legal system is based in
part on government policies and internal rules (some of which are not published
on a timely basis or at all) that may have a retroactive effect. As a result, we
may not be aware of our violation of these policies and rules until some time
after the violation. In addition, any litigation in China may be protracted and
result in substantial costs and diversion of resources and management
attention.





You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us, our management or the experts named in the
prospectus.





We
conduct substantially all of our operations in China and substantially all of
our assets are located in China. In addition, most of our senior executive
officers reside within China. As a result, it may not be possible to effect
service of process within the United States or elsewhere outside China upon our
senior executive officers, including with respect to matters arising under U.S.
federal securities laws or applicable state securities laws. Moreover, our PRC
counsel has advised us that the PRC does not have treaties with the United
States or many other countries providing for the reciprocal recognition and
enforcement of judgment of courts.




30





Governmental
control of currency conversion may affect the value of your
investment.





The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of China. We receive
substantially all of our revenues in RMB. Under our current structure, our
income is primarily derived from payments from Laiyang Jiangbo. Shortages in the
availability of foreign currency may restrict the ability of our PRC
subsidiaries and our affiliated entity to remit sufficient foreign currency to
pay dividends or other payments to us, or otherwise satisfy their foreign
currency denominated obligations. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions,
interest payments and expenditures from trade-related transactions, can be made
in foreign currencies without prior approval from the PRC State Administration
of Foreign Exchange by complying with certain procedural requirements. However,
approval from appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay capital
expenses such as the repayment of bank loans denominated in foreign currencies.
The PRC government may also 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 sufficient foreign currency to satisfy
our currency demands, we may not be able to pay dividends in foreign currencies
to our shareholders.





Fluctuation
in the value of RMB may have a material adverse effect on your
investment.





The value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Our revenues and costs are mostly denominated in RMB, while a significant
portion of our financial assets are denominated in U.S. dollars. We rely
entirely on fees paid to us by our affiliated entity in China. Any significant
fluctuation in value of RMB may materially and adversely affect our cash flows,
revenues, earnings and financial position, and the value of, and any dividends
payable on, our stock in U.S. dollars. For example, an appreciation of RMB
against the U.S. dollar would make any new RMB denominated investments or
expenditures more costly to us, to the extent that we need to convert U.S.
dollars into RMB for such purposes. An appreciation of RMB against the U.S.
dollar would also result in foreign currency translation losses for financial
reporting purposes when we translate our U.S. dollar denominated financial
assets into RMB, as RMB is our reporting currency.





We
face risks related to health epidemics and other outbreaks.





Our
business could be adversely affected by the effects of H1N1 virus or another
epidemic or outbreak. Since all of our operations are in China, H1N1 virus,
Asian Bird Flu or other epidemic in China in the future may disrupt our business
operations and have a material adverse effect on our financial condition and
results of operations. For instance, health or other government regulations
adopted in response may require temporary closure of our production facilities
or of our offices. Such closures would severely disrupt our business operations
and adversely affect our results of operations. We have not adopted any written
preventive measures or contingency plans to combat any future outbreak of health
epidemics or any other outbreaks.





Risks Related to an
Investment in Our Securities





We
do not anticipate paying any cash dividends.





We
presently do not anticipate that we will pay any dividends on any of our capital
stock in the foreseeable future. The payment of dividends, if any, would be
contingent upon our revenues and earnings, if any, capital requirements, and
general financial condition. The payment of any dividends is within the
discretion of our Board of Directors. We presently intend to retain all
earnings, if any, to implement our business plan; accordingly, we do not
anticipate the declaration of any dividends in the foreseeable
future.




31





Because
the OTC Bulletin Board is a quotation system, not an issuer listing service,
market or exchange, it may be difficult for you to sell your common stock or you
may not be able to sell your common stock for an optimum trading
price.





The OTC
Bulletin Board is a regulated quotation service that displays real-time quotes,
last sale prices and volume limitations in over-the-counter securities. Because
trades and quotations on the OTC Bulletin Board involve a manual process, the
market information for such securities cannot be guaranteed. In addition, quote
information, or even firm quotes, may not be available. The manual execution
process may delay order processing and intervening price fluctuations may result
in the failure of a limit order to execute or the execution of a market order at
a significantly different price. Execution of trades, execution reporting and
the delivery of legal trade confirmations may be delayed significantly.
Consequently, one may not be able to sell shares of our common stock at the
optimum trading prices.





The
dealer’s spread (the difference between the bid and ask prices) may be large and
may result in substantial losses to the seller of securities on the OTC Bulletin
Board if the common stock or other security must be sold immediately. Further,
purchasers of securities may incur an immediate “paper” loss due to the price
spread. Moreover, dealers trading on the OTC Bulletin Board may not have a bid
price for securities bought and sold through the OTC Bulletin Board. Due to the
foregoing, demand for securities that are traded through the OTC Bulletin Board
may be decreased or eliminated.





The
application of the “penny stock” rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those
shares.





In the
event the trading price of our common shares reaches below $5 per
share, the open-market trading of our common shares will be subject to the
“penny stock” rules. The “penny stock” rules impose additional sales practice
requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of securities and
have received the purchaser's written consent to the transaction before the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a disclosure
schedule prescribed by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common shares, and may result in decreased
liquidity for our common shares and increased transaction costs for sales and
purchases of our common shares as compared to other securities.





Our
common shares are thinly traded and, you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.





We cannot
predict the extent to which an active public market for its common stock will
develop or be sustained. However, we do not rule out the possibility of applying
for listing on the Nasdaq National Market or other exchanges.





Our
common shares have historically been sporadically or "thinly-traded" on the OTC
Bulletin Board, meaning that the number of persons interested in purchasing our
common shares at or near bid prices at any given time may be relatively small or
non-existent. This situation is attributable to a number of factors, including
the fact that we are a small company which is relatively unknown to stock
analysts, stock brokers, institutional investors and others in the investment
community that generate or influence sales volume, and that even if we came to
the attention of such persons, they tend to be risk-averse and would be
reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we became more seasoned and
viable. As a consequence, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect on share
price. We cannot give you any assurance that a broader or more active public
trading market for our common stock will develop or be sustained, or that
current trading levels will be sustained.




32





The
market price for our common stock is particularly volatile given our status as a
relatively small company with a small and thinly traded “float” and lack of
current revenues that could lead to wide fluctuations in our share price. The
price at which you purchase our common stock may not be indicative of the price
that will prevail in the trading market. You may be unable to sell your common
stock at or above your purchase price if at all, which may result in substantial
losses to you.





The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares are sporadically and/or thinly traded. As a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our shareholders may disproportionately influence the
price of those shares in either direction. The price for our shares could, for
example, decline precipitously in the event that a large number of our common
shares are sold on the market without commensurate demand, as compared to a
seasoned issuer which could better absorb those sales without adverse impact on
its share price. Secondly, we are a speculative or "risky" investment due to our
lack of revenues or profits to date and uncertainty of future market acceptance
for our current and potential products. As a consequence of this enhanced risk,
more risk-adverse investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be more inclined
to sell their shares on the market more quickly and at greater discounts than
would be the case with the stock of a seasoned issuer. The following factors may
add to the volatility in the price of our common shares: actual or anticipated
variations in our quarterly or annual operating results; adverse outcomes; the
termination of our contractual agreements with Laiyang Jiangbo; and additions or
departures of our key personnel, as well as other items discussed under this
"Risk Factors" section, as well as elsewhere in this report. Many of these
factors are beyond our control and may decrease the market price of our common
shares, regardless of our operating performance. We cannot make any predictions
or projections as to what the prevailing market price for our common shares will
be at any time, including as to whether our common shares will sustain their
current market prices, or as to what effect that the sale of shares or the
availability of common shares for sale at any time will have on the prevailing
market price. However, we do not rule out the possibility of applying for
listing on the Nasdaq National Market or other exchanges.





Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same securities by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect to be
in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.





The
market price for our stock may be volatile and the volatility in our common
share price may subject us to securities litigation.





The
market price for our stock may be volatile and subject to wide fluctuations in
response to factors including the following:




33




·
              actual or anticipated
      fluctuations in our quarterly operating
  results;
 
 ·
              changes in financial estimates by
      securities research
analysts;
 
 ·
              conditions in pharmaceutical and
      agricultural 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 litigation;
      and
 
 ·
              general economic or political
      conditions in China.





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





The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
In the past, plaintiffs have often initiated securities class action litigation
against a company following periods of volatility in the market price of its
securities. We may, in the future, be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources.





Our
corporate actions are substantially controlled by our principal shareholders and
affiliated entities.





Our
principal shareholders and their affiliated entities own approximately 44% of
our outstanding common shares, representing approximately 44% of our voting
power. These shareholders, acting individually or as a group, could exert
substantial influence over matters such as electing directors and approving
mergers or other business combination transactions. In addition, because of the
percentage of ownership and voting concentration in these principal shareholders
and their affiliated entities, elections of our board of directors will
generally be within the control of these shareholders and their affiliated
entities. While all of our shareholders are entitled to vote on matters
submitted to our shareholders for approval, the concentration of shares and
voting control presently lies with these principal shareholders and their
affiliated entities. As such, it would be difficult for shareholders to propose
and have approved proposals not supported by management. There can be no
assurances that matters voted upon by our officers and directors in their
capacity as shareholders will be viewed favorably by all shareholders of our
company.




34





The
elimination of monetary liability against our directors, officers and employees
under Florida law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures by us and may
discourage lawsuits against our directors, officers and employees.





Our
articles of incorporation contain specific provisions that eliminate the
liability of our directors for monetary damages to our company and shareholders,
and we are prepared to give such indemnification to our directors and officers
to the extent provided by Florida law. We may also have contractual
indemnification obligations under our employment agreements with our officers.
The foregoing indemnification obligations could result in our company incurring
substantial expenditures to cover the cost of settlement or damage awards
against directors and officers, which we may be unable to recoup. These
provisions and resultant costs may also discourage our company from bringing a
lawsuit against directors and officers for breaches of their fiduciary duties,
and may similarly discourage the filing of derivative litigation by our
shareholders against our directors and officers even though such actions, if
successful, might otherwise benefit our company and shareholders.





Legislative
actions, higher insurance costs and potential new accounting pronouncements may
impact our future financial position and results of operations.





There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results of
operations. The Sarbanes-Oxley Act of 2002 and other rule changes are likely to
increase general and administrative costs and expenses. In addition, insurers
are likely to increase premiums as a result of high claims rates over the past
several years, which we expect will increase our premiums for insurance
policies. Further, there could be changes in certain accounting rules. These and
other potential changes could materially increase the expenses we report under
generally accepted accounting principles, and adversely affect our operating
results.





Past
activities of Genesis and its affiliates may lead to future
liability.





Prior to
the Exchange Agreement among Genesis, Karmoya and the Karmoya Shareholders
executed on October 1, 2007, we engaged in businesses unrelated to our current
operations. Neither Genesis’s prior management nor any of its shareholders prior
to the Exchange Transaction are providing indemnifications against any loss,
liability, claim, damage or expense arising out of or based on any breach of or
inaccuracy in any of their representations and warranties made regarding such
acquisition, and any liabilities relating to such prior business against which
we are not completely indemnified may have a material adverse effect on our
company. For example, we are aware of three lawsuits arising from past
activities of Genesis, alleging breach of contract. Please see “Legal
Proceedings” for more information.





We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our shareholders.





We
believe that our current cash and cash equivalents, anticipated cash flows from
operations and the net proceeds from a proposed offering will be sufficient to
meet our anticipated cash needs for the near future. We may, however, require
additional cash resources due to changed business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
If our resources are insufficient to satisfy our cash requirements, we may seek
to sell additional equity or debt securities or obtain a credit facility. The
sale of additional equity securities could result in additional dilution to our
shareholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that
would restrict our operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.





Existing
stockholders may experience some dilution as a result of the exercise of
warrants.





In the
May 2008 financing, we issued notes and, in conjunction with the notes,
Class A warrants to purchase, collectively, up to 1,875, 000 shares of our
common stock, subject to adjustment. In the November 2007 financing, we issued
debentures and, in connection with the debentures, warrants to purchase,
collectively, up to 400,000 shares of our common stock. Any issuances of shares
upon any exercise of these warrants will cause dilution in the interests of our
shareholders.




35





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 will
be 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, an independent registered public accounting
firm must 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 help 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.





We
will incur increased costs as a result of being a public company.





As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company. In addition, the Sarbanes-Oxley Act
and other new rules subsequently implemented by SEC have required changes in
corporate governance practices of public companies. We expect these new rules
and regulations to increase our legal, accounting and financial compliance costs
and to make certain corporate activities more time-consuming and costly. In
addition, we will incur additional costs associated with our public company
reporting requirements. We are currently evaluating and monitoring developments
with respect to these new rules, and we cannot predict or estimate the amount of
additional costs we may incur or the timing of such costs.





ITEM
1B. UNRESOLVED STAFF COMMENTS





Not
applicable.





ITEM
2. DESCRIPTION OF PROPERTY





Our
principal executive offices are located at Middle Section, Longmao Street, Area
A, Laiyang Waixiangxing Industrial Park, Laiyang City, Yantai, Shandong
Province, PRC 265200, where we have developed approximately 25,000 square meters
of production facilities, office, and garage space. Our total building area is
13,052 square meters,our production workshop area is more than 10,900 square
meters and our warehouses area is approximately 1400 square meters. Those
properties are owned by us.





On August
13, 2003, the Laiyang Development Planning Agency approved Laiyang Jiangbo’s
plan to construct garage and office space. On August 18, 2003, the Laiyang
Industrial Park Administration certified Laiyang Jiangbo’s investment of RMB 10
million ($1.3 million) in Section A of the Industrial Park to build on a 13,000
square meters lot.




36





In
October 2007, the Laiyang Bureau of Land and Resources sold us a 50 years land
use right for a 266,664 square meters lot located in Laiyang City to Laiyang
Jiangbo. The Company paid approximately RMB 60.8 million ($8.9 million) for the
land use right.





ITEM
3. LEGAL PROCEEDINGS





The
Company is involved in various legal matters arising in the ordinary course of
business. After taking into consideration the Company’s legal counsel’s
evaluation of such matters, the Company’s management is of the opinion that the
outcome of these matters will not have a significant effect on the Company’s
consolidated financial position as of June 30, 2009.





The
following summarizes the Company’s pending  legal proceedings as of
June 30, 2009:





CRG Partners, Inc. and
Capital Research Group, Inc. and Genesis Technology Group, Inc., n/k/a Genesis
Pharmaceuticals Enterprises, Inc. (Arbitration) - Case No. 32 145 Y 00976 07,
American Arbitration Association, Southeast Case Management
Center





On
December 4, 2007, CRG Partners, Inc. (“CRGP”), a former consultant of the
Company, filed a demand for arbitration against the Company alleging breach of
contract and seeking damages of approximately $10 million as compensation for
consulting services rendered to the Company. The amount of damages sought by the
claimant was equal to the dollar value of 29,978,900 shares of the Company’s
common stock (Pre 40-to-1 reverse split) in November 2007, in which the claimant
alleged were due and owing to CRGP. On December 5, 2007, the Company gave
notice of termination of the relationship with CRG under the consulting
agreement. CRGP subsequently filed an amendment to the demand for arbitration to
include Capital Research Group, Inc. (“CRG”) as an added claimant and increased
the damage amount sought under this matter to approximately $13.8
million.





The
Company subsequently filed counter claims in reference to the aforementioned
allegations of breach of contract. In February 2009, the Company was notified by
the arbitration panel of American Arbitration Association (the “Panel”) that the
Panel awarded CRG and CRGP jointly, a net total of $ 980,070 (the “Award”) to be
paid by the Company on or before February 27, 2009. Once the Award is satisfied,
CRG and CRGP would have no further claims against the Company’s common stock or
other property that were the subject of the arbitration. The amount has been
charged to operations for the year ended March 31, 2009, and is included in
liabilities assumed from reorganization as of June 30, 2009.





On March
6, 2009, CRG , former consultants of the Company, filed a motion to confirm the
arbitration award conferred by a panel of arbitrators of the American
Arbitration Association on February 2, 2009. On July 15, 2009, the Circuit Court
of the 11th Judicial Circuit in and for Miami-Dade County confirmed the
arbitration award and entered judgment against Genesis Technology Group, Inc. At
June 30, 2009, the award has not been paid and the Company is in the process of
appealing the case.





ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





On March
3, 2009, the holders of 52.22% of the Company’s issued and outstanding common
stock (5,416,200) approved a change of the Company’s name "Genesis
Pharmaceuticals Enterprises, Inc." to "Jiangbo Pharmaceuticals, Inc." (the
"Corporate Name Change").  The Corporate Name Change became effective on
April 16, 2009.





37





PART II





Item 5. MARKET FOR COMMON EQUITY, RELATED
SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES





Market
Information





Our
common stock is not listed on any stock exchange. Our common stock is traded
over-the-counter on the Over-the-Counter Electronic Bulletin Board under the
symbol “JGBO”. The following table sets forth the high and low bid information
for our common stock for each quarter within our last two fiscal years, as
reported by the Over-the-Counter Electronic Bulletin Board. The bid prices
reflect inter-dealer quotations, do not include retail markups, markdowns or
commissions and do not necessarily reflect actual transactions.





LOW
                        
                        
                        HIGH2009Quarter
      ended June 30, 2009
                        
                        $
                        3.75
                        
                        
                        $
                        13.75Quarter
      ended March 31, 2009
                        
                        $
                        3.59
                        
                        
                        $
                        5.90Quarter
      ended December 31, 2008
                        
                        $
                        3.31
                        
                        
                        $
                        8.50Quarter
      ended September 30, 2008
                        
                        $
                        5.25
                        
                        
                        $
                        11.082008Quarter
      ended June 30, 2008
                        
                        $
                        7.50
                        
                        
                        $
                        14.40Quarter
      ended March 31, 2008
                        
                        $
                        7.04
                        
                        
                        $
                        14.72Quarter
      ended December 31, 2007
                        
                        $
                        8.80
                        
                        
                        $
                        14.40Quarter
      ended September 30, 2007
                        
                        $
                        3.40
                        
                        
                        $
                        6.00




As of
September 24, 2009, the closing sales price for shares of our common stock was
$11.50 per share on the Over-The-Counter Bulletin Board.





Holders





As of
September 24, 2009, there were approximately 953 shareholders of record of our
common stock based upon the shareholders’ listing provided by our transfer
agent. Our transfer agent is Computershare Trust Company, 350 Indiana St., #800,
Golden, Colorado 80401, and its telephone number is (303) 262-0600.





Dividend
Policy





We have
not paid cash dividends on our common stock since the Company became public
through reverse merger. We intend to keep future earnings to finance the
expansion of our business, and we do not anticipate that any cash dividends will
be paid in the foreseeable future. We rely on dividends from Laiyang Jiangbo for
our funds and PRC regulations may limit the amount of funds distributed to us
from Laiyang Jiangbo, which will affect our ability to declare any dividends.
See "Risk Factors - Risks Related to Doing Business in the PRC – Laiyang Jiangbo
and GJBT are subject to restrictions on paying dividends and making other
payments to us" and " Governmental control of currency conversion may affect the
value of your investment."





Our
future payment of dividends will depend on our earnings, capital requirements,
expansion plans, financial condition and relevant factors that our board of
directors may deem relevant. Our retained earnings limits our ability to pay
dividends.




38





Unregistered Sales of Equity
Securities and Use of Proceeds





The
following private placements of the Company’s securities were made in reliance
upon the exemption from registration under Section 4(2) of the Securities Act of
1933, as amended, and/or, Rule 506 of Regulation D promulgated under the
Securities Act. The Company did not use underwriters in any of the following
private placements.




In July
2008, the Company issued 2,500 shares of common stock to two of the Company’s
current and former directors as part of their compensation for services. The
Company valued these shares at the fair market value on the date of grant of $8
per share, or $20,000 in total, based on the trading price of common stock. We
recorded related stock-based compensation expenses of $20,000 for the year ended
June 30, 2009, accordingly





In
September 2008, we issued 2,500 shares of restricted common stock to two of our
former and current directors for director compensation. We valued these common
shares at the fair market value on the date of the grant at $9 per share or
$22,500 in total. We recorded related stock-based compensation expenses of
$22,500 for the year ended June 30, 2009, accordingly.





In
December 2008, the Company issued 20,000 shares of its common stock in
connection with the conversion of $160,000 of convertible debt relating to the
debt financing. As a result of the conversion, the Company recorded $145,524
interest expense to fully amortize the unamortized discount related to the
converted dentures.





In
January 2009, in connection with the Hongrui acquisition, the Company recorded
643,651 shares of Jiangbo’s common stock issuable to Shandong Traditional
Chinese Medicine College as part of the consideration for
acquisition.  The fair value of the common stock of $4.035 per share
was based on the weighted average trading price of 5 days prior to the date of
the acquisition, and amounted to $2,597,132.





In July
2009, the Company issued 1,009 share of common stock to a director as part of
his compensation for services. The Company valued these shares at the fair
market value on the date of grant of $9.91 per share, or $10,000 in total, based
on the trading price of common stock.





In
August, 2009, the Company entered into a Letter Agreement  with Pope
Investments LLC (“Pope”),  pursuant to which the Company issued 82,500
shares of common stock to Pope in lieu of payment of the $660,000 in cash
interest that was due and payable to Pope with respect to November 2007
Debentures and the May 2008 Notes held by Pope.  In exchange, Pope
agreed to waive certain events of defaults (as defined in the November 2007
Debentures and May 2008 Notes) that had  occurred as a result of the
Company’s failure to timely make interest payments on the November 2007
Debentures and May 2008 Notes that were due and payable on May 30, 2009, and
agreed not to provide written notice to the Company with respect to the
occurrence of either of such events of default.





In
September 2009, the Company issued 62,500 shares   of its common stock in
connection with the conversion of $500,000 of May 2008 Convertible
Debentures.





Issuer
Purchases of Equity Securities.





None.





ITEM
6. SELECTED FINANCIAL DATA





As a
smaller reporting company, we are not required to provide the information called
for by Item 6 of Form 10-K.




39




ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





The
following analysis of our consolidated financial condition and results of
operations for the years ended June 30, 2009, 2008 and 2007, should be read in
conjunction with our audited consolidated financial statements, including
footnotes, and other information presented elsewhere in this annual report on
Form 10-K. This discussion contains forward-looking statements that involve
significant risks and uncertainties. As a result of many factors, such as those
set forth under “Forward Looking Statements” and “Item 1A. Risk Factors” and
elsewhere in this Form 10-K, our actual results may differ materially from those
anticipated in these forward-looking statements. When used in this section,
"fiscal 2009" means our fiscal year ended June 30, 2009 and "fiscal 2008" means
our fiscal year ended June 30, 2008.





OVERVIEW





We were
incorporated on August 15, 2001, in the State of Florida under the name Genesis
Technology Group, Inc. On October 12, 2001, we consummated a merger with
NewAgeCities.com, an Idaho public corporation formed in 1969. We were the
surviving entity after the merger.




On
October 1, 2007, we completed a share exchange transaction by and among us,
Karmoya International Ltd. (“Karmoya”), a British Virgin Islands company, and
Karmoya’s shareholders. As a result of the share exchange transaction, Karmoya,
a company which was established as a “special purpose vehicle” for the foreign
capital raising activities of its Chinese subsidiaries, became our wholly-owned
subsidiary and our new operating business. Karmoya was incorporated under the
laws of the British Virgin Islands on July 17, 2007, and owns 100% of the
capital stock of Union Well International Limited (“Union Well”), a Cayman
Islands company. Karmoya conducts its business operations through Union Well’s
wholly-owned subsidiary, Genesis Jiangbo (Laiyang) Biotech Technology Co., Ltd.
(“GJBT”). GJBT was incorporated under the laws of the People’s Republic of China
("PRC") on September 16, 2007, and registered as a wholly foreign owned
enterprise (“WOFE”) on September 19, 2007. GJBT has entered into consulting
service agreements and equity-related agreements with Laiyang Jiangbo
Pharmaceutical Co., Ltd. (“Laiyang Jiangbo”), a PRC limited liability company
incorporated on August 18, 2003.   On October 12, 2007, the
Company’s corporate name was changed to Genesis Pharmaceuticals Enterprises,
Inc.





As a
result of the share exchange transaction, our primary operations consist of the
business and operations of Karmoya and its subsidiaries, which are conducted by
Laiyang Jiangbo in the PRC. Laiyang Jiangbo produces and sells western
pharmaceutical products in China and focuses on developing innovative medicines
to address various medical needs for patients worldwide.





On July
27, 2008, our board of directors and the majority holders of our capital stock
approved a one-for-forty reverse stock split of our common stock. On August 29,
2008, we received confirmation from the Department of the State of Florida that
the Articles of Amendment to the Amended and Restated Articles of Incorporation
(“August 2008 Amended Articles of Incorporation”) to effect a reverse stock
split was duly filed and on September 3, 2008, the reverse stock split was
effectuated. Following the reverse stock split, the total number of shares of
our common stock outstanding was reduced from 412,986,078 shares to
approximately 10,325,000 shares and the maximum number of shares of common stock
that the Company is authorized to issue was also reduced from 900,000,000 to
22,500,000. The financial statements have been retroactively adjusted to reflect
the reverse split. Additionally, all share representations are on a post-split
basis hereinafter.





Pursuant
to a Certificate of Amendment to our Amended and Restated Articles of
Incorporation filed with the Department of State of the State of Florida which
took effect as of April 16, 2009, our name was changed from "Genesis
Pharmaceuticals Enterprises, Inc." to "Jiangbo Pharmaceuticals, Inc." (the
"Corporate Name Change").  The Corporate Name Change was approved and
authorized by our Board of Directors as well as our holders of a majority of the
outstanding shares of voting stock by written consent.




As
a result of the Corporate Name Change, our stock symbol changed to "JGBO" with
the opening of trading on May 12, 2009 on the OTCBB.




40




FINANCIAL
PERFORMANCE HIGHLIGHTS:





Net
Revenues





2009
                    
                    
                    2008
                    
                    
                    2007Net
      Revenues (in '000)
                    
                    $
                    117,388
                    
                    
                    $
                    99,547
                    
                    
                    $
                    76,194%
      change year over year
                    
                    
                    17.9
                    %
                    
                    
                    30.7
                    %
                    
                    
                    55
                    %




Net
revenues for fiscal 2009 of $117.4 million reflected an increase of 17.9%
over fiscal 2008 net revenues of $99.5 million. Our net revenues experienced
30.7% growth from fiscal 2007, $ 76.2 million, to fiscal 2008, $ 99.5
million.





Gross
margin




2009
                    
                    
                    2008
                    
                    
                    2007Cost
      of Goods Sold (in '000)
                    
                    $
                    27,909
                    
                    
                    $
                    22,507
                    
                    
                    $
                    21,162Gross
      Margin
                    
                    
                    76.2
                    %
                    
                    
                    77.4
                    %
                    
                    
                    72
                    %




Gross
margin decreased to 76.2% in 2009 compared with 77.4% in 2008 and 72% in 2007.
This was primarily due to we reduced the per unit sales price as part of the
effort to restructure our distribution and sales system.





SG&A




2009
                    
                    
                    2008
                    
                    
                    2007SG&A
      (in ‘000)
                    
                    $
                    35,316
                    
                    
                    $
                    41,593
                    
                    
                    $
                    25,579Percentage
      of Sales
                    
                    
                    30.1
                    %
                    
                    
                    41.8
                    %
                    
                    
                    33.6
                    %




SG&A
as a percentage of sales decreased to 30.1 % in 2009 from 41.8 % in 2008 and
33.6% in 2007, as a result of the restructuring our distribution and sales
system to sell our products primarily through 28 large
independent regional distributors and significantly reducing the commission paid
to your sales representatives on those products.





Net
income




2009
                    
                    
                    2008
                    
                    
                    2007Net
      income (in '000)
                    
                    $
                    28,880
                    
                    
                    $
                    22,451
                    
                    
                    $
                    22,053net
      margin
                    
                    
                    24.5
                    %
                    
                    
                    22.6
                    %
                    
                    
                    28.9
                    %




Net
margin increased to 24.5% in 2009 from 22.55% in 2008, primarily due to
lower SG&A as a percentage of sales and partially offset by no tax
exemption received in 2009 as compared to 2008.




41





RESULTS
OF OPERATIONS





The
following table sets forth the results of our operations for the periods
indicated as a percentage of total net sales: ($ in thousands)




Year Ended
                                June 30,
                              
                              
                              % of
                              
                              
                              Year Ended
                                June 30,
                              
                              
                              % of
                              
                              
                              Year Ended
                                June 30,
                              
                              
                              % of2009
                              
                              
                              Revenue
                              
                              
                              2008
                              
                              
                              Revenue
                              
                              
                              2007
                              
                              
                              RevenueREVENUES
                              
                              
                              117,144
                              
                              
                              
                              99.79
                              %
                              
                              
                              93,983
                              
                              
                              
                              94.41
                              %
                              
                              
                              72,259
                              
                              
                              
                              94.84
                              %REVENUES
      - RELATED PARTY
                              
                              
                              244
                              
                              
                              
                              0.21
                              %
                              
                              
                              5,564
                              
                              
                              
                              5.59
                              %
                              
                              
                              3,934
                              
                              
                              
                              5.16
                              %COST
      OF REVENUES
                              
                              
                              27,855
                              
                              
                              
                              23.73
                              %
                              
                              
                              21,073
                              
                              
                              
                              21.17
                              %
                              
                              
                              19,961
                              
                              
                              
                              26.20
                              %COST
      OF REVENUES-RELATED PARTIES
                              
                              
                              54
                              
                              
                              
                              0.05
                              %
                              
                              
                              1,434
                              
                              
                              
                              1.44
                              %
                              
                              
                              1,200
                              
                              
                              
                              1.58
                              %GROSS
      PROFIT
                              
                              
                              89,479
                              
                              
                              
                              76.22
                              %
                              
                              
                              77,040
                              
                              
                              
                              77.39
                              %
                              
                              
                              55,032
                              
                              
                              
                              72.23
                              %SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                              
                              
                              35,315
                              
                              
                              
                              30.08
                              %
                              
                              
                              41,593
                              
                              
                              
                              41.78
                              %
                              
                              
                              25,579
                              
                              
                              
                              33.57
                              %RESEARCH
      AND DEVELOPMENT
                              
                              
                              4,395
                              
                              
                              
                              3.74
                              %
                              
                              
                              3,236
                              
                              
                              
                              3.25
                              %
                              
                              
                              11,144
                              
                              
                              
                              14.63
                              %INCOME
      FROM OPERATIONS
                              
                              
                              49,768
                              
                              
                              
                              42.40
                              %
                              
                              
                              32,211
                              
                              
                              
                              32.36
                              %
                              
                              
                              18,309
                              
                              
                              
                              24.03
                              %OTHER
      EXPENSES(INCOME)
                              
                              
                              8,108
                              
                              
                              
                              6.91
                              %
                              
                              
                              2,789
                              
                              
                              
                              2.80
                              %
                              
                              
                              (6,375
                              )
                              
                              
                              (8.37
                              )%INCOME
      BEFORE PROVISION FOR INCOME TAXES
                              
                              
                              41,660
                              
                              
                              
                              35.49
                              %
                              
                              
                              29,422
                              
                              
                              
                              29.56
                              %
                              
                              
                              24,684
                              
                              
                              
                              32.40
                              %PROVISION
      FOR INCOME TAXES
                              
                              
                              12,780
                              
                              
                              
                              10.89
                              %
                              
                              
                              6,971
                              
                              
                              
                              7.00
                              %
                              
                              
                              2,631
                              
                              
                              
                              3.45
                              %NET
      INCOME
                              
                              
                              28,880
                              
                              
                              
                              24.60
                              %
                              
                              
                              22,451
                              
                              
                              
                              22.56
                              %
                              
                              
                              22,053
                              
                              
                              
                              28.94
                              %OTHER
      COMPREHENSIVE INCOME
                              
                              
                              (1,177
                              )
                              
                              
                              (1.00
                              )%
                              
                              
                              6,554
                              
                              
                              
                              6.58
                              %
                              
                              
                              1,018
                              
                              
                              
                              1.34
                              %COMPREHENSIVE
      INCOME
                              
                              $
                              27,703
                              
                              
                              
                              23.60
                              %
                              
                              $
                              29,005
                              
                              
                              
                              29.14
                              %
                              
                              $
                              23,071
                              
                              
                              
                              30.28
                              %





Comparison
of Years Ended June 30, 2009 and 2008





REVENUES. Revenues by product
categories were as follows: ($ in thousands)





Year Ended June 30,
                      
                      
                      Increase/
                      
                      
                      Increase/Product
                      
                      2009
                      
                      
                      2008
                      
                      
                      (Decrease)
                      
                      
                      (Decrease)Western
      pharmaceutical medicines
                      
                      $
                      75,814
                      
                      
                      $
                      86,401
                      
                      
                      $
                      (10,578
                      )
                      
                      
                      (12.24
                      )%Chinese
      traditional medicines
                      
                      
                      41,574
                      
                      
                      
                      13,145
                      
                      
                      
                      28,429
                      
                      
                      
                      216.27
                      %TOTAL
                      
                      $
                      117,388
                      
                      
                      $
                      99,546
                      
                      
                      $
                      17,842
                      
                      
                      
                      17.92
                      %




42




Our
revenues include revenues from sales and revenues from sales to related party of
$117.1million and $0.2 million, respectively, for the year ended June 30, 2009.
During the year ended June 30, 2009, we had revenues from sales of $117.1
million as compared to revenues from sales of $94.0 million for the year ended
June 30, 2008, an increase of $23.2 million or approximately 24.64%. During the
year ended June 30, 2009, we had revenues from sales to related parties of $0.2
million as compared to revenues from sales to related parties of $5.6 million
for the year ended June 30, 2008, a decrease of approximately 95.61%. The
overall increase in total revenue was primarily attributable to the increase of
sales volume of our Chinese traditional medicine Baobaole chewable tablets and
the new product Radix Isatidis Disperable Tablets that was commercially launched
in October 2008, partially offset by the decrease in the revenue generated from
Clarithromycin Sustained-release tablets and Itopride Hydrochloride granules. In
January 2009, as part of the effort to restructure our distribution and sales
system to sell our products primarily through 28 large distributors and reduced,
we reduced the per unit sales price by an average of 25.6% for for
Clarithromycin Sustained-release tablets, Itopride Hydrochloride granules and
Baobaole chewable tables. At the same, we reduced the commission paid to our
sales representatives on those products to approximately 5%. The quantities sold
for Clarithromycin Sustained-release tablets and Itopride Hydrochloride
granules, our two largest products in 2009 were materially consistent with 2008
while the total revenue generated from the two products decreased by $12.5
million, or 14.35% The revenue generated from Baobaole chewable tables increased
approximately $16.2 million or 116.48 % in 2009 compared with 2008. While we
expect our sales from the Chinese traditional medicines continue to grow, our
sales from the western pharmaceutical medicines will have minimal growth as both
Clarithromycin Sustained-release tablets and Itopride Hydrochloride granules
have entered into their maturity.





COST OF REVENUES. Our cost of
revenues includes cost of sales and cost of sales to related party of $27.9
million and $0.1 million, respectively, for the year ended June 30, 2009. For
the year ended June 30, 2008, cost of sales and cost of sales to related parties
amounted to $21.1 million and $1.4 million, respectively. Total cost of sales
for 2009 increased $5.4 million or 24.01% , from $22.5 million for the year
ended June 30, 2008 to $27.9 million for the year ended June 30, 2009. Cost of
sales as a percentage of net revenue for the year ended June 30, 2009 is
approximately 23.78%, compared to the year ended June 30, 2008 at approximately
22.61%. The increase in cost of sales as a percentage of net revenue in fiscal
2009 was was primarily attributable to the reduction in the per unit sales price
due to our distribution and sales system restructuring effort in January 2009
mentioned above. The increase in cost of sales as a percentage of net revenue in
2009 was partially offset by more sales being generated from products with
higher- profit- margins, such as Baobaole chewable tablets and Radix Isatidis
Dispersible Tablets and our ability to properly manage raw material purchase
prices.




GROSS PROFIT. Gross profit
was $89.5 million for the year ended June 30, 2009 as compared to $77.0 million
for the year ended June 30, 2008, representing gross margins of approximately
76.22% and 77.39%, respectively. The decrease in the gross profit in fiscal 2009
was primarily due to the lower unit price charged as a result of sales net work
restructure mentioned above and partially offset by our improved product sales
mixture to generate more sales from products with higher profit
margins.





SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES. Selling, general and administrative expenses totaled $35.3
million for the year ended June 30, 2009, as compared to $41.6 million for the
year ended June 30, 2008, a decrease of approximately 15.10% as summarized below
($ in thousands):





Years Ended June 30,2009
                              
                              
                              2008Shipping
      and handling
                              
                              $
                              576
                              
                              
                              $
                              365Advertisement,
      marketing and promotion spending
                              
                              
                              7,572
                              
                              
                              
                              13,695Travel
      and entertainment- sales related
                              
                              
                              1,571
                              
                              
                              
                              982Depreciation
      and amortization
                              
                              
                              1,068
                              
                              
                              
                              458Salaries,
      commissions, wages and related benefits
                              
                              
                              22,228
                              
                              
                              
                              24,614Travel
      and entertainment- non sales related
                              
                              
                              274
                              
                              
                              
                              325Other
                              
                              
                              2,024
                              
                              
                              
                              1,154Total
                              
                              $
                              35,313
                              
                              
                              $
                              41,593





43




The
changes in these expenses during the year ended June 30, 2009, as compared to
the corresponding period in 2008 included the following:




·
                Shipping
      and handling expenses increased by $0.2 million or approximately 57.81%
      for the year ended June 30, 2007 as compared to the corresponding period
      of fiscal 2008, primarily because there was an increase in sales volume in
      fiscal year 2009 and the increase in fuel
costs.
  ·
                A decrease of $6.1 million or
      approximately 44.71% in advertising, marketing and promotional spending
      for the year ended June 30, 2009 was primarily due to less marketing and
      promotional spending and better managed advertising and promotional costs
      in the third and fourth quarter of
2009.
 
 ·
                Travel and entertainment -sales
      related expenses increased by $0.6 million or approximately 59.98% for the
      year ended June 30, 2009 as compared to the corresponding period in fiscal
      2008 was primarily due to our marketing and sales travel related
      activities related to establishing the distribution network for the
      product and promoting our newly launched products in fiscal
      2009.
 
 ·
                Depreciation and amortization
      increased by $0.6 million or 133.19% for the year ended June 30, 2009 as
      compared to the corresponding period of fiscal 2008, primarily due to
      additional plant and equipments  and intangible assets being
      depreciated or
amortized.
 
 ·
                Salaries, wages, commissions and
      related benefits decreased by $2.4 million or 9.69% for the year ended
      June 30, 2009 as compared to the corresponding period of fiscal 2008. The
      decrease was primarily because the significant decrease in commission paid
      to our sales representatives beginning in third quarter of 2009. In
      connection with the distribution and sales system restructuring, we
      reduced the commissions paid to our sales representatives to approximately
      5% for the sale of our three major products which was approximately 30% of
      the product sales
price.
 
 ·
                A decrease of $0.1 million or
      approximately 15.69% in travel and entertainment -non sales related
      expenses for the year ended June 30, 2009 as compared to the corresponding
      period of fiscal 2008 due the increase was primarily due better traveling
      and entertainment spending controls in fiscal year
      2009.
 
 ·
                Other selling, general and
      administrative expenses, which includes professional fees, utilities,
      office supplies and expenses increased by $0.9 million or 75.39% for the
      year ended June 30, 2008 as compared to the corresponding period in fiscal
      2008 primarily due to more professional fees, and other expenses related
      to being a publicly traded company in fiscal
  2009.





RESEARCH AND DEVELOPMENT
COSTS. Research and development costs, which consist fees paid to third
parties for research and development related activities conducted for the
Company and cost of material used and salaries paid for the development of the
Company’s products, totaled $4.4 million for the year ended June 30, 2009, as
compared to $3.2 million for the year ended June 30, 2008, an increase of
approximately $1.2 million or 35.83%. The increase in research and development
expenses in fiscal 2009 was due to the expenses for the two cooperative research
and development agreements with monthly payments  were for the full
year in 2009 as compared to three quarters in 2008 as those agreements
were  signed in second quarter of 2008.




44





OTHER EXPENSES. Our other
expenses consisted of loss from discontinued operations, valued added tax and
various other tax exemptions from the government, financial expenses and other
non-operating expenses. We had net other expense of $8.1 million for the year
ended June 30, 2009 as compared to net other expense of $2.8 million for the
year ended June 30, 2008, an increase of 5.1 million or 190.69%. The increase in
net other expenses was primarily attributable to we did not receive any tax
exemption in fiscal 2009 as compared to non-operating income of $1.4 million
generated from the tax exemption received from the government, an increase of
$1.5 million in debt discount amortization related to the financings in November
2007 and May 2008 and $1.4 million increase in our loss from
discontinued operations in fiscal 2009.





NET INCOME. Our net income
for the year ended June 30, 2009 was $28.9million as compared to $22.5 million
for the year ended June 30, 2008, an increase of $6.4 million or 28.63%. The
increase in net income is primarily attributable to increase in sales volume and
significant decrease in selling expenses and offset by increase in other
expenses as well as income tax expense as the Company did not receive any tax
exemption from the government in fiscal 2009.




Comparison
of Years Ended June 30, 2008 and 2007





REVENUES. Revenues by product
categories were as follows: ($ in thousands)





Year Ended June 30,
                      
                      
                      Increase/
                      
                      
                      Increase/Product
                      
                      2008
                      
                      
                      2007
                      
                      
                      (Decrease)
                      
                      
                      (Decrease)Western
      pharmaceutical medicines
                      
                      $
                      86,401
                      
                      
                      $
                      76,194
                      
                      
                      $
                      10,207
                      
                      
                      
                      13.40
                      %Chinese
      traditional medicines
                      
                      
                      13,145
                      
                      
                      
                      -
                      
                      
                      
                      13,145
                      
                      
                      
                      100.00
                      %TOTAL
                      
                      $
                      99,546
                      
                      
                      $
                      76,194
                      
                      
                      $
                      23,352
                      
                      
                      
                      30.65
                      %





Our
revenues include revenues from sales and revenues from sales to related party of
$94.0 million and $5.6 million, respectively, for the year ended June 30, 2008.
During the year ended June 30, 2008, we had revenues from sales of $94.0 million
as compared to revenues from sales of $72.3 million for the year ended June 30,
2007, an increase of approximately 30.06%. During the year ended June 30, 2008,
we had revenues from sales to related parties of $5.6 million as compared to
revenues from sales to related parties of $4.0 million for the year ended June
30, 2007, an increase of approximately 41.44%. The overall increase in total
revenue was primarily attributable to the increase of sales volume of our best
selling products: Clarithromycin sustained-release tablets and Itopride
Hydrochloride Granules; additionally, we released a new product, Baobaole
chewable tablets in the second quarter of fiscal year 2008 and the product has
been very popular in the market. Revenues generated from Clarithromycin
sustained-release tablets increased approximately $14.6 million or 45.89 % in
2008 compared with 2007 as the product was in the introduction period in 2007
and entering its growth period in later part of 2008.  Revenues
generated from Itopride Hydrochloride granules increased approximately $6.3
million or 21.64 % in 2008 compared with 2007 as the product has been in its
growth period since 2007 and entered into its maturity in 2008. The increase in
the two products resulted primarily from our strong marketing and sales effort,
and increased market demand as the two products are both approaching its
maturity in later part of 2008. The increase in revenues was partially offset by
a decrease in revenues of $11.1 million or 73.49 % in 2008 compared with 2007
generated from our two products, Ciprofloxacin Hydrochloride tablets and
Paracetamol tablets, which are in the declining period due to significant market
competition.





We
anticipate our revenues generated from our two best selling products,
Clarithromycin sustained-release tablets and Itopride Hydrochloride granules,
will gradually stabilize in 2009 as the two products have entered into their
maturity. The two products are expected to hold their current market share
through 2010 as the China SFDA has slowed its process in approving new drug
rights resulted in less competition in the near future market. Revenues
generated from Baobaole chewable tablets are expected to grow significantly
through 2009 as the product is currently in its growth stage and the market
demand for the product has been very strong.




45





COST OF REVENUES. Our cost of
revenues includes cost of sales and cost of sales to related party of $21.1
million and $1.4 million, respectively, for the year ended June 30, 2008. For
the year ended June 30, 2007, cost of sales and to related parties amounted to
$20.0 million and $1.2 million, respectively. Total cost of sales for 2008
increased $1.3 million or 6.36%, from $21.1 million for the year ended June 30,
2007 to $22.5 million for the year ended June 30, 2008. Cost of sales as a
percentage of net revenue for the year ended June 30, 2008 is approximately
22.61%, compared to the year ended June 30, 2007 at approximately 27.77%. The
decrease was attributable to more sales being generated from producing of
high-profit-margins products, the highly profitable new product Baobaole
chewable tables, more efficient producing process, our ability to better manage
raw material purchase prices and the government exemption on sales taxes and
miscellaneous  fees received in fiscal 2008.




GROSS PROFIT. Gross profit
was $77.0 million for the year ended June 30, 2008 as compared to $55.0 million
for the year ended June 30, 2007, representing gross margins of approximately
77.39% and 72.23%, respectively. The increase in our gross profits was mainly
due to decrease in cost of sales as a percentage of net revenue as we better
managed raw material purchase prices and our product sales mixture to generate
more sales from products with higher profit margins.





SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES. Selling, general and administrative expenses totaled $41.6
million for the year ended June 30, 2008, as compared to $25.6 million for the
year ended June 30, 2007, an increase of approximately 62.56% as summarized
below ($ in thousands):


Years
      Ended June 30,2008
                            
                            
                            2007Shipping
      and handling
                            
                            $
                            365
                            
                            
                            $
                            280Advertisement,
      marketing and promotion spending
                            
                            
                            13,695
                            
                            
                            
                            7,054Travel
      and entertainment- sales related
                            
                            
                            982
                            
                            
                            
                            564Depreciation
      and amortization
                            
                            
                            458
                            
                            
                            
                            280Salaries,
      commissions, wages and related benefits
                            
                            
                            24,614
                            
                            
                            
                            16,832Travel
      and entertainment- non sales related
                            
                            
                            325
                            
                            
                            
                            36Other
                            
                            
                            1,154
                            
                            
                            
                            533Total
                            
                            $
                            41,593
                            
                            
                            $
                            25,579


The
changes in these expenses during the year ended June 30, 2008, as compared to
the corresponding period in 2007 included the following:




·
                An increase of $6.6million or approximately94.15% in advertising, marketing and
      promotional spending for the year ended June 30, 2008 was primarily due to
      TV commercials and magazine advertisements expenses to promote our new
      product- Baobaole Chewable tablets, as well as our brand name. Additionally, we
      also increased our marketing and promotional activities to promote our two
      best selling products.
 
 ·
                Travel and entertainment -sales
      related expenses increased by $0.4 million or approximately 74.14% for the
      year ended June 30, 2008 as compared to the corresponding period in fiscal
      2007was primarily
      due toour marketing
      and sales travel related activities related to promoting our
      Baobole Chewable tablets and establishing the distribution network for the
      product as well as promoting our two other best selling
      products.
 
 ·
                Shipping and handling expenses
      increased by $0.1 million or approximately 30.43% for the year ended June 30,
      2008 as compared to the corresponding period of fiscal 2007,primarily because there was an
      increase in sales volume in fiscal year
  2008.
 
 ·
                Depreciation and amortization
      increased by $0.2 million or 63.45% for the yearended June 30, 2008 as compared
      to the corresponding period of fiscal 2007, primarilydue to additional fixed assets
      being depreciated.
  46
  ·
                Salaries, wages, commissions and
      related benefits increased by $7.8million or46.23% for the year ended June30, 2008 as compared
      to the corresponding period of fiscal 2007. The increase was primarilydue to increase in
      commission payments as a percentage of sales to sales representatives as
      well as an increase in number of employees and sales representatives as a
      result of expanding our distribution network from 26 provinces and regions
      to 30 provinces and regions in fiscal
  2008.
 
 ·
                An increase of $0.3 million or
      approximately 806.12% in travel and entertainment -non sales related
      expenses for the year ended June 30, 2008 as compared to the corresponding
      period of fiscal 2007. The increase wasprimarily due to increase in
      corporate executives’ and managers’ entertainment and travel related to
      public company related
activities.
 
 ·
                Other selling, general and
      administrative expenses, which includes professional fees, utilities,
      office supplies and expenses increased by $0.6 millionor 116.37% for the year ended
      June 30, 2008 as compared to the corresponding period in fiscal 2008
      primarilydue to
      more professional fees, and other expenses related to being a publicly
      traded company in fiscal
2008.




RESEARCH AND DEVELOPMENT
COSTS. Research and development costs, which consist fees paid to third
parties for research and development related activities conducted for the
Company and cost of material used and salaries paid for the development of the
Company’s products, totaled $3 million for the year ended June 30, 2008, as
compared to $11 million for the year ended June 30, 2007, an decrease of
approximately 70.96%. The significant decrease in research and development
expenses in fiscal 2008 was mainly due to major spending on a research and
development project conducted and paid for new drug clinical trials and project
were expensed in the second quarter of fiscal 2007. The Company completed
several research and development projects prior to the end of fiscal 2007 and
those drugs are currently in the final process of being approved by the
Chinese SFDA.





OTHER INCOME (EXPENSES). Our
other expenses consisted of valued added tax and various other tax exemptions
from the government, financial expenses and non-operating expenses. We had net
other expense of $2.8 million for the year ended June 30, 2008 as compared to
net other income of $6.3 million for the year ended June 30, 2007. The increase
in net other expenses was due the decrease of $3.5 million tax exemption
received by the Company in fiscal 2008, the increase in interest expense as a
result of our financings in November 2007 and May 2008, realized and unrealized
losses on our marketable securities, and our loss from
discontinued operations in fiscal 2008 which we did not occur in
fiscal 2007.





NET INCOME. Our net income
for the year ended June 30, 2008 was $22.5 million as compared to $22.1 million
for the year ended June 30, 2007, an increase of $0.4 million or 1.80%. The
increase in net income is primarily attributable to increase in sales volume of
our best selling products, as well as improved profit margin and partially
offset by higher operating expense and significantly $4.7 million less tax
exemptions received in fiscal 2008 and the interest expenses related to our
financings in November 2007 and May 2008 .





LIQUIDITY
AND CAPITAL RESOURCES





We have
historically financed our operations and capital expenditures principally
through private placements of debt and equity offerings, bank loans, and cash
provided by operations. We did not have significant financing activities in
fiscal year 2009. In fiscal year 2008, our primary financing activities included
the following:




·
              In November 2007, we raised
      $5,000,000 in gross proceeds through the sale of a convertible note. We
      received $4,645,592 in net proceeds after deducting placement agent
      discounts and commissions and payment of professional and other related
      expenses. Further detailed discussion regarding this financing is provided
      in the footnotes to financial
statements.
  47
  ·
              In May 2008, we raised
      $30,000,000 in gross proceeds through the sale of a convertible note. We
      received $28,313,500 in net proceeds after deducting placement agent
      discounts and commissions and payment of professional and other related
      expenses. Further detailed discussion regarding this financing is provided
      in the footnotes to financial
statements.





Cash
Flows




2009 Compared to
2008





Net cash
flow provided by operating activities was $62.9 million in fiscal 2009, compared
with $17.1 million in fiscal 2008, an increase of $45.8 million. The 2009
increase in cash provided by operating activities primarily due to the
followings: 1) increase in our income from continued operations of $7.8
million  2) increase in add-back of amortization on debt discount of
$1.5 million, 3) decrease in accounts receivable and accounts receivable-related
party of $5.2 million, 4) decrease in advances to suppliers of $1.5 million, 5)
increase in accounts payable of $3.8 million 6) increase in accrued liabilities
of $1.2 million 7) increase in refundable deposits of $4.1million 8) increase in
taxes payable of $11.1 million and  partially offset by the decrease
in other payables and other payable –related parties of $1.6 million and
decrease from liabilities from discontinued operations of $1.3
million.





Net cash
flow used in investing activities was $8.3 million in fiscal 2009 and $7.6
million in fiscal 2008, a $0.7 million increased. Uses of cash flow for
investing activities in 2009 included equipment purchases of $$0.1 million
and payments for the Hongrui acquisition of $8.6 million.





Net cash
flow provided by financing activities was $1.4 million in fiscal 2009 and while
net cash flow provided by financing activities was $18.5 million in fiscal 2008.
The decrease  of net cash flow provided by financing activities was
mainly due to the $33.0 million net proceed received from the two convertible
debts financings in fiscal 2008 of which we did not have similar activities in
2009 and partially offset by decrease in payments for dividend of $10.6 million
and decrease in change in restricted cash of $2.8 million.





We
reported a net increase in cash for the year ended June 30, 2009 of $56.2
million as compared to a net increase in cash of $30.5 million for the year
ended June 30, 2008.





Our
working capital position improved by $26.6 million to $99.8 million at June 30,
2009 from $73.2  million at June 30, 2008. This increase in working
capital is primarily attributable to an increase in cash of $ 56.2 million and a
decrease in other payable of $1.4 million offset by a decrease in short term
investments of $1.2 million, a decrease in accounts receivables and accounts
receivable - related parties totaling of $5.7 million, a decrease in advances to
suppliers of $1.5 million, an increase in accounts payable of $3.8 million, an
increase in notes payable of $1.5 million, an increase in refundable deposit of
$4.1 million, an increase in accrued liabilities of $1.0 million and an increase
in taxes payable of $11.2 million.




2008Compared to 2007





Net cash
flow provided by operating activities was $17.1 million in fiscal 2008, compared
with $15.3 million in fiscal 2007, an increase of $1.8 million. The 2008
increase in cash provided by operating activities included the followings: 1)
decrease in inventory of $1.7 million 2) an add-back of amortization on debt
discount of $2.5 million, 3) an add-back of unrealized loss on marketable
securities of $0.7 million, 4) increase in other payables and other payables-
related parties of $1.1 million and partially offset by the increase in accounts
receivable and 5) increase in advances to suppliers. We also have cash payment
for liabilities from discontinued operations of $ 1.2 million in 2008 while we
do not have corresponding payment in fiscal 2007.




48





Net cash
flow used in investing activities was $7.6 million in fiscal 2008 and $0.2
million in fiscal 2007, a $7.4 million increased. Uses of cash flow for
investing activities included equipment purchases and payments for
intangible assets. The increase of net cash flow used in investing activities in
fiscal 2008 was mainly due to increase in property and equipments payments
of $0.3 million and purchase of intangible assets of $8.9 million offset by
proceeds from sale of marketable securities of $1.0 million and cash received
from reverse acquisition of $0.5 million.





Net cash
flow provided by financing activities was $18.5 million in fiscal 2008 and while
net cash flow used in financing activities was $1.2 million in fiscal 2007. The
increase of net cash flow provided by financing activities was mainly due to
increase in proceeds from convertible debt of $33 million, decrease in
payments for short term loans of $ 0.9 million offset by payment for
dividend of $10.6 million, payment to escrow account of $2.0 million and
decrease in proceeds from short term loan of $ 1.9 million.





Our
working capital position increased $57.2 million, to $73.2 million at June 30,
2008, from $16.0 million at June 30, 2007. This increase in working capital is
primarily attributable to the increase in cash in bank of $30.5 million,
accounts receivable of $12.5 million, marketable equity securities of $2.1
million, advances to suppliers of $1.4 million and decrease of dividend payable
of $10.5 million, notes payable of $2.6 million, short term bank loans of $1.8
million, and offset by decrease of inventories of $1.2 million, and increase of
other payables of $2.3 million and the liability assumed from discontinued
operations of $1.1 million.





We
have historically financed our operations and capital expenditures principally
through private placements of debt and equity offerings, bank loans, and cash
provided by operations. At June 30, 2009, the majority of our liquid assets were
held in the Chinese Renminbi (“RMB”) denominations deposited in banks within the
PRC. The PRC has strict rules for converting RMB to other currencies and for
movement of funds from the PRC to other countries. Consequently, in the future,
we may face difficulties in moving funds deposited within the PRC to fund
working capital requirements in the U.S. Management has been evaluating and
resolving the situation.





We
anticipate that our working capital requirements may increase as a result of our
anticipated business expansion plan, continued increase in sales, potential
increases in the price of our raw materials, competition and our relationship
with suppliers or customers. We believe that our existing cash, cash equivalents
and cash flows from operations will be sufficient to sustain our current
operations for at least the next 12 months. We may, however, require additional
cash resources due to changed business conditions or other future developments,
including any investments or acquisitions we may decide to pursue.





Contractual
Obligations and Off-Balance Sheet Arrangements





Contractual
Obligations





We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.





The
following tables summarize our contractual obligations as of June 30, 2009, and
the effect these obligations are expected to have on our liquidity and cash
flows in future periods.




49




Payments Due by PeriodTotal
                  
                  
                  Less than 1
                    year
                  
                  
                  1-3 Years
                  
                  
                  3-5 Years
                  
                  
                  5 Years +Contractual
      Obligations:Convertible
      Debenture and Related Interest
                  
                  $
                  39,917,072
                  
                  
                  $
                  3,329,622
                  
                  
                  $
                  36,587,450
                  
                  
                  $
                  -
                  
                  
                  $
                  -Bank
      Indebtedness and Related Interest
                  
                  $
                  9,522,500
                  
                  
                  $
                  9,522,500
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Research
      and Development Contract Obligations
                  
                  $
                  7,398,250
                  
                  
                  $
                  4,395,000
                  
                  
                  $
                  2,637,000
                  
                  
                  $
                  366,250
                  
                  
                  $
                  -Total
      Contractual Obligations:
                  
                  $
                  56,837,822
                  
                  
                  $
                  17,247,122
                  
                  
                  $
                  39,224,450
                  
                  
                  $
                  366,250
                  
                  
                  $
                  -





Bank
Indebtedness amounts include the short-term bank loans amount and notes payable
amount.





Off-balance
Sheet Arrangements





We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our 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.





Risk
Factors





Interest Rates. Our exposure
to market risk for changes in interest rates primarily relates to our short-term
investments and short-term obligations; thus, fluctuations in interest rates
would not have a material impact on the fair value of these securities. At June
30, 2009, we had approximately $104.4 million in cash and cash equivalents. A
hypothetical 2 % increase or decrease in interest rates would not have a
material impact on our earnings or loss, or the fair market value or cash flows
of these instruments.





Foreign Exchange Rates. All
of our sales are denominated in the Chinese RMB. As a result, changes in the
relative values of the U.S. dollars and the RMB affect our reported levels of
revenues and profitability as the results are translated into U.S. dollars for
financial reporting purposes. In particular, fluctuations in currency exchange
rates could have a significant impact on our financial stability due to a
mismatch among various foreign currency-denominated sales and costs.
Fluctuations in exchange rates between the U.S. dollar and RMB affect our
gross and net profit margins and could result in foreign exchange and operating
losses.




Our
exposure to foreign exchange risk primarily relates to currency gains or losses
resulting from timing differences between signing of sales contracts and
settling of these contracts. Furthermore, we translate monetary assets and
liabilities denominated in other currencies into RMB, the functional currency of
our operating business. Our results of operations and cash flows are translated
at average exchange rates during the period, and assets and liabilities are
translated at the unified exchange rate as quoted by the People’s Bank of China
at the end of the period. Translation adjustments resulting from this process
are included in accumulated other comprehensive income in our statements of
shareholders’ equity. We recorded net foreign currency gains of $ 0.3 million
and $5.2 million for the years ended June 30, 2009 and 2008, respectively. We
have not used any forward contracts, currency options or borrowings to hedge our
exposure to foreign currency exchange risk. We cannot predict the impact of
future exchange rate fluctuations on our results of operations and may incur net
foreign currency losses in the future. As our sales, denominated in RMB,
continue to grow, we will consider using arrangements to hedge our exposure to
foreign currency exchange risk.




50





Our
financial statements are expressed in U.S. dollars but the functional
currency of our operating subsidiary is the RMB. The value of your investment in
our stock will be affected by the foreign exchange rates between the
U.S. dollar and the RMB. To the extent we hold assets denominated in
U.S. dollars, any appreciation of the RMB against the U.S. dollar
could result in a change to our statements of operations and a reduction in the
value of our U.S. dollar denominated assets. On the other hand, a decline
in the value of RMB against the U.S. dollar could reduce the
U.S. dollar equivalent amounts of our financial results, the value of your
investment in our company and the dividends we may pay in the future, if any,
all of which may have a material adverse effect on the price of our
stock.





Credit Risk. We have not
experienced significant credit risk, as most of our customers are long-term
customers with excellent payment records. We review our accounts receivable on a
regular basis to determine if the allowance for doubtful accounts is adequate at
each quarter-end. We typically extend 30 to 90 day trade credit to our largest
customers and we have not seen any of our major customers’ accounts receivable
go uncollected beyond the extended period of time or experienced any material
write-off of accounts receivable in the past.




Inflation Risk. In recent
years, China has not experienced significant inflation, and thus inflation has
not had a material impact on our results of operations. According to the
National Bureau of Statistics of China (“NBS”) (www.stats.gov.cn), the change in
Consumer Price Index (“CPI”) in China was 3.9%, 1.8% and 1.5% in 2004, 2005 and
2006, respectively. However, in 2007, according to NBS, CPI rose significantly
at a monthly average rate of 4.8%. Especially during the months of August,
September, October, November, and December, CPI was up 6.5%, 6.2%, 6.5%, 6.9%,
and 6.5%, respectively. Inflationary factors, such as increases in the cost of
our products and overhead costs, could impair our operating results. Although we
do not believe that inflation has had a material impact on our financial
position or results of operations to date, a high rate of inflation may have an
adverse effect on our ability to maintain current levels of gross margin and
selling, general and administrative expenses as a percentage of sales revenue if
the selling prices of our products do not increase with these increased
costs.





Basis
of Presentation





Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”). These
accounting principles require us to make certain estimates, judgments and
assumptions. We believe that the estimates, judgments and assumptions upon which
we rely are reasonable based upon information available to us at the time that
these estimates, judgments and assumptions are made. These estimates, judgments
and assumptions can affect the reported amounts of assets and liabilities as of
the date of the financial statements as well as the reported amounts of revenues
and expenses during the periods presented. Our financial statements would be
affected to the extent there are material differences between these estimates
and actual results. In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not require management’s
judgment in its application. There are also areas in which management’s judgment
in selecting any available alternative would not produce a materially different
result.





CRITICAL
ACCOUNTING POLICIES





The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.





51




A summary
of significant accounting policies is included in Note 2 to the audited
consolidated financial statements included in this Form 10-K. This section
should be read together with the Summary of Significant Accounting Policies
included as Note 2 to the consolidated financial statements included in our
Annual Report on Form 10-K for the year ended June 30, 2009. Management believes
that the application of these policies on a consistent basis enables us to
provide useful and reliable financial information about the company's operating
results and financial condition.





Use
of Estimates





The
preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our estimates and
assumptions. We base our estimates on historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Significant estimates in 2009, 2008 and 2007 include the allowance for doubtful
accounts, the allowance for obsolete inventory, the useful life of property and
equipment and intangible assets, and accruals for taxes due.





Inventories





Inventories,
consisting of raw materials and finished goods related to the Company’s products
are stated at the lower of cost or market utilizing the weighted average
method.





Property
and equipment





Property
and equipment are stated at cost less accumulated depreciation. Depreciation is
computed using straight-line method over the estimated useful lives of the
assets. The estimated useful lives of the assets are as follows:





Useful LifeBuilding
      and building improvements
                  
                  5 -
      40
                  
                  YearsManufacturing
      equipment
                  
                  5 –
      20
                  
                  YearsOffice
      equipment and furniture
                  
                  5 –
      10
                  
                  YearsVehicle
                  
                  5
                  
                  Years





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.





Long-lived
assets of the Company are reviewed periodically or more often if circumstances
dictate, to determine whether their carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives.





In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", 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. The Company recognizes an impairment loss when the sum of
expected undiscounted future cash flows is less than the carrying amount of the
asset. The amount of impairment is measured as the difference between the
asset’s estimated fair value and its book value.




52





Intangible
assets





All land
in the People’s Republic of China is owned by the government and cannot be sold
to any individual or company. The Company has recorded the costs paid to acquire
a long-term interest to utilize the land underlying the Company's facility as
land use rights. This type of arrangement is common for the use of land in the
PRC. The land use rights are amortized on the straight-line method over the term
of the land use rights of 50 years.





Purchased
technological know-how includes secret formulas, manufacturing processes,
technical, procedural manuals and the certificate of drugs production and is
amortized using the straight-line method over the expected useful economic life
of 5 years, which reflects the period over which those formulas, manufacturing
processes, technical and procedural manuals are kept secret to the Company as
agreed between the Company and the selling parties.





Intangible
assets of the Company are reviewed periodically or more often if circumstances
dictate, to determine whether their carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives.





Investments and restricted
investments





Investments
are comprised primarily of equity securities and are stated fair value. Certain
of these investments are classified as trading securities based on the Company’s
intent to sell and dispose of them within the year. Further, certain of these
securities are classified as available-for-sale and are reflected as restricted,
noncurrent investments based on the Company’s intent to hold them beyond one
year. For trading securities, realized and unrealized gains and losses are
included in the accompanying consolidated statements of income. For
available-for-sale securities, realized gains and losses are included in the
consolidated statements of income. Unrealized gains and losses for these
available-for-sale securities are reported in other comprehensive income, net of
tax, in the consolidated statements of shareholders’ equity. The Company has no
investments that are considered to be held-to-maturity securities.





Accounting for Stock Based
Compensation





Effective
October 1, 2005, we adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share Based Payment ("SFAS No. 123R"). SFAS No. 123R establishes
the financial accounting and reporting standards for stock-based compensation
plans. As required by SFAS No. 123R, we recognize the cost resulting from all
stock-based payment transactions including shares issued under our stock option
plans in the financial statements. The adoption of SFAS No. 123R will have a
negative impact on our future results of operations.





Revenue
recognition





Product
sales are generally recognized when title to the product has transferred to
customers in accordance with the terms of the sale. The Company recognizes
revenue in accordance with the Securities and Exchange Commission’s (SEC) Staff
Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial
Statements” as amended by SAB No. 104 (together,
“SAB 104”), and Statement of Financial Accounting Standards (SFAS)
No. 48 “Revenue
Recognition When Right of Return Exists.” SAB 104 states that
revenue should not be recognized until it is realized or realizable and earned.
In general, the Company records revenue when persuasive evidence of an
arrangement exists, services have been rendered or product delivery has
occurred, the sales price to the customer is fixed or determinable, and
collectibility is reasonably assured.




53





The
Company is generally not contractually obligated to accept returns. However, on
a case-by-case negotiated basis, the Company permits customers to return their
products. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 48, "Revenue Recognition when the Right of Return Exists", revenue
is recorded net of an allowance for estimated returns. Such reserves are based
upon management's evaluation of historical experience and estimated costs. The
amount of the reserves ultimately required could differ materially in the near
term from amounts included in the consolidated financial
statements.





Income
taxes





The
Company’s subsidiaries, GJBT and Laiyang Jiangbo, are governed by the
Income Tax Law of the People’s Republic of China. Income taxes are accounted for
under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," which is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. The charge for taxation is based on the results for
the year as adjusted for items, which are non-assessable or disallowed. It is
calculated using tax rates that have been enacted or substantively enacted by
the balance sheet date.





Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized.





Deferred
tax is calculated using tax rates that are expected to apply to the period when
the asset is realized or the liability is settled. Deferred tax is charged or
credited in the income statement, except when it is related to items credited or
charged directly to equity, in which case the deferred tax is also dealt with in
equity.





Deferred
tax assets and liabilities are offset when they related to income taxes levied
by the same taxation authority and the Company intends to settle its current ax
assets and liabilities on a net basis.





The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The adoption had no
affect on the Company’s financial statements.





Variable
Interest Entities





Pursuant
to Financial Accounting Standards Board Interpretation No. 46 (Revised),
“Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51”
(“FIN 46R”) we are required to include in our consolidated financial statements
the financial statements of variable interest entities. FIN 46R requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss for the variable interest entity or is
entitled to receive a majority of the variable interest entity’s residual
returns. Variable interest entities are those entities in which we, through
contractual arrangements, bear the risk of, and enjoy the rewards normally
associated with ownership of the entity, and therefore we are the primary
beneficiary of the entity.




54





Laiyang
Jiangbo are considered a variable interest entity (“VIE”), and we are the
primary beneficiary. On October 1, 2008, we entered into agreements with Laiyang
Jiangbo to which we shall receive 100% of Laiyang Jiangbo’s net income. In
accordance with these agreements, Laiyang Jiangbo shall pay consulting fees
equal to 100% of its net income to our wholly-owned foreign subsidiary, GJBT,
and GJBT shall supply the technology and administrative services needed to
service Laiyang Jiangbo.





The
accounts of Laiyang Jiangbo are consolidated in the accompanying financial
statements pursuant to FIN 46R. As a VIE, Laiyang Jiangbo sales are included in
our total sales, its income from operations is consolidated with our, and our
net income includes all of Laiyang Jiangbo's net income. We do not have any
non-controlling interest and accordingly, did not subtract any net income in
calculating the net income attributable to us. Because of the contractual
arrangements, we have pecuniary interest in Laiyang Jiangbo that require
consolidation of our financial statements and Laiyang Jiangbo financial
statements.





Recent
accounting pronouncements





In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 (“EITF 07-5”),
“Determining whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock.” EITF No. 07-5 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. Early application is not permitted.
Paragraph 11(a) of SFAS 133 “Accounting for Derivatives and Hedging Activities”
specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company’s own stock and
(b) classified in stockholders’ equity in the statement of financial
position would not be considered a derivative financial instrument. EITF 07-5
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer’s own stock and thus
able to qualify for the SFAS 133 paragraph 11(a) scope exception. This standard
triggers liability accounting on all warrants exercisable at strike prices
denominated in any currency other than the functional currency of the
operating entity in the PRC (Renminbi). Management is currently evaluating the
impact of adoption of EITF 07-5 on the accounting for related convertible notes
transactions.





On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which
clarifies the application of SFAS 157 when the market for a financial asset is
inactive. Specifically, FSP 157-3 clarifies how (1) management’s internal
assumptions should be considered in measuring fair value when observable data
are not present, (2) observable market information from an inactive market
should be taken into account, and (3) the use of broker quotes or pricing
services should be considered in assessing the relevance of observable and
unobservable data to measure fair value. The adoption of FSP 157-3 did not have
a material impact on the Company’s consolidated financial
statements.




In
November 2008, the FASB issued EITF Issue No. 08-7, “Accounting for
Defensive Intangible Assets,” or EITF No. 08-7. EITF No. 08-7
discusses that when an entity acquired in a business combination or an asset
acquisition an intangible asset that it did not intend to actively use,
otherwise known as a defensive asset, the entity historically allocated little
or no value to the defensive asset. However, with the issuance of SFAS
No. 141(R) and SFAS No. 157 the entity must recognize a value for the
defensive asset that reflects the asset’s highest and best use based on market
assumptions. Upon the effective date of both SFAS No. 141(R) and SFAS
No. 157, acquirers will generally assign a greater value to a defensive
asset than would typically have been assigned under SFAS No. 141. EITF
No. 08-7 will be effective for the first annual reporting period beginning
on or after December 15, 2008. EITF No. 08-7 will apply prospectively
to business combinations for which the acquisition date is after fiscal years
beginning on or after December 15, 2008. The adoption of EITF No. 08-7
did not have a material impact on the Company’s results of operations or
financial condition.




55




In April 2009, the FASB issued FSP SFAS
No. 141 (R), “Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies,” or FSP SFAS No. 141
(R). FSP SFAS No. 141 (R) amends and clarifies SFAS No. 141,
“Business Combinations,” in regards to the initial recognition and measurement,
subsequent measurement and accounting, and disclosures of assets and liabilities
arising from contingencies in a business combination. FSP SFAS No. 141
(R) applies to all assets acquired and liabilities assumed in a business combination that
arise from contingencies that would be within the scope of SFAS No. 5,
“Accounting for Contingencies”, if not acquired or assumed in a business
combination, except for assets or liabilities arising from contingencies that
are subject to specific guidance in SFAS No. 141 (R). FSP SFAS No. 141
(R) will be effective for the first annual reporting period beginning on or
after December 15, 2008. FSP SFAS No. 141(R) will apply prospectively
to business combinations for which the acquisition date is after fiscal years
beginning on or after December 15, 2008. The adoption of SFAS No. 141
(R) will not have a material impact on the Company’s results of operations or
financial condition.




In April
2009, the FASB issued FSP FAS 157-4, which provides guidance on how to determine
the fair value of assets and liabilities when the volume and level of activity
for the asset or liability has significantly decreased when compared with normal
market activity for the asset or liability as well as guidance on identifying
circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is
effective for interim and annual periods ending after June 15, 2009. The Company
is currently evaluating the financial impact that FSP FAS. 157-4 will have, but
expects that the financial impact, if any, will not be material on its
Consolidated Financial Statements.




In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, which amends the requirements
for the recognition and measurement of other-than-temporary impairments for debt
securities by modifying the current "intent and ability" indicator. Under FSP
FAS 115-2 and FAS 124-2, an other-than-temporary impairment must be recognized
if the Company has the intent to sell the debt security or the Company is more
likely than not will be required to sell the debt security before its
anticipated recovery. In addition, FSP FAS 115-2 and FAS 124-2 requires
impairments related to credit loss, which is the difference between the present
value of the cash flows expected to be collected and the amortized cost basis
for each security, to be recognized in earnings while impairments related to all
other factors to be recognized in other comprehensive income. FSP FAS 115-2 and
FAS 124-2 is effective for interim and annual periods ending after June 15,
2009. The Company is currently evaluating the financial impact that FSP FAS
115-2 and FAS 124-2 will have, but expects that the financial impact, if any,
will not be material on its Consolidated Financial Statements.




In April 2009, the FASB
issued FSP 107-1 and 28-1. This FSP amends SFAS 107, to require disclosures
about fair value of financial instruments not measured on the balance sheet at
fair value in interim financial statements as well as in annual financial
statements. Prior to this FSP, fair values for these assets and liabilities were
only disclosed annually. This FSP applies to all financial instruments within
the scope of SFAS 107 and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This FSP shall be effective for interim periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP 157-4 and 115-2 and 124-2. This FSP does not require
disclosures for earlier periods presented for comparative purposes at initial
adoption. In periods after initial adoption, this FSP requires comparative
disclosures only for periods ending after initial adoption. The Company is
currently evaluating the disclosure requirements of this new FSP.





In May
2009, the FASB issued Statement No. 165,Subsequent Events
(SFAS No. 165). SFAS No. 165 provides guidance on
management’s assessment of subsequent events. The new standard clarifies that
management must evaluate, as of each reporting period, events or transactions
that occur after the balance sheet date “through the date that the financial
statements are issued or are available to be issued.” Management must perform
its assessment for both interim and annual financial reporting
periods. SFAS No. 165 does not significantly change the Company’s
practice for evaluating such events. SFAS No. 165 is effective
prospectively for interim and annual periods ending after June 15, 2009 and
requires disclosure of the date subsequent events are evaluated through. The
Company adopted SFAS No. 165 for the fiscal year ended June 30,
2009. The adoption of SFAS No. 165 did not have any impact on the
Company’s results of operations and financial condition.




56





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FASB Interpretation No. 46(R) (“FAS 167”), which modifies how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. FAS 167
clarifies that the determination of whether a company is required to consolidate
an entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. FAS167 requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. FAS167 also requires additional disclosures about a company’s
involvement in variable interest entities and any significant changes in risk
exposure due to that involvement. FAS 167 is effective for fiscal years
beginning after November 15, 2009. The Company is currently assessing the impact
of the standard on its consolidated financial statements





In June 2009, the FASB issued Statement
No. 168,The FASB
Accounting Standards CodificationTM(“Codification”) and the Hierarchy of Generally
Accepted Accounting Principles—a replacement of FASB Statement
162  (SFAS No. 168). SFAS No. 168
establishes the Codification as the source of authoritative United States
accounting and reporting standards for all non-governmental entities (other than
guidance issued by the SEC). The Codification is a reorganization of current
GAAP into a topical format that eliminates the current GAAP hierarchy and
establishes two levels of guidance — authoritative and nonauthoritative.
According to the FASB, all “non-grandfathered, non-SEC accounting literature”
that is not included in the Codification would be considered nonauthoritative.
The FASB has indicated that the Codification does not change current GAAP.
Instead, the changes aim to (1) reduce the time and effort it takes for
users to research accounting questions and (2) improve the usability of
current accounting standards. The Codification is effective for interim and
annual periods ending on or after September 15, 2009. The Company will
apply the Codification to its disclosures beginning with the first quarter ended
September 30, 2009. As the Codification is not intended to change the
existing accounting guidance, its adoption will not have an impact on the
Company’s results of operations and financial condition.




Item
7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES AND MARKET RISK





As a
smaller reporting company, we are not required to provide the information called
for by Item 7A of Form 10-K.





ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





See
"Index to Financial Statements" beginning on page F-1 below for our financial
statements included in this annual report on Form 10-K.





ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE





On
February 25, 2008, the Company’s board of directors engaged Moore Stephens Wurth
Frazer & Torbet, LLP ("Moore Stephens") to serve as the Company’s principal
accountant to audit the Company’s financial statements. There have been no
disagreements with our independent auditors. Prior to the engagement
of Moore Stephens as the independent auditor, there were no consulting or
other services provided to the Company by Moore Stephens.





ITEM
9A. CONTROLS AND PROCEDURES





Our
management does not expect that our disclosure controls or our internal controls
over financial reporting will prevent all error and fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, but no
absolute, assurance that the objectives of a control system are met. Further,
any control system reflects limitations on resources, and the benefits of a
control system must be considered relative to its costs. These limitations also
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people or by management override of a control. A design of a control
system is also based upon certain assumptions about potential future conditions;
over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and may not be
detected.




57




Disclosure
Controls and Procedures




We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms, and that such information is accumulated and communicated to our
management, including our principal executive officer (our president) and our
principal accounting and financial officer (our chief financial officer) to
allow for timely decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, our management recognizes
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and our management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.




As of
June 30, 2009, the year end period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our principal executive officer and our principal accounting officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our chief executive officer and our chief
financial officer concluded that our disclosure controls and procedures were not
effective as of the end of the period covered by this annual report due to the
significant deficiencies described below in "Management’s Report on
Internal Control over Financial Reporting.




Management's Report on Internal
Control over Financial Reporting




Our
management, under the supervision of our chief executive officer and chief
financial officer, is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act.  Our management is also
required to assess and report on the effectiveness of our internal control over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of
2002 (“Section 404”).   Management assessed the effectiveness of our
internal control over financial reporting as of June 30, 2009.  In
making this assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control - Integrated Framework.  During our assessment of the
effectiveness of internal control over financial reporting as of June 30, 2009,
management identified significant deficiencies and determined that our internal
controls over financial reporting were not effective as of that date. The
significant deficiencies related to the following:





1.  Accounting and Finance
Personnel Weaknesses - US GAAP expertise - The current staff in
the accounting department does not have extensive experience with U.S. GAAP, and
needs substantial training so as to meet with the higher demands of being a U.S.
public company. The accounting skills and understanding necessary to fulfill the
requirements of U.S. GAAP-based reporting, including the skills of subsidiary
financial statements consolidation, are inadequate and were inadequately
supervised. The lack of sufficient and adequately trained accounting and finance
personnel resulted in an ineffective segregation of duties relative to key
financial reporting functions.




2.  Lack of internal audit
function– The Company lacks qualified resources to perform the internal
audit functions properly, which was ineffective in preventing and detecting
control lapses and errors in the accounting of certain key areas like revenue
recognition, inter-company transactions, cash receipt and cash disbursement
authorizations, inventory safeguard and proper accumulation for cost of
products, in accordance with the appropriate costing method used by the company.
In addition, the scope and effectiveness of the internal audit function are yet
to be developed.




58





During
majority of fiscal year ended June 30, 2009, our internal accounting staff was
primarily engaged in ensuring compliance with PRC accounting and reporting
requirements for our operating subsidiaries and was not required to meet or
apply U.S. GAAP requirements.  As a result, our current accounting
department responsible for financial reporting of the Company, on a consolidated
basis, is relatively new to U.S. GAAP and the related internal control
procedures required of U.S. public companies.  Although our accounting
staff is professional and experienced in accounting requirements and procedures
generally accepted in the PRC, management has determined that they require
additional training and assistance in U.S. GAAP matters.  Management
has determined that our internal audit function is also significantly deficient
due to insufficient qualified resources to perform internal audit
functions.





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




1.
                We
      have started training our internal accounting staff on US GAAP and
      financial reporting requirements. Additionally, we are also taking steps
      to hire additional accounting personnel to ensure we have adequate
      resources to meet the requirements of segregation of
    duties.
 
 2.
                We
      plan on involving both internal accounting and operations personnel and
      outside consultants with US GAAP technical accounting expertise, as
      needed, early in the evaluation of a complex, non-routine transaction to
      obtain additional guidance as to the application of generally accepted
      accounting principles to such a proposed transaction. During the year
      ended June 30, 2009, our senior management has started interviewing and
      selecting outside internal control consultants. In December 2008, we
      engaged a reputable independent accounting firm as internal control
      consultants to provide advice and assistance on improving our internal
      controls. The internal control consultants have began working with our
      internal audit department to implement new policies and procedures within
      the financial reporting process with adequate review and approval
      procedures.
 
 3.
                We
      have continued to evaluate the internal audit function in relation to the
      Company’s financial resources and requirements. During the year ended June
      30, 2009, we have established an internal audit department and the
      department has started evaluating the Company’s current internal control
      over financial reporting process.  To the extent possible, we
      will provide necessary trainings to our internal audit staff and implement
      procedures to assure that the initiation of transactions, the custody of
      assets and the recording of transactions will be performed by separate
      individuals.




We
believe that the foregoing steps will remediate the significant deficiencies
identified above, and we will continue to monitor the effectiveness of these
steps and make any changes that our management deems appropriate to insure that
the foregoing do not become material weaknesses. We plan to fully implement the
above remediation plan by December 31, 2009.




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.




Our
management is not aware of any material weaknesses in our internal control over
financial reporting, and nothing has come to the attention of management that
causes them to believe that any material inaccuracies or errors exist in our
financial statements as of June 30, 2009.  The reportable conditions
and other areas of our internal control over financial reporting identified by
us as needing improvement have not resulted in a material restatement of our
financial statements.  Nor are we aware of any instance where such
reportable conditions or other identified areas of weakness have resulted in a
material misstatement or omission in any report we have filed with or submitted
to the Commission.


59


Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.





Auditor
Attestation





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.





Changes
in Internal Controls over Financial Reporting





Except as
described above, there were no changes in our internal controls over financial
reporting during fiscal year 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control systems are met.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. Such limitations include the fact that human
judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures, such as simple errors or mistakes
or intentional circumvention of the established process.





ITEM
9B. OTHER INFORMATION





None.





PART III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT





Current
Management





The
following table sets forth the name, age and position of each of our directors,
executive officers and significant employees:




Name
                  
                  Age
                  
                  PositionCao
      Wubo
                  
                  44
                  
                  Chief
      Executive Officer and Chairman of the BoardElsa
      Sung
                  
                  35
                  
                  Chief
      Financial OfficerXu
      Haibo
                  
                  37
                  
                  Chief
      Operating Officer and DirectorDong
      Lining
                  
                  50
                  
                  Vice
      President, Director of TechnologyYang
      Weidong
                  
                  38
                  
                  Vice
      President, Director of SalesXin
      Jingsheng
                  
                  54
                  
                  Director
      of EquipmentXue
      Hong
                  
                  41
                  
                  ControllerFeng
      Xiaowei
                  
                  41
                  
                  DirectorHuang
      Lei
                  
                  27
                  
                  DirectorGe
      Jian
                  
                  37
                  
                  DirectorMichael
      Marks
                  
                  38
                  
                  DirectorJohn
      (Yang) Wang
                  
                  39
                  
                  Director




60





Cao Wubohas served as our
chief executive officer and chairman of the board since October 2007. He has
served as the chairman and general manager of Laiyang Jiangbo since 2003. From
1981 to 1988, Mr. Cao completed his military service in the Chinese Army, during
which he was sales section director in Laiyang Yongkang Pharmaceutical Factory.
From 1988 to 1998, he continued working in Laiyang Yongkang Pharmaceutical
Factory as Marketing Manager. From 1998 to 2003, he was general manager of
Laiyang Jiangbo Pharmacy Co. Ltd. and Laiyang Jiangbo Chinese and Western
Pharmacy Co. Ltd. He is the founder of Laiyang Jiangbo Pharmacy Co. Ltd.,
Laiyang Jiangbo Chinese and Western Pharmacy Co. Ltd., and Laiyang Jiangbo
Pharmaceutical Co. Ltd.





Elsa Sung has served as our
chief financial officer since October 2007. Prior to June 2008, she was also
Vice President of CFO Oncall, Inc. Prior to joining CFO Oncall, Inc., Ms. Sung
was an Audit Manager from January 2006 to July 2007 at Sherb & Co., Boca
Raton, Florida, responsible for managing, monitoring, as well as performing
audits for domestic and international clients. From June 2005 to December 2005,
Ms. Sung was a Senior Internal Auditor at Applica Consumer Products, Inc., an
U.S. publicly traded company. From 2002 to 2005, Ms. Sung was with Ernst &
Young, LLP in West Palm Beach, Florida as a Senior Auditor in the Assurance and
Advisory Business Service Group. Ms. Sung is a licensed CPA in the State of
Georgia and a member of the American Institute of Certified Public Accountants.
She received her Master of Business Administration and Bachelor’s Degree,
graduated “Cum Laude,” in Accounting from Florida Atlantic University. She also
holds a Bachelor’s Degree in Sociology from National Chengchi University in
Taipei, Taiwan.





Xu Haibo has served as our
chief operating officer and director since October 2007. He has served as a
deputy general manager of Laiyang Jiangbo since August 2006. He graduated from
Shanghai Financial and Economic University in 1993 and has engaged in a banking
career for more than ten years. From July 1993 to July 2004, he worked in the
Bank of China Yantai Branch as Credit Clerk in the Credit Department, Section
Chief in the Operation Department, Governor of the Bank of China Yantai Fushan
Branch, and Director of the Risk Control Department in the Bank of China Yantai
Branch. From August 2004 to July 2006, he was general manager of Shandong
Province Licheng Investment Co. Ltd.





Dong Lining has served as our
vice president and director of technology since October 2007. He has served as
deputy manager of Laiyang Jiangbo since July 2003. He graduated from Shandong
Pharmacy University in 1995. From July 1986 to July 2003, he worked in Laiyang
Biochemistry Pharmaceutical Factory, where he was a checker, technologist,
workshop director, product technology section chief, technology deputy factory
director, and factory director. He has published several pharmaceutical thesis
articles in magazines such as, Chinese Biochemical Medical Magazine, Food and
Drug, and China New Clinical Medicine.





Yang Weidong has served as our
vice president and director of sales since October 2007. He has served as a
deputy general manager for Laiyang Jiangbo since August 2004. He graduated from
Nanjing University with a masters degree. From February 1995 to March 2000, he
worked at Jiangsu Yangtze Pharmaceutical Co. Ltd as a sales clerk. From April
2000 to July 2004, he was area director in Jiangsu Jizhou Pharmaceutical Co.
Ltd.





Xin Jingsheng has served as
our director of equipment since October 2007. He has served as a deputy general
manager of Laiyang Jiangbo since October 2003. He graduated from the Chinese
People’s Liberation Army Shengqing Engineering Institute in August 1978. Mr. Xin
has experience as a member of a group of trained personnel at 54685 Army
Pharmacy from April 1983 to August 2001 and at China Laiyang Construction Bureau
from August 2001 to September 2003. He has been engaged in the pharmaceutical
industry for more than 20 years, and his varied experience includes positions as
a technician, engineer assistant, engineer, deputy factory director, factory
director and deputy general manager. He has participated in industry training
held by the Chinese National Drug Supervising Department and Shandong Drug
Supervising Department and is very familiar with laws and statutes in the
Chinese pharmaceutical industry.


61





Xue Hong has served as our
controller since October 2007. She has served as finance controller of Laiyang
Jiangbo since April 2003. From July 1988 to March 1990, she worked in Qingzhou
Iron and Steel Works as quality control inspector and auditor. From March 1990
to March 1999, She was a quality examiner at Laiyang City Power Facility. From
March 1999 to March 2000, she worked as an accountant at Laiyang Yongkang
Company. From March 2000 to September 2003, she was the chief accountant of
Laiyang Jiangbo Pharmacy.





Feng Xiaowei has served as our
director since October 2007. Mr. Feng graduated from Dalian Jiaotong University
Railway Locomotive & Car Department with a bachelors degree and Jilin
University Postgraduate Research Institute Foreign Economic Law Department with
a masters degree. Over the course of his career, he has been procurator in
Shenyang Railroad Transportation Procuratorate, associate professor in Jilin
University, counsel in China Jilin International Trust and Investment
Corporation, expert commissary of China Strategy and Administration Association,
and deputy secretary-general of the “China Strengthening Self-Innovative
Capacity and Building Innovative Nation Forum.” He has participated in the
Research on National Economic Development Strategy and in the subject
investigation of Beijing Olympic Games, Guangzhou Development Zone and Tianjin
Development Zone. He has been commissioner of Yunnan Province Policy and
Economic Development Task Team, commissioner of the Xinjiang Uygur Autonomous
Region Policy and Economic Development Task Team and commissioner of the China
Shi Hezi National Economic Development Zone Task Team. He is the founder of the
Chinese Young People Network Home Co. Ltd., and has presided over the China
Young People Card Project. From January 2003 to June 2005, he was Vice President
of the Chinese Young People Network Home Co. Ltd. Mr. Feng has been the general
manager of Anqiao International Investment Co., Ltd. since June 2005 through
present.





Huang Lei has served as our
director since October 2007. Ms. Huang graduated from Kwantlen University
College in Canada. She also earned her MBA degree from the University of British
Columbia in October 2006. From November 2006 to 2007, she was a marketing
manager in CúC Top Enterprises Ltd. Ms. Huang has published articles on business
administration at Canada Weekly and school magazines, and earned the Best
International Student Scholarship and a full scholarship. Ms. Huang speaks
English, French, Mandarin and Cantonese, and has a working knowledge of
accountancy and business administration.





Ge Jian has served as our
director since October 2007. Mr. Ge Jian graduated from Shandong University
Management Sciences Department with a Bachelor of Business Administration in
1992. From 1992 to the end of 2000, he worked for the Development and Reform
Commission of Yantai. From 2001 to 2006, he was the minister of the Capital
Operation Department and the minister of the Development Department in Zhenghai
Group Co. Ltd., and a director of Yantai Hualian Development Group Co. Ltd.
Since 2006, he has been the general manager of Yantai Zhenghai Pawn Co.
Ltd.





Michael Marks has served as
our director since July 18, 2008. Since 2007, he has served as an independent
director of China Housing & Land Development, Inc., a property developer in
China. In 2006, Mr. Marks became the President of Middle Kingdom Alliance Corp.,
a publicly traded Special Purpose Acquisition Corporation active in China. In
January of 2003, Mr. Marks founded the China practice of Sonnenblick Goldman, a
real estate investment bank, and served as its Managing Director in China until
December 2007. In 2001, he founded B2Globe, providing technology solutions to
international internet businesses in Asia. In 1999, he co-founded Metro
Corporate Training in Shanghai to offer training and management development, and
was its Chief Executive Officer until 2001. From 1998 to 1999, Mr. Marks worked
as a management consultant with Horwath Asia Pacific in Australia and China.
From 1995 to 1998, Mr. Marks worked in the audit, corporate finance and advisory
divisions of PricewaterhouseCoopers in South Africa. Mr. Marks received a
Bachelor of Commerce (Honors) in 1994 and Masters of Commerce in 1997 from the
University of the Witwatersrand in Johannesburg, South Africa. In 1998, he
graduated with a Bachelor of Arts (Psychology) degree from the University of
South Africa. In 1997, Mr. Marks became a Chartered Accountant in South Africa,
and a Fellow of the Association of International Accountants in the United
Kingdom in 1999. He speaks fluent Mandarin, French and English.


62





John (Yang) Wang has served as
our director since September 8, 2008. Since November 2004, Mr. Wang has been the
President of Marbella Capital Partners. Since September 2007, he also serves as
the CEO of Hambrecht Asia Acquisition Corp., and is on the Board of Directors of
Hong Kong Stock Exchange listed Wuyi International Pharmaceuticals Company
Limited. From 2000 to 2004, he was Executive Vice President of SBI E2-Capital
(HK) Limited. From 1997 to 1999, he managed Accenture Consulting’s (formerly
known as Andersen Consulting) Greater China communication, media and high tech
strategy practice. Prior to that, he was the lead telecom analyst covering
Greater China and Southeast Asia for Pyramid Research, an emerging market
telecom research firm based in Cambridge, Massachusetts. Mr. Wang holds a
Bachelor of Arts in International Relations from Tufts University and an
M.A.L.D. degree in international law and business from The Fletcher School of
Law and Diplomacy. He has over 15 years of experience in investment banking and
consulting and speaks fluent Mandarin and English.





Family
Relationships





There are
no family relationships between or among any of the current directors, executive
officers or persons nominated or charged by the Company to become directors or
executive officers.





Section 16(a)
Beneficial Ownership Reporting Compliance





Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires the Company’s
directors, executive officers and persons who own more than 10% of the Company’s
Common Stock to file reports of ownership and changes in ownership on Forms 3, 4
and 5 with the Securities and Exchange Commission (the “SEC”). Directors,
executive officers and greater than 10% stockholders are required by SEC rules
to furnish the Company with copies of Section 16(a) forms they
file.





The
Company believes that all of its directors, executive officers and greater than
10% beneficial owners complied with all filing requirements applicable to them
in fiscal year 2009.





Codes
of Ethics.




In
January 2006, we adopted a Code of Ethics and Business Conduct to provide
guiding principles to our officers, directors and employees. Our Code of Ethics
and Business Conduct also strongly recommends that all directors and employees
of our company comply with the code in the performance of their duties.
Generally, our Code of Ethics and Business Conduct provides guidelines
regarding:




.
            compliance with laws, rules and
      regulations


.
            conflicts of
      interest,


.
            insider
      trading,


.
            corporate
      opportunities


.
            competition and fair
      dealing,


.
            discrimination and
      harassment,


.
            health and
      safety,


.
            record-keeping,


.
            confidentiality,


.
            protection and proper use of
      company assets, and


.
            payments to government
      personnel.


63


A copy of
the Code of Ethics and Business Conduct is included as Exhibit 14 to our 2007
annual report on Form 10-K filed with the SEC.





Meetings
and Committees of the Board of Directors





The Board
of Directors held seven board meetings during the fiscal year 2009. In addition
to meetings of the full Board, directors attended meetings of Board committees
on which they served. The Board’s standing committees are the Audit and
Compensation Committees.





Committee
Membership





The
following table shows the current membership on the standing
committees:





Committee
              
              Chair
              
              Member
              
              MemberAudit
              
              Michael
      Marks
              
              John
      (Yang) Wang
              
              Feng
      XiaoweiCompensation
              
              Feng
      Xiaowei
              
              John
      (Yang) Wang
              
              Ge
      Jian





Audit
Committee.





The Board
of Directors has an Audit Committee established in accordance with section
3(a)(58) of Securities Exchange Act of 1934 (the “Exchange Act”). The Board of
Directors has determined that each of the members of the Audit Committee is
“independent,” as defined in the corporate governance listing standards of
NASDAQ and Rule 10A-3 under the Exchange Act relating to audit committees.
In addition, the Board has determined that all members of the Audit Committee
are financially literate and that Mr. Marks qualifies as an “audit committee
financial expert” as defined by the Securities and Exchange
Commission.





The
committee assists the Board in fulfilling its oversight responsibilities
relating to:





· our auditing,
accounting and reporting practices;


· the adequacy
of our systems of internal controls;


· and the
quality and integrity of publicly reported financial
disclosures.





In this
role, the committee appoints the independent auditors and reviews and approves
the scope of the audit, the financial statements and the independent auditors’
fees. The Audit Committee met four time since during the fiscal year
2009  and the Chairman met with management and the external auditors
prior to the release of our financial results.





The Audit
Committee exercises the powers of the Board of Directors in connection with our
accounting and financial reporting practices, and provides a channel of
communication between the Board of Directors and independent registered public
accountants.





Compensation
Committee.





The
Compensation Committee is comprised of three directors who meet the independence
requirements of NASDAQ, are “non-employee directors” for purposes of Rule 16b-3
under the Securities Exchange Act of 1934 and are “outside directors” for
purposes of Section 162(m) of the Internal Revenue Code. The purpose of our
compensation committee is to discharge the responsibilities of our board of
directors relating to compensation of our executive officers. Specific
responsibilities of our compensation committee include:





· reviewing and
recommending approval of compensation of our executive
officers;


· administering our
stock incentive plan;


64


· and reviewing and
making recommendations to our board with respect to incentive compensation and
equity plans.





The
Compensation Committee has yet to hold a meeting since its first inception in
July 2008.





Stockholder
Nominees





There
have been no material changes to the procedures by which security holders may
recommend nominees to the registrant’s Board of directors since our last annual
report on form 10-K.





Involvement
in Certain Legal Proceedings





There are
no orders, judgments, or decrees of any governmental agency or administrator, or
of any court of competent jurisdiction, revoking or suspending for cause any
license, permit or other authority to engage in the securities business or in
the sale of a particular security or temporarily or permanently restraining any
of our officers or directors from engaging in or continuing any conduct,
practice or employment in connection with the purchase or sale of securities, or
convicting such person of any felony or misdemeanor involving a security, or any
aspect of the securities business or of theft or of any felony. Nor are any of
the officers or directors of any corporation or entity affiliated with us so
enjoined.





ITEM
11. EXECUTIVE COMPENSATION





Introductions





We
endeavor to provide our “named executive officers” (as defined in Item 402 of
Regulation S-K) with a competitive base salary that is in-line with their roles
and responsibilities when compared to peer companies of comparable size in the
same or similar locality. It is not uncommon for PRC private corporations in
that locality to have base salaries as the sole and only form of compensation.
The base salary level is established and reviewed based on the level of
responsibilities, the experience and tenure of the individual and the current
and potential contributions of the individual. The base salary is compared to
similar positions within comparable peer companies and with consideration of the
executive’s relative experience in his or her position. Base salaries are
reviewed periodically and at the time of promotion or other changes in
responsibilities.





Under the
governance of our newly established compensation committee, we plan to implement
a more comprehensive compensation program, which takes into account other
elements of compensation, including, without limitation, short and long term
compensation, cash and non-cash compensation, and other equity-based
compensation such as stock options. This compensation program shall be
comparative to our peers in the industry and aimed to retain and attract
talented individuals.





Director
Compensation





The
following table sets forth information concerning the compensation of each
person who served as a non-employee director during our fiscal year ended June
30, 2009. The compensation for each of our executive officers who also served as
a director during fiscal year ended June 30, 2009 is fully reflected under our
“Summary Compensation of Named Executive Officers” disclosure
below.


65





Director
Compensation of Non-Employee Directors


for
Fiscal Year Ended June 30, 2009





Name
                                                                                  
                                                                                  Fees
                                                                                    Earned
                                                                                    or Paid in
                                                                                    Cash
                                                                                    ($)
                                                                                  
                                                                                  
                                                                                  Stock
                                                                                    Awards
                                                                                    ($)
                                                                                  
                                                                                  
                                                                                  Option
                                                                                    Awards
                                                                                    ($)
                                                                                  
                                                                                  
                                                                                  Non-Equity
                                                                                    Incentive Plan
                                                                                    Compensation
                                                                                    ($)
                                                                                  
                                                                                  
                                                                                  Nonqualified
                                                                                    Deferred
                                                                                    Compensation
                                                                                    Earnings ($)
                                                                                  
                                                                                  
                                                                                  All Other
                                                                                    Compensation
                                                                                    ($)
                                                                                  
                                                                                  
                                                                                  Total
                                                                                    ($)Feng
      Xiaowei
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  $
                                                                                  —Huang
      Lei
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  $
                                                                                  —Ge
      Jian
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  $
                                                                                  —Michael
      Marks
                                                                                  
                                                                                  $
                                                                                  33,542
                                                                                  
                                                                                  
                                                                                  
                                                                                  10,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  $
                                                                                  43,542John
      (Yang) Wang
                                                                                  
                                                                                  $
                                                                                  25,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  11,250
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  $
                                                                                  36,250





The
non-executive directors would also be reimbursed for all of their out-of-pocket
expenses in traveling to and attending meetings of the Board of Directors and
committees on which they would serve.





Executive
Compensation




The
following is a summary of the compensation we paid for each of the three years
ended June 30, 2009, 2008 and 2007, respectively (unless otherwise provided) (i)
to the persons who acted as our principal executive officers during the three
years, (ii) to the person who acted as our principal financial officer or acted
in a similar capacity during the three years and (iii) our other executive
officers received compensation in excess of $100,000 in these three year. We
refer to these individuals in this 10-K as “named executive
officers.”





Summary
Compensation of Named Executive Officers




The
following table reflects all compensation awarded to, earned by or paid to our
named executive officers for our fiscal years ended June 30





Name and
                                                            Principal
                                                            Position
                                                          
                                                          Fiscal
                                                            Year
                                                            Ended
                                                          
                                                          Salary
                                                            ($)
                                                          
                                                          
                                                          Bonus
                                                            ($)
                                                          
                                                          
                                                          Stock
                                                            Awards
                                                          
                                                          
                                                          Option
                                                            Awards
                                                          
                                                          
                                                          Non-Equity
                                                            Incentive Plan
                                                            Compensation
                                                            ($)
                                                          
                                                          
                                                          Nonqualified
                                                            Deferred
                                                            Compensation
                                                            Earnings
                                                            ($)
                                                          
                                                          
                                                          All Other
                                                            Compensation
                                                            ($)
                                                          
                                                          
                                                          Total
                                                            ($)Cao
      Wubo,
                                                          
                                                          2009
                                                          
                                                          $
                                                          156,000
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          $
                                                          156,000Chairman
      of the
                                                          
                                                          2008
                                                          
                                                          $
                                                          117,000
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          $
                                                          117,000Board,
      Chief
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          $Executive
      Officer, andPresidentElsa
      Sung,
                                                          
                                                          2009
                                                          
                                                          $
                                                          120,000
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          $
                                                          120,000Chief
      Financial Officer
                                                          
                                                          2008
                                                          (1)
                                                          $
                                                          67,500
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          27,000
                                                          
                                                          
                                                          
                                                          10,847
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          26,295
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          131,642Xu
      Haibo,
                                                          
                                                          2009
                                                          
                                                          $
                                                          67,200
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          $
                                                          67,200Director,
      Chief Operating Officer
                                                          
                                                          2008
                                                          
                                                          $
                                                          50,400
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          $
                                                          50,400Gary
      Wolfson,
                                                          
                                                          2009
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —Former
      Director and Former Chief Executive Officer (2)
                                                          
                                                          2008
                                                          (3)
                                                          $
                                                          45,375
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          311,348
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          $
                                                          356,723Adam
      Wasserman,
                                                          
                                                          2009
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —Former
      Chief Financial Officer (2)
                                                          
                                                          2008
                                                          
                                                          $
                                                          26,803
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          $
                                                          26,803Kenneth
      Clinton,
                                                          
                                                          2009
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          $
                                                          —Former
      Director and Former President (2)
                                                          
                                                          2008
                                                          (4)
                                                          $
                                                          45,375
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          311,348
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          $
                                                          356,723




66


(1) Ms. Sung’s compensation for fiscal
2008 included $94,500 salary payable under the terms of his employment
agreement, of which $67,500 was paid by cash, issuance of 3375 shares of our
restricted common stock valued at of $27,000 in June 2008 and options to
purchase 2,000 shares of our common stock at an exercise price of $12 per share
representing other annual compensation which were valued at $10,847 pursuant to
the terms of her employment agreement. Options to purchase 5,500 shares of our
common stock at an average exercise price of $20.09 per share representing
nonqualified deferred compensation earnings other annual compensation which were
valued at $26,250 pursuant to the terms of her employment agreement. During our
fiscal year ended June 30, 2008, we granted Ms. Sung options for 2,000 shares
exercisable at a price of $12 per share, 1,750 shares exercisable at a price of
$16 per share, 1,875 shares exercisable at a price of $20 per share and 1,875
shares exercisable at $24 per share with vesting period, 500 shares exercisable
at a price of $0.105 per share, which was the lowest closing price of our common
stock on the OTC Bulletin Board in the 5 trading days immediately preceding the
grant date. These options were granted to Ms. Sung in June, 2008. The options
expire on June 10, 2013. The value of the option award was calculated using the
Black-Scholes option pricing model based on the following assumptions: weighted
average life of 5 years; risk-free interest rate of 3.57 %; volatility rate of
95%; and weighted average fair market value of $0.1238 per share at date of
grant. The aggregate number of stock awards and option awards issued to Ms. Sung
and outstanding as of June 30, 2008 is 3,375 and 7,500,
respectively.


(2)
Effective October 1, 2007, Mr. Gary Wolfson resigned from his positions as Chief
Executive Officer and a director of the Company, Mr. Adam Wasserman resigned as
Chief Financial Officer of the Company and Mr. Kenneth Clinton resigned from his
positions as President and a director of the Company.





(3) Mr.
Wolfson’s compensation for fiscal 2008 included $45,250 salary payable under the
term of his employment agreement and options to purchase 61,036 shares of our
common stock at an exercise price of $4.20 per share representing other annual
compensation which were valued at $311,348 pursuant to the terms of his
employment




(4)
Mr. Clinton’s compensation for fiscal 2008 inlcuded $45,250 a salary payable
under the term of his employment agreement and options to purchase 61,036 shares
of our common stock at an exercise price of $4.20 per share representing other
annual compensation which were valued at $311,348 pursuant to the terms of his
employment




Outstanding
Equity Awards




The
following table sets forth certain information concerning unexercised options,
stock that has not vested, and equity incentive plan awards outstanding as of
June 30, 2009 for the named executive officers below:


67


Outstanding
Equity Awards at Fiscal Year Ended


June
30, 2009





Option Awards
                                                      
                                                      Stock AwardsName
                                                      
                                                      Number of
                                                        Securities
                                                        Underlying
                                                        Unexercised
                                                        Options
                                                        Exercisable
                                                      
                                                      
                                                      Number of
                                                        Securities
                                                        Underlying
                                                        Unexercised
                                                        Options
                                                        Unexercisable
                                                      
                                                      Equity
                                                        Incentive Plan
                                                        Awards:
                                                        Number of
                                                        Securities
                                                        Underlying
                                                        Unexercised
                                                        Unearned
                                                        Options
                                                      
                                                      Option
                                                        Exercise
                                                        Price
                                                        ($)
                                                      
                                                      Option
                                                        Expiration
                                                        Date
                                                      
                                                      Number of
                                                        Shares or
                                                        Units of
                                                        Stock That
                                                        Have Not
                                                        Vested
                                                      
                                                      
                                                      Market Value
                                                        of Shares or
                                                        Units of Stock
                                                        That Have Not
                                                        Vested
                                                        ($)
                                                      
                                                      
                                                      Equity Incentive
                                                        Plan
                                                        Awards:
                                                        Number of
                                                        Unearned
                                                        Shares,
                                                        Units or
                                                        Other
                                                        Rights
                                                        That
                                                        Have Not
                                                        Vested
                                                      
                                                      
                                                      Equity Incentive
                                                        Plan
                                                        Awards:
                                                        Market or
                                                        Payout
                                                        Value of
                                                        Unearned
                                                        Shares,
                                                        Units or
                                                        Other
                                                        Rights
                                                        That Have
                                                        Not
                                                        Vested
                                                        ($)Elsa
                                                      
                                                      
                                                      2,000
                                                      
                                                      
                                                      
                                                      
                                                      –
                                                      
                                                      $
                                                      12
                                                      
                                                      6/10/2013
                                                      
                                                      
                                                      –
                                                      
                                                      
                                                      
                                                      –
                                                      
                                                      
                                                      
                                                      –
                                                      
                                                      
                                                      
                                                      –Sung
                                                      
                                                      
                                                      1,750
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      16
                                                      
                                                      6/10/20131,875
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      20
                                                      
                                                      6/10/20131,875
                                                      
                                                      
                                                      
                                                      $
                                                      24
                                                      
                                                      6/10/2013Gary
      Wolfson (1)
                                                      
                                                      
                                                      61,036
                                                      
                                                      
                                                      
                                                      –
                                                      
                                                      –
                                                      
                                                      $
                                                      4.2
                                                      
                                                      12/31/2010
                                                      
                                                      
                                                      –
                                                      
                                                      
                                                      
                                                      –
                                                      
                                                      
                                                      
                                                      –
                                                      
                                                      
                                                      
                                                      –





(1)These options were fully vested as of
July 1, 2007.





We
currently have no plans that provide for payments or other benefits at,
following, or in connection with retirement of our named executive
officers.




Nonqualified
defined contribution and other nonqualified deferred compensation
plans.




We
currently have no defined contribution or other plans that provide for the
deferral of compensation to our named executive officers on a basis that is not
tax-qualified.




Employment
Agreements.




Effective
June 10, 2008, the Company entered into an employment agreement (the “Employment
Agreement”) with Ms. Sung, our Chief Financial Officer. In accordance with the
terms of the Employment Agreement, Ms. Sung will receive an annual base salary
of $120,000 and will be entitled to receive performance bonuses of (i) $18,000
if the Company is successfully listed or quoted on the New York Stock Exchange,
the American Stock Exchange, the NASDAQ Select Market, the NASDAQ Global Market
or the NASDAQ Capital Market; (ii) $8,000 if the Company meets its 2008
Guaranteed EBT ( the Company’s adjusted 2008 earnings before taxes is more than
$26,700,000 USD or, the Company’s 2008 adjusted fully diluted earnings before
taxes per share is less than $1.6 USD); and (iii) $20,000 if the Company meets
its 2009 Guaranteed EBT ( the Company’s adjusted 2009 earnings before taxes is
less than $38,400,000 USD or, the Company’s adjusted fully diluted earnings
before taxes per share is less than $2.32 USD). In addition, In connection with
Ms. Sung’s employment, the Board of Directors has approved a non-qualified stock
option grant to Ms. Sung in the amount of 7,500 shares of common stock of the
Company vesting over an eighteen months period. All shares pursuant to the
option must be exercised within five years after the grant date. If the Company
terminates Ms. Sung, without cause or if Ms. Sung terminates her employment for
Good Reason (as defined therein), Ms. Sung is entitled to receive (i) a lump sum
cash payment equal to any accrued and unpaid salary and bonus; (ii) an amount
equal to the sum of (a) 80% of her then current base salary and (b) 50% of the
average annual cash bonus payments during the preceding 2 fiscal years, with
such sum payable in 6 substantially equal monthly installments; and (iii) 6
months of medical and life insurance costs. If the Company terminates Ms. Sung’s
employment with Cause, she is entitled to her accrued and unpaid salary and
accrued and unpaid bonus through the effective date of termination as well as
the reimbursement of any expenses.





Potential
payments upon termination or change-in-control.




The
employment contract with Ms. Sung provided the terms of potential payments upon
termination. A description of her employment agreement can be found above in the
section titled “Employment Agreements”.


68





ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS




Security
Ownership of Certain Beneficial Owners and Management




The
following table sets forth, as of June 30, 2009, certain information concerning
the beneficial ownership of our Common Stock by (i) each shareholder known by us
to own beneficially five percent or more of our outstanding Common Stock; (ii)
each director; (iii) each executive officer; and (iv) all of our executive
officers and directors as a group, and their percentage ownership and voting
power.





Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Unless otherwise indicated in the table, the persons and
entities named in the table have sole voting and sole investment power with
respect to the shares set forth opposite the shareholder’s name. Unless
otherwise indicated, the address of each beneficial owner listed below is c/o
Laiyang Jiangbo Pharmaceuticals Enterprises, Inc., Middle Section, Longmao
Street, Area A, Laiyang Waixiangxing Industrial Park, Laiyang City, Yantai,
Shandong Province, PRC 265200. The percentage of class beneficially owned set
forth below is based on 11,142,046 shares of common stock outstanding on
September 24, 2009. The issued and outstanding shares do not include 2,415,900
shares of our common stock issuable upon the exercise of our outstanding
warrants and options and 4,292,500 shares of our common stock issuable upon
conversion of our standing convertible debts.




Named Executive Officers and Directors
                        
                        Number of
                          Shares of
                          Common Stock
                          Beneficially
                          Owned (1) (2)
                        
                        
                        Percentage
                          of
                          Outstanding
                          Common
                          StockCao
      Wubo, Chief Executive Officer and Chairman of the Board†
                        
                        
                        4,856,592
                        (3)
                        
                        
                        43.58
                        %Elsa
      Sung, Chief Financial Officer†
                        
                        
                        3,875
                        
                        
                        
                        *Xu
      Haibo, Vice President, Chief Operating Officer and
    Director†
                        
                        
                        –
                        
                        
                        
                        –Dong
      Lining, Vice President, Director of Technology†
                        
                        
                        –
                        
                        
                        
                        –Yang
      Weidong, Vice President, Director of Sales†
                        
                        
                        –
                        
                        
                        
                        –Xin
      Jingsheng, Director of Equipment†
                        
                        
                        –
                        
                        
                        
                        –Xue
      Hong, Controller†
                        
                        
                        7,500
                        
                        
                        
                        *Feng
      Xiaowei, Director†
                        
                        
                        –
                        
                        
                        
                        –Huang
      Lei, Director†
                        
                        
                        –
                        
                        
                        
                        –Ge
      Jian, Director†
                        
                        
                        9,993
                        
                        
                        
                        *Michael
      Marks†
                        
                        
                        1,250
                        
                        
                        
                        *John
      (Yang) Wang†
                        
                        
                        1,250
                        
                        
                        
                        *Total
      Held by Directors and Executive Officers (twelve
    individuals)
                        
                        
                        4,880,460
                        
                        
                        
                        43.80
                        %5%
      ShareholdersVerda
      International Limited (4)
                          A-1
      Building Dasi Street
                          Laiyan
      City, Shandong Province, PRC
                        
                        
                        4,856,592
                        
                        
                        
                        43.58
                        %Qiao
      Pengju
                          No.
      1 Building, Zhongxiao District
                          Mashang
      Road No.4-002
                          Laiyang
      City, Shandong Province, PRC
                        
                        
                        643,651
                        
                        
                        
                        5.77
                        %Pope
      Investments LLC(5)(6)
                          5100
      Poplar Avenue, Suite 805
                          Memphis,
      Tennessee 38137
                        
                        
                        1,113,090
                        
                        
                        
                        9.99
                        %





* Represents
less than one percent (1%).





(1)
            Based on 11,142,046 outstanding
      shares of Common Stock as of September 24,
  2009.




69





(2)
            Unless otherwise noted, the
      Company believes that all persons named in the table have sole voting and
      investment power with respect to all shares of the Common Stock
      beneficially owned by them. A person is deemed to be the beneficial owner
      of securities which may be acquired by such person within sixty (60) days
      from the date indicated above upon the exercise of options, warrants or
      convertible securities. Each beneficial owner’s percentage of ownership is
      determined by assuming that options, warrants or convertible securities
      that are held by such person (not those held by any other person) and
      which are exercisable within sixty (60) days of the date indicated above,
      have been exercised.





(3)
            Includes 4,856,592 shares of
      common stock owned by Verda International Limited, a company of which Mr.
      Cao is the Executive Director and owner of 100% of the equity interest.
      The address for Verda International Limited is A-1 Building Dasi
      Street,Laiyang City, Shandong province,
  China.





(4)
            The natural person with voting
      power and investment power on behalf of Verda International Limited is Mr.
      Cao Wubo.




(5)
            Includes (i) 625,000 shares of
      Common Stock issuable to Pope Investments LLC,, upon conversion of
      $5,000,000 aggregate principal amount of the Company’s Debentures and
      400,000 shares of Common Stock issuable upon exercise of the November
      Warrants and (ii) up to an additional 2,1250,000 shares of Common Stock of
      the 2,125,000 shares of Common Stock issuable to Pope Investments upon
      conversion of $17,000,000 aggregate principal amount of the Company’s
      Notes and 1,062,500 shares of Common Stock issuable upon exercise of
      1,062,500 Class A Warrants. Pope Asset Management LLC, a Tennessee limited
      liability company (“Pope Asset”) serves as an investment adviser and/or
      manager to Pope Investments. Pope Asset is the sole manager for Pope
      Investments and has sole voting control and investment and disposition
      power and discretion with respect to all securities held by Pope
      Investments. Pope Asset may be deemed to beneficially own shares owned or
      held by, or held for the account or benefit of, Pope Investments. Mr.
      William P. Wells is the sole manager of Pope Asset. Mr. Wells may be
      deemed to own shares owned or held by, or held for the account or benefit
      of, Pope Investments. Pope Asset and Mr. Wells do not directly own any
      shares of Common Stock




(6)
            The percentage of shares of
      Common Stock that may be beneficially owned by Pope Investments is limited
      to 9.99% and no shares of Common Stock in excess of this beneficial
      ownership limitation may be issued by the Company to Pope Investments.
      This limitation may be waived by Pope Investments at any time upon 61
      days’ notice to the Company.




Securities
Authorized for Issuance Under Equity Compensation Plans or Individual
Compensation Arrangements




The
following table sets forth information as of June 30, 2009 regarding securities
authorized for issuance under equity compensation plans, including individual
compensation arrangements, by us under our 2002 Stock Option Plan and our 2003
Stock Option, our 2004 Stock Plan as amended and any compensation plans not
previously approved by our shareholders as of June 30, 2009.




70




Equity Compensation as of
June 30, 2009





Plan Category
                                                  
                                                  Number of securities to be
                                                    Issued
                                                    upon exercise of outstanding
                                                    options, warrants and rights
                                                  
                                                  
                                                  Weighted average exercise
                                                    price
                                                    of outstanding options,
                                                    warrants and rights
                                                  
                                                  
                                                  Number of securities
                                                    remaining
                                                    available for future
                                                    issuance
                                                    under equity
                                                    compensation plans
                                                    (excluding securities
                                                    reflected incolumn 2)133,400
                                                  
                                                  
                                                  $
                                                  4.20
                                                  
                                                  
                                                  -Equity
      Compensation Plans or
                                                  
                                                  
                                                  2,000
                                                  
                                                  
                                                  $
                                                  12.00
                                                  
                                                  
                                                  -Individual
      Compensation
                                                  
                                                  
                                                  1,750
                                                  
                                                  
                                                  $
                                                  16.00
                                                  
                                                  
                                                  -Arrangements
      Not Approved by
                                                  
                                                  
                                                  1,875
                                                  
                                                  
                                                  $
                                                  20.00
                                                  
                                                  
                                                  -Security
      Holders (1)
                                                  
                                                  
                                                  1,875
                                                  
                                                  
                                                  $
                                                  24.00
                                                  
                                                  
                                                  
                                                  -TOTAL
                                                  
                                                  
                                                  140,900
                                                  
                                                  
                                                  $
                                                  5.18
                                                  
                                                  
                                                  
                                                  -





(1)
            Equity compensation plan not
      approved by shareholders is comprised of options granted and/or restricted
      stock to be issued to employees and non-employees, including directors,
      consultants, advisers, suppliers, vendors, customers and lenders for
      purposes including to provide continued incentives, as compensation for
      services and/or to satisfy outstanding indebtedness to
      them.




ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE





Agreement and Plan of Share
Exchange




On
October 1, 2007, we executed a Share Exchange Agreement (“Exchange Agreement”)
by and among Karmoya International Limited, a British Virgin Islands company
(“Karmoya”), and the shareholders of 100% of Karmoya’s capital stock (the
“Karmoya Shareholders”) on the one hand, and us and the majority shareholders of
our capital stock (the “Genesis Shareholders”) on the other hand. Separately,
Karmoya owns 100% of the capital stock of Union Well International Limited, a
Cayman Islands company (“Union Well”), which has established and owns 100% of
the equity in Genesis Jiangbo (Laiyang) Biotech Technologies Co., Ltd., a wholly
foreign owned enterprise in the People’s Republic of China (“GJBT”). GJBT has
entered into consulting service agreements and equity-related agreements with
Laiyang Jiangbo Pharmaceutical Co., Ltd. (“Laiyang Jiangbo”), a limited
liability company headquartered in, and organized under the laws of,
China.




Under the
Exchange Agreement, on the Closing Date, we issued 5,995,780 shares of our
Series B Voting Convertible Preferred Stock, which were converted into
299,789,000 shares of our common stock on October 26, 2007. As a result of this
transaction, the Karmoya Shareholders became our controlling shareholders and
Karmoya became our wholly owned subsidiary. In connection with Karmoya becoming
our wholly owned subsidiary, we acquired the business and operations of the LJ
Group, and our principal business activities continued to be conducted through
the LJ Group’s operating company in China, Laiyang Jiangbo.




Our
Contractual Arrangements with Laiyang Jiangbo and Its Shareholders




PRC law
currently limits foreign equity ownership of Chinese companies. To comply with
these foreign ownership restrictions, we operate our business in China through a
series of contractual arrangements with Laiyang Jiangbo and its shareholders
that were executed on September 21, 2007. For a description of these contractual
arrangements, see “Contractual Arrangements with Laiyang Jiangbo and Its
Shareholders” under the “Business” section above.




As a
result of the Exchange Transaction, we have contractual arrangements with
Laiyang Jiangbo which give us the ability to substantially influence Laiyang
Jiangbo's daily operations and financial affairs, appoint its senior executives
and approve all matters requiring shareholder approval.





Related
Parties Transactions of Laiyang Jiangbo




Set forth
below are the related parties transactions since July 1, 2008 between Laiyang
Jiangbo’s shareholders, officers and/or directors, and Laiyang Jiangbo. As a
result of the Exchange Transaction, we have contractual arrangements with
Laiyang Jiangbo which give us the ability to substantially influence Laiyang
Jiangbo's daily operations and financial affairs, appoint its senior executives
and approve all matters requiring shareholder approval.




71





Accounts receivable -
related parties





The
Company had engaged in business activities with three related parties, Jiangbo
Chinese-Western Pharmacy, Laiyang Jiangbo Medicals, Co., Ltd, and Yantai Jiangbo
Pharmaceuticals Co., Ltd. The Company’s Chief Executive Officer and other
related parties have majority ownership of these entities. At June 30, 2009 and
2008, accounts receivable from the Company’s product sales to these related
entities were $0 and $673,808, respectively. Accounts receivable due from
related parties are receivable in cash and due within 3 to 6 months. For the
years ended June 30, 2009, 2008, and 2007, the Company recorded sales to related
parties as follows:




Name of Related Party
                            
                            Relationship
                            
                            Net Sales2009
                            
                            
                            2008
                            
                            
                            2007Jiangbo
      Chinese-Western Pharmacy
                            
                            90%
      owned by Chief Executive Officer
                            
                            $
                            108,176
                            
                            
                            $
                            1,622,935
                            
                            
                            $
                            3,018,502Laiyang
      Jiangbo Medicals, Co. Ltd
                            
                            100%
      owned by Chief
                              Executive
      Officer and his spouse
                            
                            
                            -
                            
                            
                            
                            1,185,183
                            
                            
                            
                            436,909Yantai
      Jiangbo Pharmaceuticals Co., Ltd.
                            
                            Owned
      by Other Related
                              Party
                            
                            
                            135,850
                            
                            
                            
                            2,755,980
                            
                            
                            
                            478,470Total
                            
                            
                            
                            $
                            244,026
                            
                            
                            $
                            5,564,098
                            
                            
                            $
                            3,933,881





Other income
from related parties





The
Company leases two of its buildings to Jiangbo Chinese-Western Pharmacy. For the
years ended June 30, 2009, 2008, and 2007, the Company recorded other income of
$382,970, $110,152, and $102,472 from leasing the two buildings.




Other payables - related
parties





Other
payable-related parties primarily consist of accrued salary payable to the
Company’s officers and directors, and advances from the Company’s Chief
Executive Officer. These advances are short-term in nature and bear no interest.
The amounts are expected to be repaid in the form of cash.  Other
payable - related parties consisted of the following:





June 30,
                                2009
                              
                              
                              June 30,
                                2008Payable
      to Wubo Cao, Chief Executive Officer and Chairman of the Board
                              
                              $
                              184,435
                              
                              
                              $
                              281,137Payable
      to Haibo Xu, Chief Operating Officer and Director
                              
                              
                              33,688
                              
                              
                              
                              43,839Payable
      to Elsa Sung, Chief Financial Officer
                              
                              
                              18,333
                              
                              
                              
                              -Payable
      to John Wang, Director
                              
                              
                              2,500
                              
                              
                              
                              -Total
      other payable - related parties
                              
                              $
                              238,956
                              
                              
                              $
                              324,976




72





May 2008 Escrow
Agreement





In
connection with the May 2008 Financing, Mr. Cao, the Company’s Chief Executive
Officer and Chairman of the Board, placed 3,750,000 shares of common stock of
the Company owned by him into an escrow account pursuant to a make good escrow
agreement, dated May 30, 2008 (the “Make Good Escrow Agreement”). In the event
that either (i) the Company’s adjusted 2008 earnings before taxes is less than
$26,700,000 USD (“2008 Guaranteed EBT”) or (ii) the Company’s 2008 adjusted
fully diluted earnings before taxes per share is less than $1.6 USD (“2008
Guaranteed Diluted EBT”), 1,500,000 of such shares (the “2008 Make Good Shares”)
are to be released pro rata to the May 2008 Investors. In the event that either
(i) the Company’s adjusted 2009 earnings before taxes is less than $38,400,000
USD (“2009 Guaranteed EBT”) or (ii) the Company’s adjusted fully diluted
earnings before taxes per share is less than $2.32 USD (or $2.24 USD if the
500,000 shares of common stock held in escrow in connection with the November
2007 private placement have been released from escrow) (“2009 Guaranteed Diluted
EBT”), 2,250,000 of such shares (the “2009 Make Good Shares”) are to be released
pro rata to the May 2008 Investors. Should the Company successfully satisfy
these respective financial milestones, the 2008 Make Good Shares and 2009 Make
Good Shares will be returned to Mr. Cao. The Company has determined that both
thresholds for the period ended June 30 2009 and June 30, 2008 have been met.
The make good shares have yet to be returned to Mr. Cao.  In addition,
Mr. Cao is required to deliver shares of common stock owned by him to the
Investors on a pro rata basis equal to the number of shares (the “Settlement
Shares”) required to satisfy all costs and expenses associated with the
settlement of all legal and other matters pertaining to the Company prior to or
in connection with the completion of the Company’s October 2007 share exchange
in accordance with formulas set forth in the May 2008 Securities Purchase
Agreement (post 40-to-1 reverse split).





Director
Independence




For our
description of director independence, see “Board Committees and Director
Independence” under the section entitled “Directors, Executive Officers,
Promoters, Control Persons and Corporate Governance; Compliance with Section
16(a) of the Exchange Act” above.





ITEM
14 PRINCIPAL ACCOUNTANT FEES AND SERVICES





Aggregate fees billed by our current
principal accountants, Moore Stephens Wurth Frazer and Torbet, LLP for audit
services related to the
most recent fiscal year, and for other professional services billed in the most
recent fiscal year, were as follows:





Fiscal 2009
                            
                            
                            Fiscal 2008Audit
      Fees
                            
                            $
                            268,600
                            
                            
                            $
                            245,000Audit-Related
      Fees
                            
                            
                            26,000
                            
                            
                            
                            20,000Tax
      Fees
                            
                            
                            8,000
                            
                            
                            
                            -All
      Other Fees
                            
                            
                            -
                            
                            
                            
                            -Total
                            
                            $
                            302,600
                            
                            
                            $
                            265,000




Aggregate
fees billed by our previous principal accountants, Sherb & Co., for audit
services related to the most recent two fiscal years, and for other professional
services billed in the most recent two fiscal years, were as
follows:


73





Fiscal 2007Audit
      Fees
                          
                          $
                          82,500Audit-Related
      Fees
                          
                          
                          0Tax
      Fees
                          
                          
                          12,500All
      Other Fees
                          
                          
                          0Total
                          
                          $
                          95,000




Audit Fees— This category
includes the audit of our annual financial statements, review of financial
statements included in our Form 10-Q Quarterly Reports and services that are
normally provided by the independent auditors in connection with engagements for
those fiscal years. This category also includes advice on audit and accounting
matters that arose during, or as a result of, the audit or the review of interim
financial statements.




Audit-Related Fees— This
category consists of assurance and related services by the independent auditors
that are reasonably related to the performance of the audit or review of our
financial statements and are not reported above under "Audit Fees." The services
for the fees disclosed under this category include consultation regarding our
correspondence with the SEC and other accounting consulting.




Tax Fees— This category
consists of professional services rendered by our independent auditors for tax
compliance and tax advice. The services for the fees disclosed under this
category include tax return preparation and technical tax advice.




All Other Fees— This category
consists of fees for other miscellaneous items.




Pre-Approval Policies and
Procedures— Prior to engaging its accountants to perform particular
services, our board of directors obtains an estimate for the service to be
performed. All of the services described above were approved by the board of
directors in accordance with its procedure.





PART
IV





ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES





(a) Financial
Statements and Financial Statements Schedules




The
following financial statements of Jiangbo Pharmaceuticals, Inc. and Reports
of Independent Registered Public Accounting Firms are presented in the “F” pages
of this report:





Reports
      of Independent Registered Public Accounting Firms
                    
                    F-1Consolidated
      Balance Sheets - as of June 30, 2009 and 2008
                    
                    F-2Consolidated
      Statements of Income and Other Comprehensive Income - for the
      Years ended June 30, 2009, 2008 and 2007
                    
                    F-3Consolidated
      Statements of Shareholders’ Equity - for the Years ended June 30, 2009,
      2008 and 2007
                    
                    F-4Consolidated
      Statements of Cash Flows - for the Years ended June 30, 2009, 2008 and
      2007
                    
                    F-5Notes
      to Consolidated Financial Statements
                    
                    F-6
      - F-38




74





(b) Exhibits





*Filed
Herewith




Exhibit
                  Number
                
                Description2.1
                
                Share
      Acquisition and Exchange Agreement by and among Genesis, Karmoya and
      Karmoya Shareholders dated October 1, 2007 (1)3.1
                
                Articles
      of Incorporation (2)3.2
                
                Bylaws
      (2)3.3
                
                Articles
      of Amendment to Articles of Incorporation (2)3.4
                
                Articles
      of Amendment to Articles of Incorporation (2)3.5
                
                Articles
      of Amendment to Articles of Incorporation (3)3.6
                
                Articles
      of Amendment to Articles of Incorporation (4)3.7
                
                Articles
      of Amendment to Articles of Incorporation (5)4.1
                
                Articles
      of Amendment to Articles of Incorporation, Preferences and Rights of
      Series A Preferred Stock (6)4.2
                
                Articles
      of Amendment to Articles of Incorporation, Preferences and Rights of
      Series B Voting Convertible Preferred Stock (7)4.3
                
                6%
      Convertible Subordinated Debenture, dated November 7, 2007
    (8)4.4
                
                Common
      Stock Purchase Warrant, dated November 7, 2007 (8)4.5
                
                Form
      of 6% Convertible Note (9)4.6
                
                Form
      of Class A Common Stock Purchase Warrant (9)10.1
                
                Securities
      Purchase Agreement, dated as of November 6, 2007, between Genesis
      Pharmaceuticals Enterprises, Inc. and Pope Investments, LLC
      (8)10.2
                
                Registration
      Rights Agreement, dated as of November 6, 2007, between Genesis
      Pharmaceuticals Enterprises, Inc. and Pope Investments, LLC
      (8)





10.3
                
                Closing
      Escrow Agreement, dated as of November 6, 2007, by and among Genesis
      Pharmaceuticals Enterprises, Inc., Pope Investments, LLC and Sichenzia
      Ross Friedman Ference LLP (8)10.4
                
                Securities
      Purchase Agreement, dated May 30, 2008, by and among the Company, Karmoya
      International Ltd., Genesis Jiangbo (Laiyang) Biotech Technologies Co.,
      Ltd., Wubo Cao and the investors party thereto (9)10.5
                
                Make
      Good Escrow Agreement, dated May 30, 2008, by and among the Company, the
      investors party thereto, Pope Investments LLC, Wubo Cao and Loeb &
      Loeb LLP (9)10.6
                
                Holdback
      Escrow Agreement, dated May 30, 2008, by and among the Company, the
      investors party thereto and Loeb & Loeb LLP (9)10.7
                
                Registration
      Rights Agreement, dated May 30, 2008, by and among the Company and the
      investors party thereto (9)10.8
                
                Lock-up
      Agreement, dated May 30, 2008, between the Company and Wubo Cao
      (9)10.9
                
                Employment
      Agreement between Elsa Sung and the Company, dated June 10, 2008
      (10)10.10
                
                Consulting
      Agreement between the Company and Robert Cain, dated September 10,
      2008 (11)10.11
                
                Asset
      Transfer Contract between Shandong Traditional Chinese Medicine College,
      The Traditional Chinese Medicine College of Shandong Hongrui
      Pharmaceutical Factory and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated
      January 23, 2009.(14)10.12
                
                Lease
      Agreement between Laiyang Jiangbo Pharmaceutical Co., Ltd and Jiangbo
      Chinese-Western Pharmacy dated May 4, 2008 (15)10.13
                
                Unofficial
      Summary Translation of the Supplemental Asset Transfer Agreement between
      Shandong Traditional Chinese Medicine College, The Traditional
      Chinese Medicine College of Shandong Hongrui Pharmaceutical
      Factory and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated February 10,
      2009. (16)




75





10.14
              
              Letter
      Agreement between the Company and Pope Investments LLC dated August 10,
      2009. (17)10.15
              
              Unofficial
      Summary Translation of the Technology Cooperation Agreement between
      Shangdon University and Laiyang Jiangbo Pharmaceutical Co., Ltd.
      dated  September 16, 2007 *10.16
              
              Unofficial
      Summary Translation of the Pharmaceutical Industrialization Joint Base
      Agreement between Institute of Microbiology, Chinese Academy of Sciences
      and Laiyang Jiangbo Pharmaceutical Co. Ltd date November 12,
      2007*14.1
              
              Code
      of Business Conduct and Ethics (12)31.1
              
              Certification
      by the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)
      *31.2
              
              Certification
      by the Chief Financial Officer pursuant to Rule 13a-14(a) or
      15d-14(a)*32.1
              
              Certification
      of the Chief Executive Officer pursuant 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  *32.2
              
              Certification
      of the Chief Financial Officer pursuant 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  *99.1
              
              Consulting
      Services Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies
      Co., Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September
      21, 2007 (English Translation) (1)99.2
              
              Equity
      Pledge Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies
      Co., Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September
      21, 2007 (English Translation) (1)99.3
              
              Operating
      Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies Co.,
      Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September 21,
      2007 (English Translation) (1)99.4
              
              Proxy
      Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies Co.,
      Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September 21,
      2007 (English Translation) (1)99.5
              
              Option
      Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies Co.,
      Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September 21,
      2007 (English Translation) (1)99.6
              
              Audit
      Committee Charter (13)99.7
              
              Compensation
      Committee Charter (13)







(1)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on October
      1, 2007.





(2)
            Incorporated
      by reference to the Company’s Registration Statement on Form SB-2 filed on
      September 1, 1999.





(3)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on
      August 21, 2008.





(4)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed
      on September 5, 2008.





(5)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed
      on April 21, 2009.





(6)
            Incorporated
      by reference to the Company’s Quarterly Report on Form 10-QSB filed on
      January 22, 2004.





(7)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on October
      9, 2007.





(8)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on November
      9, 2007.





(9)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on June 3,
      2008.





(10)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on June 12,
      2008.





(11)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed
      on September 12, 2008.


76





(12)
            Incorporated
      by reference to the Company's Annual Report on Form 10-KSB filed on
      January 13, 2006.





(13)
            Incorporated
      by reference to the Company's Registration Statement on Form S-1/A filed
      on August 26, 2008.





(14)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on January
      29, 2009.





(15)
            Incorporated
      by reference to the Company’s Annual Report on Form 10-K/A filed on April
      10, 2009.





(16)
            Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q filed on May
      15, 2009.





(17)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on August
      14, 2009.





* Filed
herewith.





SIGNATURES





In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on September 28, 2009.




JIANGBO
PHARMACEUTICALS, INC.





/s/ Cao
    WuboCao
      Wubo, Chief Executive Officer and
                President




In
accordance with the Securities Exchange 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.





NAME
                                                            
                                                            TITLE
                                                            
                                                            DATE/s/
      Cao Wubo
                                                            
                                                            Chairman
      of the Board, Chief Executive Officer and President
                                                            
                                                            September 28, 2009Cao
      Wubo/s/
      Xu Haibo
                                                            
                                                            Vice
      President, Chief Operating Officer and Director
                                                            
                                                            September
      28, 2009Xu
      Haibo/s/
      Elsa Sung
                                                            
                                                            Chief
      Financial Officer
                                                            
                                                            September
      28, 2009Elsa
      Sung/s/
      Xue Hong
                                                            
                                                            Financial
      Controller
                                                            
                                                            September
      28, 2009Xue
      Hong/s/
      Feng Xiaowei
                                                            
                                                            Director
                                                            
                                                            September
      28, 2009Feng
      Xiaowei


77





/s/
      Huang Lei
                              
                              Director
                              
                              September
      28, 2009Huang
      Lei/s/
      Ge Jian
                              
                              Director
                              
                              September
      28, 2009Ge
      Jian/s/Michael
      Marks
                              
                              Director
                              
                              September
      28, 2009Michael
      Marks/s/John
      (Yang) Wang
                              
                              Director
                              
                              September
      28, 2009John
      (Yang) Wang


78




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






To the
Board of Directors and Shareholders of


Jiangbo
Pharmaceuticals, Inc. and Subsidiaries
  We have
audited the consolidated balance sheets of Jiangbo Pharmaceuticals, Inc. and
Subsidiaries (the "Company") as of June 30, 2009 and 2008, and the consolidated
statements of income and other comprehensive income, shareholders’ equity, and
cash flows for each of the years in the three-year period ended June 30, 2009.
Jiangbo Pharmaceuticals, Inc.’s management is responsible for these consolidated
financial statements. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 consolidated financial position of Jiangbo
Pharmaceuticals, Inc and Subsidiaries as of June 30, 2009 and 2008, and the
consolidated results of its operations and its cash flows for each of the years
in the three-year period ended June 30, 2009 in conformity with accounting
principles generally accepted in the United States of America.
 
 /S/ Moore
Stephens Wurth Frazer and Torbet, LLP
 
 Brea,
California
 September 28,
2009


F-1







JIANGBO
      PHARMACEUTICALS, INC. AND SUBSIDIARIES(FORMERLY
      KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)CONSOLIDATED
      BALANCE SHEETSAS
      OF JUNE 30, 2009 AND 2008
  A S
      S E T S2009
                                                              
                                                              
                                                              2008CURRENT
      ASSETS:Cash
                                                              
                                                              $
                                                              104,366,117
                                                              
                                                              
                                                              $
                                                              48,195,798Restricted
      cash
                                                              
                                                              
                                                              7,325,000
                                                              
                                                              
                                                              
                                                              7,839,785Investments
                                                              
                                                              
                                                              879,228
                                                              
                                                              
                                                              
                                                              2,055,241Accounts
      receivable, net of allowance for doubtful accounts of $694,370 and
      $155,662as
      of June 30, 2009 and 2008, respectively
                                                              
                                                              
                                                              19,222,707
                                                              
                                                              
                                                              
                                                              24,312,077Accounts
      receivable - related parties
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              673,808Inventories
                                                              
                                                              
                                                              3,277,194
                                                              
                                                              
                                                              
                                                              3,906,174Other
      receivables
                                                              
                                                              
                                                              167,012
                                                              
                                                              
                                                              
                                                              152,469Advances
      to suppliers
                                                              
                                                              
                                                              236,496
                                                              
                                                              
                                                              
                                                              1,718,504Financing
      costs - current
                                                              
                                                              
                                                              680,303
                                                              
                                                              
                                                              
                                                              680,303Total
      current assets
                                                              
                                                              
                                                              136,154,057
                                                              
                                                              
                                                              
                                                              89,534,159PLANT
      AND EQUIPMENT, net
                                                              
                                                              
                                                              13,957,397
                                                              
                                                              
                                                              
                                                              11,225,844OTHER
      ASSETS:Restricted
      investments
                                                              
                                                              
                                                              1,033,463
                                                              
                                                              
                                                              
                                                              2,481,413Financing
      costs, net
                                                              
                                                              
                                                              556,365
                                                              
                                                              
                                                              
                                                              1,236,641Intangible
      assets, net
                                                              
                                                              
                                                              17,041,181
                                                              
                                                              
                                                              
                                                              9,916,801Total
      other assets
                                                              
                                                              
                                                              18,631,009
                                                              
                                                              
                                                              
                                                              13,634,855Total
      assets
                                                              
                                                              $
                                                              168,742,463
                                                              
                                                              
                                                              $
                                                              114,394,858L I
      A B I L I T I E S    A N D    S H
      A R E H O L D E R S'   E Q U I T YCURRENT
      LIABILITIES:Accounts
      payable
                                                              
                                                              $
                                                              6,146,497
                                                              
                                                              
                                                              $
                                                              2,341,812Short
      term bank loans
                                                              
                                                              
                                                              2,197,500
                                                              
                                                              
                                                              
                                                              2,772,100Notes
      payable
                                                              
                                                              
                                                              7,325,000
                                                              
                                                              
                                                              
                                                              5,843,295Other
      payables
                                                              
                                                              
                                                              2,152,063
                                                              
                                                              
                                                              
                                                              3,510,864Refundable
      security deposits due to distributors
                                                              
                                                              
                                                              4,102,000
                                                              
                                                              
                                                              
                                                              -Other
      payables - related parties
                                                              
                                                              
                                                              238,956
                                                              
                                                              
                                                              
                                                              324,976Accrued
      liabilities
                                                              
                                                              
                                                              1,356,898
                                                              
                                                              
                                                              
                                                              334,439Liabilities
      assumed from reorganization
                                                              
                                                              
                                                              1,565,036
                                                              
                                                              
                                                              
                                                              1,084,427Taxes
      payable
                                                              
                                                              
                                                              11,248,226
                                                              
                                                              
                                                              
                                                              166,433Total
      current liabilities
                                                              
                                                              
                                                              36,332,176
                                                              
                                                              
                                                              
                                                              16,378,346CONVERTIBLE
      DEBT, net of discount $28,493,089 and $32,499,957as
      of June 30, 2009 and 2008, respectively
                                                              
                                                              
                                                              6,346,911
                                                              
                                                              
                                                              
                                                              2,500,043Total
      liabilities
                                                              
                                                              
                                                              42,679,087
                                                              
                                                              
                                                              
                                                              18,878,389COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Convertible
      preferred stock Series A ($0.001 par value; 0 and
    20,000,000shares
      authorized as of June 30, 2009 and 2008, respectively; 0 shares issued and
      outstanding as of June 30, 2009 and 2008)
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -Common
      stock ($0.001 par value, 22,500,000 and 15,000,000 shares authorized,
      10,435,099 and9,767,844
      shares issued and outstanding as of June 30, 2009 and 2008,
      respectively)
                                                              
                                                              
                                                              10,435
                                                              
                                                              
                                                              
                                                              9,770Paid-in-capital
                                                              
                                                              
                                                              48,397,794
                                                              
                                                              
                                                              
                                                              45,554,513Captial
      contribution receivable
                                                              
                                                              
                                                              (11,000
                                                              )
                                                              
                                                              
                                                              (11,000
                                                              )Retained
      earnings
                                                              
                                                              
                                                              67,888,667
                                                              
                                                              
                                                              
                                                              39,008,403Statutory
      reserves
                                                              
                                                              
                                                              3,253,878
                                                              
                                                              
                                                              
                                                              3,253,878Accumulated
      other comprehensive income
                                                              
                                                              
                                                              6,523,602
                                                              
                                                              
                                                              
                                                              7,700,905Total
      shareholders' equity
                                                              
                                                              
                                                              126,063,376
                                                              
                                                              
                                                              
                                                              95,516,469Total
      liabilities and shareholders' equity
                                                              
                                                              $
                                                              168,742,463
                                                              
                                                              
                                                              $
                                                              114,394,858


See
report of indepdendent registered public accounting firm.


The
accompanying notes are an integral part of these consolidated financial
statements.


F-2





JIANGBO
      PHARMACEUTICALS, INC. AND SUBSIDIARIES(FORMERLY
      KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)CONSOLIDATED
      STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOMEFOR
      THE YEARS  ENDED JUNE 30, 2009, 2008 AND
  2007
  2009
              
              
              2008
              
              
              2007REVENUES:Sales
              
              $
              117,143,950
              
              
              $
              93,982,407
              
              
              $
              72,259,812Sales
      - related parties
              
              
              244,026
              
              
              
              5,564,098
              
              
              
              3,933,881TOTAL
      REVENUES, net
              
              
              117,387,976
              
              
              
              99,546,505
              
              
              
              76,193,693Cost
      of sales
              
              
              27,854,747
              
              
              
              21,072,674
              
              
              
              19,961,439Cost
      of sales - related parties
              
              
              54,519
              
              
              
              1,433,873
              
              
              
              1,200,091COST
      OF SALES
              
              
              27,909,266
              
              
              
              22,506,547
              
              
              
              21,161,530GROSS
      PROFIT
              
              
              89,478,710
              
              
              
              77,039,958
              
              
              
              55,032,163RESEARCH
      AND DEVELOPMENT EXPENSE
              
              
              4,395,000
              
              
              
              3,235,715
              
              
              
              11,143,830SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
              
              
              35,315,529
              
              
              
              41,593,197
              
              
              
              25,579,361INCOME
      FROM OPERATIONS
              
              
              49,768,181
              
              
              
              32,211,046
              
              
              
              18,308,972OTHER
      (INCOME) EXPENSE, NETNon-operating
      expense
              
              
              894,014
              
              
              
              708,338
              
              
              
              -Non-operating
      income
              
              
              (89,453
              )
              
              
              (1,281,149
              )
              
              
              (6,484,484
              )Non-operating
      income - related party
              
              
              (382,970
              )
              
              
              (110,152
              )
              
              
              (102,472
              )Interest
      expense, net
              
              
              5,904,511
              
              
              
              3,092,183
              
              
              
              211,616Loss
      from discontinued operations
              
              
              1,781,946
              
              
              
              380,027
              
              
              
              -OTHER
      EXPENSE (INCOME), NET
              
              
              8,108,048
              
              
              
              2,789,247
              
              
              
              (6,375,340
              )INCOME
      BEFORE PROVISION FOR INCOME TAXES
              
              
              41,660,133
              
              
              
              29,421,799
              
              
              
              24,684,312PROVISION
      FOR INCOME TAXES
              
              
              12,779,869
              
              
              
              6,970,739
              
              
              
              2,631,256NET
      INCOME
              
              
              28,880,264
              
              
              
              22,451,060
              
              
              
              22,053,056OTHER
      COMPREHENSIVE INCOME:Unrealized
      gain (loss) on marketable securities
              
              
              (1,514,230
              )
              
              
              1,347,852
              
              
              
              -Foreign
      currency translation adjustment
              
              
              336,927
              
              
              
              5,206,612
              
              
              
              1,018,130COMPREHENSIVE
      INCOME
              
              $
              27,702,961
              
              
              $
              29,005,524
              
              
              $
              23,071,186WEIGITED
      AVERAGE NUMBER OF SHARES:Basic
              
              
              10,061,326
              
              
              
              9,164,127
              
              
              
              7,494,740Dilulted
              
              
              14,484,830
              
              
              
              9,737,832
              
              
              
              7,494,740EARNINGS
      PER SHARE:Basic
              
              $
              2.87
              
              
              $
              2.45
              
              
              $
              2.94Diluted
              
              $
              0.09
              
              
              $
              1.84
              
              
              $
              2.94
 See
report of indepdendent registered public accounting firm.


The
accompanying notes are an integral part of these consolidated financial
statements.





F-3




JIANGBO
      PHARMACEUTICALS, INC. AND SUBSIDIARIES(FORMERLY
      KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY




Common
      StockPar
      Vaule $0.001
            
            
            Treasury
      Stock
            
            
            Additional
            
            
            Capital
            
            
            Retained
      Earnings
            
            
            Accumulated
      otherNumber
            
            
            Common
            
            Number
            
            
            Treasury
            
            
            Paid-in
            
            
            contribution
            
            
            Statutory
            
            
            Unrestricted
            
            
            comprehensiveof
      shares
            
            
            stock
            
            
            of
      shares
            
            
            stock
            
            
            capital
            
            
            receivable
            
            
            reserves
            
            
            earnings
            
            
            income
            
            
            TotalsBALANCE,
      June 30, 2006
            
            
            7,494,740
            
            
            $
            7,495
            
            
            
            10,000
            
            
            $
            (2,805
            )
            
            $
            13,216,309
            
            
            $
            (12,011,000
            )
            
            $
            648,667
            
            
            $
            7,453,498
            
            
            $
            128,311
            
            
            $
            9,440,475-Capital
      contribution
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,128,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,128,000Dividend
      distribution
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (10,344,000
            )
            
            
            
            
            
            
            (10,344,000
            )Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            22,053,056
            
            
            
            
            
            
            
            22,053,056Adjustment
      to statutory reserve
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,508,970
            
            
            
            (1,508,970
            )
            
            
            
            
            
            
            -Foreign
      currency translation gain
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,018,130
            
            
            
            1,018,130BALANCE,
      June 30, 2007
            
            
            7,494,740
            
            
            $
            7,495
            
            
            
            10,000
            
            
            $
            (2,805
            )
            
            $
            18,344,309
            
            
            $
            (12,011,000
            )
            
            $
            2,157,637
            
            
            $
            17,653,584
            
            
            $
            1,146,441
            
            
            $
            27,295,661Recapitalization
      of Company
            
            
            2,131,603
            
            
            
            2,132
            
            
            
            
            
            
            
            
            
            
            
            3,815,813
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,817,959Common
      stock Issued for conversion of options
            
            
            44,031
            
            
            
            44
            
            
            
            
            
            
            
            
            
            
            
            (44
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            0Issuance
      of common stock @ $4.80 per share
            
            
            37,500
            
            
            
            38
            
            
            
            
            
            
            
            
            
            
            
            179,963
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            180,001Exercise
      of stock options to common stock @ $4.20 per share
            
            
            37,500
            
            
            
            38
            
            
            
            
            
            
            
            
            
            
            
            157,463
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            157,501Conversion
      of convertible preferred stock A to common stock
            
            
            16,595
            
            
            
            17
            
            
            
            
            
            
            
            
            
            
            
            (2
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Capital
      contribution registered
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (12,000,000
            )
            
            
            12,000,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Sales
      of treasury stock
            
            
            
            
            
            
            
            
            
            
            (10,000
            )
            
            
            2,805
            
            
            
            (830
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,975Grant
      of warrants and beneficial conversion featurein
      connection with convertible debt
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            35,000,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            35,000,000Common
      stock issued for service @ $8.00 per share
            
            
            5,875
            
            
            
            6
            
            
            
            
            
            
            
            
            
            
            
            46,994
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            47,000Stock
      option compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10,847
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10,847Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            22,451,060
            
            
            
            
            
            
            
            22,451,060Adjustment
      to statutory reserve
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,096,241
            
            
            
            (1,096,241
            )
            
            
            
            
            
            
            -Change
      in fair value on restricted marketable equity securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,347,852
            
            
            
            1,347,852Foreign
      currency translation gain
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,206,612
            
            
            
            5,206,612BALANCE,
      June 30, 2008
            
            
            9,767,844
            
            
            $
            9,770
            
            
            
            -
            
            
            $
            -
            
            
            $
            45,554,513
            
            
            $
            (11,000
            )
            
            $
            3,253,878
            
            
            $
            39,008,403
            
            
            $
            7,700,905
            
            
            $
            95,516,469Shares
      issued for adjustments for 1:40 reverse split
            
            
            1,104
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Cancellation
      of common stock for settlement @ $8 per share
            
            
            (2,500
            )
            
            
            (2
            )
            
            
            
            
            
            
            
            
            
            
            (19,998
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (20,000
            )Common
      stock issued for service @ $8 per share
            
            
            2,500
            
            
            
            2
            
            
            
            
            
            
            
            
            
            
            
            19,998
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            20,000Common
      stock issued for service @ $9 per share
            
            
            2,500
            
            
            
            2
            
            
            
            
            
            
            
            
            
            
            
            22,498
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            22,500Common
      stock issued to Hongrui @ $4.035 per share
            
            
            643,651
            
            
            
            644
            
            
            
            
            
            
            
            
            
            
            
            2,596,488
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,597,132Stock-based
      compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            64,314
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            64,314Conversion
      of convertible debt to stock
            
            
            20,000
            
            
            
            20
            
            
            
            
            
            
            
            
            
            
            
            159,980
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            160,000Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            28,880,264
            
            
            
            
            
            
            
            28,880,264Change
      in fair value on restricted marketable equity securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,514,230
            )
            
            
            (1,514,230
            )Foreign
      currency translation gain
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            336,927
            
            
            
            336,927BALANCE,
      June 30, 2009
            
            
            10,435,099
            
            
            $
            10,435
            
            
            $
            -
            
            
            $
            -
            
            
            $
            48,397,794
            
            
            $
            (11,000
            )
            
            $
            3,253,878
            
            
            $
            67,888,667
            
            
            $
            6,523,602
            
            
            $
            126,063,376


See
report of indepdendent registered public accounting firm.  The
accompanying notes are an integral part of these consolidated financial
statements.




F-4








JIANGBO
      PHARMACEUTICALS, INC. AND SUBSIDIARIES(FORMERLY
      KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)CONSOLIDATED
      STATEMENTS OF CASH FLOWSFOR
      THE YEARS ENDED JUNE 30, 2009, 2008 AND
2007




2009
            
            
            2008
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
            
            $
            28,880,264
            
            
            $
            22,451,060
            
            
            $
            22,053,056Loss
      from discontinued operations
            
            
            1,781,946
            
            
            
            380,027
            
            
            
            -Income
      from continued operations
            
            
            30,662,210
            
            
            
            22,831,087
            
            
            
            22,053,056Adjustments
      to reconcile net income to cashprovided
      by operating activities:Depreciation
            
            
            679,507
            
            
            
            517,863
            
            
            
            364,417Amortization
      of intangible assets
            
            
            735,427
            
            
            
            184,465
            
            
            
            122,126Amortization
      of debt issuance costs
            
            
            680,276
            
            
            
            123,964
            
            
            
            -Amortization
      of debt discount
            
            
            4,006,868
            
            
            
            2,500,043
            
            
            
            -Bad
      debt (recovery) expense
            
            
            538,069
            
            
            
            (27,641
            )
            
            
            -Loss
      on sale of marketable securities
            
            
            473,303
            
            
            
            -
            
            
            
            -Unrealized
      loss on investments
            
            
            229,425
            
            
            
            696,528
            
            
            
            -Other
      non-cash settlement income expense
            
            
            (20,000
            )
            
            
            -
            
            
            
            -Common
      stock issued for services
            
            
            -
            
            
            
            46,994Amortization
      of stock option compensation
            
            
            106,815
            
            
            
            10,847
            
            
            
            -Gain
      on forgiveness of debt
            
            
            -
            
            
            
            (86,752
            )
            
            
            -Changes
      in operating assets and liabilitiesAccounts
      receivable
            
            
            4,651,284
            
            
            
            (10,534,270
            )
            
            
            (1,534,814
            )Accounts
      receivable - related parties
            
            
            676,579
            
            
            
            (113,465
            )
            
            
            (62,599
            )Notes
      receivables
            
            
            -
            
            
            
            60,694
            
            
            
            (26,626
            )Inventories
            
            
            792,293
            
            
            
            1,686,090
            
            
            
            1,727,215Other
      receivables
            
            
            (21,038
            )
            
            
            (111,571
            )
            
            
            (20,889
            )Advances
      to suppliers
            
            
            1,495,805
            
            
            
            (1,259,254
            )
            
            
            (66,821
            )Other
      assets
            
            
            -
            
            
            
            92,996
            
            
            
            1,563,800Accounts
      payable
            
            
            3,795,084
            
            
            
            55,085
            
            
            
            (2,027,968
            )Accrued
      liabilities
            
            
            1,182,018
            
            
            
            211,362
            
            
            
            45,567Other
      payables
            
            
            (1,534,740
            )
            
            
            2,033,689
            
            
            
            (827,498
            )Other
      payables - related parties
            
            
            (86,692
            )
            
            
            (822,155
            )
            
            
            (3,848,086
            )Refundable
      security deposits due to distributors
            
            
            4,102,000
            
            
            
            -
            
            
            
            -Liabilities
      assumed from reorganization
            
            
            (1,301,337
            )
            
            
            (1,172,816
            )
            
            
            -Taxes
      payable
            
            
            11,081,110
            
            
            
            169,790
            
            
            
            (2,168,912
            )Net
      cash provided by operating activities
            
            
            62,924,266
            
            
            
            17,093,573
            
            
            
            15,291,968CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of Hongrui
            
            
            (8,584,900
            )
            
            
            -
            
            
            
            -Proceeds
      from sale of investments
            
            
            407,005
            
            
            
            1,034,028
            
            
            
            -Proceeds
      from sale of restricted investments
            
            
            -
            
            
            
            155,000
            
            
            
            -Purchase
      of equipment
            
            
            (156,702
            )
            
            
            (453,718
            )
            
            
            (183,237
            )Purchase
      of intangible assets
            
            
            -
            
            
            
            (8,870,631
            )
            
            
            -Cash
      proceeds from sale of equipment
            
            
            15,615
            
            
            
            -
            
            
            
            -Cash
      proceeds from reverse acquisition
            
            
            -
            
            
            
            534,950Net
      cash used in investing activities
            
            
            (8,318,982
            )
            
            
            (7,600,371
            )
            
            
            (183,237
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Change
      in restricted cash
            
            
            538,815
            
            
            
            3,292,168
            
            
            
            435,022Proceeds
      from notes payable
            
            
            13,896,990
            
            
            
            -
            
            
            
            -Principal
      payments on notes payable
            
            
            (12,439,315
            )
            
            
            (3,292,168
            )
            
            
            (435,022
            )Borrowings
      on short term bank loans
            
            
            2,197,500
            
            
            
            2,616,110
            
            
            
            4,471,600Principal
      payments on short term bank loans
            
            
            (2,783,500
            )
            
            
            (4,819,150
            )
            
            
            (5,688,450
            )Proceeds
      from sale of common stock
            
            
            -
            
            
            
            337,500
            
            
            
            -Proceeds
      from sale of treasury stock
            
            
            -
            
            
            
            1,975
            
            
            
            -Payment
      to escrow acount
            
            
            -
            
            
            
            (1,996,490
            )
            
            
            -Payments
      for dividend
            
            
            -
            
            
            
            (10,608,000
            )
            
            
            -Proceeds
      from convertible debt
            
            
            -
            
            
            
            32,974,500
            
            
            
            -Payments
      for debt issuance cost
            
            
            -
            
            
            
            (15,408
            )
            
            
            -Net
      cash provided by (used in) financing activities
            
            
            1,410,490
            
            
            
            18,491,037
            
            
            
            (1,216,850
            )EFFECTS
      OF EXCHANGE RATE CHANGE IN CASH
            
            
            154,545
            
            
            
            2,474,351
            
            
            
            473,729NET
      INCREASE IN CASH
            
            
            56,170,319
            
            
            
            30,458,590
            
            
            
            14,365,610CASH,
      beginning of the year
            
            
            48,195,798
            
            
            
            17,737,208
            
            
            
            3,371,598CASH,
      end of the year
            
            $
            104,366,117
            
            
            $
            48,195,798
            
            
            $
            17,737,208SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid for interest
            
            $
            2,255,809
            
            
            $
            493,781
            
            
            $
            280,628Cash
      paid for taxes
            
            $
            6,167,810
            
            
            $
            7,001,264
            
            
            $
            447,911Non-cash
      investing and financing activities:
            
            $
            
            
            
            $
            
            
            
            $Capital
      contribution made bia contribution of land use rights and
      buildings
            
            $
            
            
            
            $
            
            
            
            $
            51,280,000Common
      stock issued to acquire Hongrui
            
            $
            2,597,132
            
            
            $
            
            
            
            $






See
report of independent registered public accounting firm.


The
accompanying notes are an integral part of these consolidated financial
statements.




F-5





JIANGBO
PHARMACEUTICALS, INC. AND SUBSIDIARIES


(FORMERLY
KNOWN AS GENESIS PHARMACEUTICALS ENTERPRISES, INC.)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




JUNE 30,
2009




Note
1 – Organization and business





Jiangbo
Pharmaceuticals, Inc. (the “Company” or “Jiangbo”) was originally incorporated
in the state of Florida on August 15, 2001, under the name Genesis Technology
Group, Inc. with the principal business objective of operating as a business
development and marketing firm that specializes in advising and
providing  a turnkey solution for small and mid-sized Chinese
companies entering western markets. On October 12, 2007, after a share exchange
transaction, the Company’s corporate name was changed to Genesis Pharmaceuticals
Enterprises, Inc (“Genesis”).




Pursuant
to a Certificate of Amendment to the Amended and Restated Articles of
Incorporation filed with the State of Florida which took effect as of April 16,
2009, the Company's name was changed from "Genesis Pharmaceuticals Enterprises,
Inc." to "Jiangbo Pharmaceuticals, Inc." (the "Corporate Name Change"). The
Corporate Name Change was approved and authorized by the Board of Directors of
the Company as well as the holders of a majority of the outstanding shares of
the Company’s voting stock by written consent. As a result of the Corporate Name
Change, our stock symbol changed to "JGBO" with the opening of trading on May
12, 2009 on the OTCBB.




On
October 1, 2007, Genesis executed a Share Acquisition and Exchange Agreement
(“Exchange Agreement”) by and among Genesis, Karmoya International Ltd.
(“Karmoya”), a British Virgin Islands (“BVI”) company, and the shareholders of
100% of Karmoya’s capital stock (the “Karmoya Shareholders”). After the closing
of the share exchange transaction, Karmoya became the Company’s wholly-owned
subsidiary, and the Company’s primary operations now consist of the business and
operations of Karmoya and its subsidiaries.





Contemporaneous
with the share exchange agreement in October 2007, the Company discontinued the
business development and marketing segment of the Company, which had been the
Company’s principal business objective prior to the reverse merger as described
in Note 6. (The business development and marketing segment represented 100% of
the Company’s activities prior to October 1, 2007.) Liabilities of the business
development and marketing segment are reclassified as liabilities assumed from
reorganization in the accompanying consolidated balance sheets. The results of
operations and cash flows of the business development and marketing segment of
the Company have been reflected as loss from discontinued operations in the
consolidated statements of income and consolidated statements of cash flows,
respectively, for the years ended June 30, 2009 and 2008. Except for Jiangbo
Pharmaceuticals, Inc., all other entities that were consolidated into the
Company prior to October 1, 2007, have been administratively
dissolved.





Karmoya
was established on July 18, 2007, under the laws of British Virgin Islands.
Karmoya was established as a “special purpose vehicle” for the foreign capital
raising activities of Laiyang Jiangbo Pharmaceutical Co., Ltd. (“Laiyang
Jiangbo”), a limited liability company formed under the laws of the People’s
Republic of China (the “PRC” or “China”). China’s State Administration of
Foreign Exchange (“SAFE”) requires the shareholders of any Chinese companies to
obtain SAFE’s approval before establishing any offshore holding company
structure for foreign financing as well as subsequent acquisition matters under
an official notice known as “Circular 106” in the PRC. On September 19, 2007,
Karmoya was approved by the local Chinese SAFE as a “special purpose vehicle”
offshore company.





On
September 20, 2007, Karmoya acquired 100% of Union Well International Limited
(“Union Well”), a Cayman Islands corporation established on May 9, 2007. On
September 17, 2007, Union Well established a wholly-owned subsidiary, Genesis
Jiangbo (“Laiyang”) Biotech Technology Co., Ltd. (“GJBT”), in the PRC as a
wholly-owned foreign limited liability company with an original registered
capital of $12 million. GJBT develops, manufactures, and sells health medicines.
The Company increased its registered capital in GJBT to $30,000,000 in June
2008. In August 2008, the PRC government approved for GJBT to increase its
registered capital from $30 million to $58 million. In August 2008, the PRC
government approved for GJBT to increase its registered capital from $30 million
to $58 million. The PRC laws require Union Well, the 100% owner of GJBT to
contribute at least 20% of the registered capital within 30 days of the approval
and the remaining balance was required to be contributed within two years of the
approval date. In August 2008, GJBT received additional registered capital in
the amount of $1,996,001




See
report of independent registered public accounting firm.


F-6





Laiyang
Jiangbo was formed under laws of the PRC in August 2003, with registered capital
of $1,210,000 (RMB 10,000,000). On December 1, 2006, Laiyang Jiangbo’s
registered capital increased to $6,664,000 (RMB 50,000,000), and on December 22,
2006, the registered capital was funded by the contribution of certain buildings
to the Company. Laiyang Jiangbo produces and sells western pharmaceutical
products in China and focuses on developing innovative medicines to address
various medical needs for patients worldwide. Laiyang Jiangbo operates in 26
provinces in the PRC, and is headquartered in Laiyang City, Shandong province,
China.




On
September 21, 2007, GJBT entered into a series of contractual arrangements
(“Contractual Arrangements”) with Laiyang Jiangbo and its shareholders. Under
the terms of the Contractual Arrangements, GJBT took control over the management
of the business activities of Laiyang Jiangbo and holds a 100% variable interest
in Laiyang Jiangbo. The Contractual Arrangements are comprised of a series of
agreements, including a Consulting Services Agreement and an Operating
Agreement, through which GJBT has the right to advise, consult, manage, and
operate Laiyang Jiangbo, and collect and own all of their respective net
profits. Additionally, Laiyang Jiangbo’s shareholders have granted their voting
rights over Laiyang Jiangbo to GJBT. In order to further reinforce GJBT’s rights
to control and operate Laiyang Jiangbo, Laiyang Jiangbo and its shareholders
have granted GJBT the exclusive right and option to acquire all of their equity
interests in Laiyang Jiangbo or, alternatively, all of the assets of Laiyang
Jiangbo. Further Laiyang Jiangbo’s shareholders have pledged all of their
rights, titles, and interests in Laiyang Jiangbo to GJBT. GJBT is 100% owned by
Union Well International Ltd. (“Union Well”) which is 100% owned Karmoya. The
Company’s CEO and Chairman, Mr. Cao Wubo and his wife, Mrs. Xun Guihong, jointly
owned 74.4 % of Karmoya prior to October 1, 2007.  Remaining 25.6% of
Karmoya ownership was transferred to Genesis Technology Group, Inc. (now known
as Genesis Pharmaceuticals Enterprises, Inc.) from various parties on October 1,
2007. As Karmoya, Union Well, and GJBT all have the same sole executive
director, Mr. Cao Wubo, and the voting ownership of Laiyang Jiangbo and GJBT
meet the criteria for common control for accounting purposes, Laiyang Jiangbo
and GJBT have been operated under the common control.





Karmoya
used the contractual arrangements to gain control of Laiyang Jiangbo, instead of
using a complete acquisition of Laiyang Jiangbo’s assets or equity to make
Laiyang Jiangbo a wholly-owned subsidiary of Karmoya, due to the following: (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, PRC’s laws would require Karmoya to acquire
Laiyang Jiangbo in cash, and at the time of the acquisition, Karmoya was unable
to raise sufficient funds to pay the full appraised cash fair value for Laiyang
Jiangbo’s assets or shares as required under PRC laws.





In
October 2007, the Company recapitalized the Company to give effect to the
Exchange Agreement.  Under generally accepted accounting principles,
the acquisition by the Company of Karmoya is considered to be capital
transactions in substance, rather than a business combination. That is, the
acquisition is equivalent to the acquisition by Karmoya of the Company, then
known as Genesis Technology Group, Inc., with the issuance of stock by Karmoya
for the net monetary assets of the Company.  This transaction is
reflected as a recapitalization, and is accounted for as a change in capital
structure.  Accordingly, the accounting for the acquisition is
identical to that resulting from a reverse acquisition. Under reverse
acquisition accounting, the comparative historical financial statements of the
Company, as the legal acquirer, are those of the accounting acquirer,
Karmoya. Since Karmoya, Union Well and GJBT did not have any business
activities, the Company’s accompanying financial statements prior to the closing
on the reverse acquisition reflect only the business activities of Laiyang
Jiangbo.  The financial statements reflect the recapitalization of the
shareholders’ equity as if the transactions occurred as of the beginning of the
first period presented.




See
report of independent registered public accounting firm.




F-7





Pursuant
to the Exchange Agreement, the shareholders of Karmoya transferred to the
Company all of the outstanding shares of Karmoya in exchange for 597 shares of
the Company’s common stock, and 5,995,780 shares of the Company’s Series B
convertible voting preferred stock and convertible into 299,789,000 common
shares of the Company. The 594 shares of common stock and 5,995,780 shares of
preferred stocks issued to the former Karmoya stockholders are deemed to be
outstanding for all periods reported prior to the date of the reverse
acquisition. Upon the preferred stock conversion, as of the closing date,
the holder of the preferred stock would hold approximately 75% of the Company’s
issued and outstanding common stock.  As a result, Karmoya became the
Company’s wholly-owned subsidiary. As a result of the transaction pursuant to
the Exchange Agreement, the Company’s business has become the business of
Laiyang Jiangbo. The sole director and officer of Karmoya is Mr. Wubo Cao, who,
as a result of the exchange, became the Chief Executive Officer, President and
Chairman of the Board of the Company.




Note
2 - Summary of significant accounting policies





Basis of
presentation




The
Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America ("US
GAAP"). All significant inter-company accounts and transactions have been
eliminated in consolidation.





Principles of
consolidation





The
accompanying consolidated financial statements include the accounts of the
following entities, and all significant intercompany transactions and balanced
have been eliminated in consolidation:





Consolidated entity name:
                                  
                                  Percentage of
                                    ownershipKarmoya
      International Ltd.
                                  
                                  100%Union
      Well International Limited
                                  
                                  100%Genesis
      Jiangbo Biotech Technology Co., Ltd.
                                  
                                  100%Laiyang
      Jiangbo Pharmaceutical Co., Ltd.
                                  
                                  Variable
      Interest Entity





Financial
Accounting Standards Board (“FASB”) Interpretation Number (“FIN”) 46 (revised
December 2003), “Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46R”),
addresses whether certain types of entities, referred to as variable interest
entities should be consolidated in a company’s consolidated financial
statements. In accordance with the provisions of FIN 46R, Laiyang Jiangbo is
considered variable interest entities, and the Company is the primary
beneficiary. The Company’s relationships with Laiyang Jiangbo and its
shareholders are governed by a series of contractual arrangements between GJBT,
the Company’s wholly foreign-owned enterprise in the PRC, and Laiyang Jiangbo,
which is the operating company of the Company in the PRC. Under PRC laws, each
of GJBT and Laiyang Jiangbo is an independent legal entity and neither of them
is exposed to liabilities incurred by the other parties. The contractual
arrangements constitute valid and binding obligations of the parties of such
agreements. Each of the contractual arrangements and the rights and obligations
of the parties thereto are enforceable and valid in accordance with the laws of
the PRC.





On
September 21, 2007, the Company entered into the following contractual
arrangements with Laiyang Jiangbo:





Consulting Services
Agreement: Pursuant to the exclusive consulting services agreement
between GJBT and Laiyang Jiangbo, GJBT has the exclusive right to provide to
Laiyang Jiangbo general consulting services related to pharmaceutical business
operations, as well as consulting services related to human resources and
technological research and development of pharmaceutical products and health
supplements (the “Services”).
Under this agreement, GJBT owns the intellectual property rights developed or
discovered through research and development while providing the Services for
Laiyang Jiangbo. Laiyang Jiangbo pays a quarterly consulting service fee in
Chinese Renminbi (“ RMB
”) to GJBT that is equal to all of Laiyang Jiangbo's revenue for such
quarter.




See
report of independent registered public accounting firm.




F-8





Operating Agreement:
Pursuant to the operating agreement among GJBT, Laiyang Jiangbo and the
shareholders of Laiyang Jiangbo who collectively hold 100% of the outstanding
shares of Laiyang Jiangbo (collectively, the “ Laiyang
Shareholders ”), GJBT provides guidance and instructions on Laiyang
Jiangbo's daily operations, financial management and employment issues. The
Laiyang Shareholders must appoint the candidates recommended by GJBT as members
of Laiyang Jiangbo's board of directors. GJBT has the right to appoint senior
executives of Laiyang Jiangbo. In addition, GJBT agrees to guarantee Laiyang
Jiangbo's performance under any agreements or arrangements relating to Laiyang
Jiangbo's business arrangements with any third party. Laiyang Jiangbo, in
return, agreed to pledge its accounts receivable and all of its assets to GJBT.
Moreover, Laiyang Jiangbo agrees that without the prior consent of GJBT, Laiyang
Jiangbo will not engage in any transactions that could materially affect the
assets, liabilities, rights or operations of Laiyang Jiangbo, including, but not
limited to, 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. The term of
this agreement is ten (10) years from September 21, 2007, unless early
termination occurs in accordance with the provisions of the agreement and may be
extended only upon GJBT's written confirmation prior to the expiration of the
this agreement, with the extended term to be mutually agreed upon by the
parties.





Equity Pledge
Agreement: Pursuant to the equity pledge agreement among GJBT, Laiyang
Jiangbo and the Laiyang Shareholders, the Laiyang Shareholders pledged all of
their equity interests in Laiyang Jiangbo to GJBT to guarantee Laiyang Jiangbo's
performance of its obligations under the consulting services agreement. If
either Laiyang Jiangbo or any of the Laiyang Shareholders breaches its
respective contractual obligations, GJBT, as pledgee, will be entitled to
certain rights, including the right to sell the pledged equity interests. The
Laiyang Shareholders also granted GJBT an exclusive, irrevocable power of
attorney to take actions in the place and stead of the Laiyang Shareholders to
carry out the security provisions of the equity pledge agreement and take any
action and execute any instrument that GJBT may deem necessary or advisable to
accomplish the purposes of the equity pledge agreement. The Laiyang Shareholders
agreed, among other things, not to dispose of the pledged equity interests or
take any actions that would prejudice GJBT's interest. The equity pledge
agreement will expire two (2) years after Laiyang Jiangbo obligations under the
exclusive consulting services agreement have been fulfilled.





Option Agreement:
Pursuant to the option agreement among GJBT, Laiyang Jiangbo and the Laiyang
Shareholders, the Laiyang Shareholders irrevocably granted GJBT or its
designated person an exclusive option to purchase, to the extent permitted under
PRC law, all or part of the equity interests in Laiyang Jiangbo for the cost of
the initial contributions to the registered capital or the minimum amount of
consideration permitted by applicable PRC law. GJBT or its designated person has
sole discretion to decide when to exercise the option, whether in part or in
full. The term of this agreement is ten (10) years from September 21, 2007,
unless early termination occurs in accordance with the provisions of the
agreement and may be extended only upon GJBT's written confirmation prior to the
expiration of the this agreement, with the extended term to be mutually agreed
upon by the parties.





Proxy
Agreement: Pursuant to the proxy agreement among GJBT and the Laiyang
Shareholders, the Laiyang Shareholders agreed to irrevocably grant and entrust
all the rights to exercise their voting power to the person(s) appointed by
GJBT. GJBT may from time to time establish and amend rules to govern how GJBT
shall exercise the powers granted to it by the Laiyang Shareholders, and GJBT
shall take action only in accordance with such rules. The Laiyang Shareholders
shall not transfer their equity interests in Laiyang Jiangbo to any individual
or company (other than GJBT or the individuals or entities designated by GJBT).
The Laiyang Shareholders acknowledged that they will continue to perform this
agreement even if one or more than one of them no longer hold the equity
interests of Laiyang Jiangbo. This agreement may not be terminated without the
unanimous consent of all of the parties, except that GJBT may terminate this
agreement by giving thirty (30) days prior written notice to the Laiyang
Shareholders.




See
report of independent registered public accounting firm.


F-9





These
contractual arrangements obligate GJBT to absorb a majority of the risk of loss
from Laiyang Jiangbo’s  activities and enable GJBT  to
receive a majority of its expected residual returns.  GJBT also has
the right to appoint senior executives and members of Laiyang Jiangbo’s board of
directors, and Laiyang Jiangbo also agrees that without the prior consent of
GJBT, Laiyang Jiangbo will not engage in any transactions that could materially
affect the assets, liabilities, rights or operations of Laiyang Jiangbo. Because
of the contractual arrangements, the Company has a pecuniary interest in Laiyang
Jiangbo that requires consolidation of the Company’s and Laiyang Jiangbo’s
financial statements.





Reverse stock
split





In July
2008, the Company approved a 40-to-1 reverse stock split, effective on September
4, 2008. The accompanying consolidated financial statements have been
retroactively adjusted to reflect the reverse split. All share representations
are on a post-split basis.





Foreign currency
translation





The
reporting currency of the Company is the U.S. dollar (“USD”). The functional
currency of the Company is the local currency, the Chinese Renminbi (“RMB”). In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52,
“Foreign Currency Translation,” results of operations and cash flows are
translated at average exchange rates during the period, assets and liabilities
are translated at the unified exchange rates as quoted by the People’s Bank of
China at the end of the period, and equity is translated at historical exchange
rates. As a result, amounts related to assets and liabilities reported on the
consolidated statements of cash flows will not necessarily agree with changes in
the corresponding balances on the consolidated balance sheets. Transaction gains
and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.





Asset and
liability accounts at June 30, 2009, were translated at 6.83 RMB to $1.00 USD as
compared to 6.85 RMB to $1.00 USD at June 30, 2008. The average translation
rates applied to income statements for the years ended June 30, 2009, 2008, and
2007 were 6.83 RMB, 7.26 RMB and 7.81 RMB to $1.00 USD,
respectively.





Use of
estimates





The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. The significant estimates made in the
preparation of the Company’s consolidated financial statements relate to the
assessment of the carrying values of accounts receivable and related allowance
for doubtful accounts, allowance for obsolete inventory, sales returns, fair
value of warrants and beneficial conversion features related to the convertible
notes, and fair value of options granted to employees. Actual results could be
materially different from these estimates upon which the carrying values were
based.





Revenue
recognition





Product
sales are generally recognized when title to the product has transferred to
customers in accordance with the terms of the sale. The Company recognizes
revenue in accordance with the Securities and Exchange Commission’s (“SEC”)
Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in
Financial Statements,” as amended by SAB No. 104 (together,
“SAB 104”), and SFAS No. 48 (“SFAS 48”) “Revenue Recognition When
Right of Return Exists.” SAB 104 states that revenue should not be
recognized until it is realized or realizable and earned. In general, the
Company records revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price to
the customer is fixed or determinable, and collectability is reasonably
assured.




See report of independent
registered public accounting firm.




F-10





The
Company is generally not contractually obligated to accept returns. However, on
a case by case negotiated basis, the Company permits customers to return their
products. In accordance with SFAS 48, revenue is recorded net of an allowance
for estimated returns. Such reserves are based upon management's evaluation of
historical experience and estimated costs. The amount of the reserves ultimately
required could differ materially in the near term from amounts included in the
accompanying consolidated statements of income.





Financial
instruments





SFAS
107, “Disclosures about Fair
Value of Financial Instruments,” defines financial instruments and
requires fair value disclosures about those instruments.  SFAS 157,
“Fair Value
Measurements,” adopted July 1, 2008, defines fair value, establishes a
three-level valuation hierarchy for disclosures of fair value measurement and
enhances disclosures requirements for fair value measures.Investments,
receivables, payables, short term loans and convertible debt all qualify as
financial instruments.  Management concluded the receivables, payables
and short term loans approximate their fair values because of the short period
of time between the origination of such instruments and their expected
realization and, if applicable, their stated rates of interest are equivalent to
rates currently available.





The three
levels of valuation hierarchy are defined as follows:





·
            Level 1 inputs to the
      valuation methodology are quoted prices (unadjusted) for identical assets
      or liabilities in active
markets.


·
            Level 2 inputs to the valuation
      methodology include quoted prices for similar assets and liabilities in
      active markets, and inputs that are observable for the asset or liability,
      either directly or indirectly, for substantially the full term of the
      financial instrument.


·
            Level 3 inputs to the
      valuation methodology are unobservable and significant to the fair value
      measurement.





The
Company analyzes all financial instruments with features of both liabilities and
equity under SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity,” SFAS
133, “Accounting for
Derivative Instruments and Hedging Activities,” and EITF 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.”  Further, as required by SFAS 157, financial assets and
liabilities are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement. Depending on the product and
the terms of the transaction, the fair value of notes payable and derivative
liabilities were modeled using a series of techniques, including closed-form
analytic formula, such as the Black-Scholes option-pricing model.





The
following table sets forth by level within the fair value hierarchy the
financial assets and liabilities that were accounted for at fair value on a
recurring basis.




Carrying Value
                  at June 30, 2009
                
                
                Fair Value Measurements at
                  June 30, 2009,
                  Using Fair Value HierarchyLevel 1
                
                
                Level 2
                
                
                Level 3Investments
                
                $
                879,228
                
                
                $
                879,228
                
                
                $
                -
                
                
                $
                -Investments,
      restricted
                
                
                1,033,463
                
                
                
                1,033,463
                
                
                
                -
                
                
                
                -$5M
      Convertible Debt (November 2007)
                
                
                1,362,923
                
                
                
                -
                
                
                
                -
                
                
                
                5,276,423$29.8M
      Convertible Debt (May 2008)
                
                
                4,983,988
                
                
                
                -
                
                
                
                -
                
                
                
                31,251,796Total
                
                $
                8,259,602
                
                
                $
                1,912,691
                
                
                $
                -
                
                
                $
                36,528,219








F-11





The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented on the consolidated balance sheets at fair value in
accordance with SFAS 157.




SFAS
159, “The Fair Value Option
for Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115,” became effective for the Company on July 1,
2008. SFAS 159 provides the Company with the irrevocable option to elect fair
value for the initial and subsequent measurement for certain financial assets
and liabilities on a contract-by-contract basis with the difference between the
carrying value before election of the fair value option and the fair value
recorded upon election as an adjustment to beginning retained earnings. The
Company chose not to elect the fair value option.




Stock-based
compensation





The
Company records stock-based compensation expense pursuant to SFAS No. 123R
(“SFAS 123R”), “Share Based Payment.” SFAS 123R requires companies to measure
compensation cost for stock-based employee compensation plans at fair value at
the grant date and recognize the expense over the employee's requisite service
period. The Company estimates the fair value of the award using the
Black-Scholes option pricing model. Under SFAS 123R, the Company’s expected
volatility assumption is based on the historical volatility of Company’s stock
or the expected volatility of similar entities. The expected life assumption is
primarily based on historical exercise patterns and employee post-vesting
termination behavior. The risk-free interest rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of
grant.





Stock-based
compensation expense is recognized based on awards expected to vest, and there
were no estimated forfeitures as the Company has a short history of issuing
options. SFAS 123R requires forfeitures to be estimated at the time of grant and
be revised in subsequent periods, if necessary, if actual forfeitures differ
from those estimates.





The
Company uses the Black-Scholes option-pricing model which was developed for use
in estimating the fair value of options. Option-pricing models require the input
of highly complex and subjective variables including the expected life of
options granted and the Company’s expected stock price volatility over a period
equal to or greater than the expected life of the options. Because changes in
the subjective assumptions can materially affect the estimated value of the
Company’s employee stock options, it is management’s opinion that the
Black-Scholes option-pricing model may not provide an accurate measure of the
fair value of the Company’s employee stock options. Although the fair value of
employee stock options is determined in accordance with SFAS 123R using an
option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.





Comprehensive
income





SFAS No.
130 (“SFAS 130”), “Reporting Comprehensive Income,” establishes standards for
reporting and display of comprehensive income and its components in financial
statements. It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The accompanying consolidated financial statements include
the provisions of SFAS 130.





Cash and cash
equivalents





Cash and
cash equivalents include cash on hand and demand deposits in accounts maintained
with state-owned banks within the PRC. The Company considers all highly liquid
instruments with original maturities of three months or less, and money market
accounts to be cash and cash equivalents.








F-12


The
Company maintains cash deposits in financial institutions that exceed the
amounts insured by the U.S. government. Balances at financial institutions or
state-owned banks within the PRC are not covered by insurance. Non-performance
by these institutions could expose the Company to losses for amounts in excess
of insured balances. At June 30, 2009 and 2008, the Company’s bank balances,
including restricted cash balances, exceeded government-insured limits by
approximately $111,684,000 and $55,576,000, respectively. The Company has not
experienced non-performance by these institutions.





Restricted
cash





Restricted
cash represent amounts set aside by the Company in accordance with the Company’s
debt agreements with certain financial institutions. These cash amounts are
designated for the purpose of paying down the principal amounts owed to the
financial institutions, and these amounts are held at the same financial
institutions with which the Company has debt agreements. Due to the short-term
nature of the Company’s debt obligations to these banks, the corresponding
restricted cash balances have been classified as current in the consolidated
balance sheets.





As of
June 30, 2009 and 2008, the Company had restricted cash of $7,325,000 and
$7,839,785, respectively, of which $7,325,000 and $5,843,295, respectively, were
maintained as security deposits for bank acceptance related to the Company’s
notes payable. At June 30, 2008, $1,996,490 of the restricted cash amounts were
maintained in the Company’s legal counsel’s hold-back escrow account related to
the May 2008 convertible note issuance (Note 14), contingent on the Company’s
satisfaction of certain financing terms. These monies were released to the
Company in full in July 2008.





Investments and restricted
investments





Investments
are comprised primarily of marketable equity securities of publicly traded
companies and are stated at fair value based on the trade price of these
securities. These investments are classified as trading securities based on the
Company’s intent to sell them within the year. Restricted investments are
marketable equity securities of publicly traded companies that were acquired
through the reverse merger and contained U.S. Securities and Exchange Commission
Rule 144 restrictions on the securities. These securities are classified as
available-for-sale and are reflected as restricted and noncurrent investments as
the restrictions are expected to be fully terminated beyond one year period and
the Company intends to hold them beyond one year. Restricted investments are
carried at fair value which is estimated using the most recent contemporaneous
offering price for these restricted securities.





For
trading securities, realized and unrealized gains and losses are included in the
accompanying consolidated statements of income. For available-for-sale
securities, realized gains and losses are included in the consolidated
statements of income. Unrealized gains and losses for these available-for-sale
securities are reported in other comprehensive income, net of tax, in the
consolidated statements of shareholders’ equity. The Company has no investments
that are considered to be held-to-maturity securities.




For the
year ended June 30, 2009, realized loss on trading securities amounted to
$473,303. Unrealized loss on trading securities amounted to $229,425 for the
year ended June 30, 2009. For the year ended June 30, 2008, realized loss on
trading securities amounted to $44,881. Unrealized loss on trading securities
amounted to $651,464 for the year ended June 30, 2008.





For the
year ended June 30, 2009, unrealized loss on available-for-sales securities
amounted to $1,514,230. For the year ended June 30, 2008, unrealized gain on
available-for-sales securities amounted to $1,347,852.





For the
years ended June 30, 2007, there was no realized or unrealized gain or loss on
trading securities or available-for-sale securities.








F-13


Accounts
receivable





In the
normal course of business, the Company extends credit to its customers without
requiring collateral or other security interests. Management reviews its
accounts receivables at each reporting period to provide for an allowance
against accounts receivable for an amount that could become uncollectible. This
review process may involve the identification of payment problems with specific
customers. The Company estimates this allowance based on the aging of the
accounts receivable, historical collection experience, and other relevant
factors, such as changes in the economy and the imposition of regulatory
requirements that can have an impact on the industry. These factors continuously
change, and can have an impact on collections and the Company’s estimation
process. These impacts may be material.





Certain
accounts receivable amounts are charged off against allowances after designated
period of collection efforts. Subsequent cash recoveries are recognized as
income in the period when they occur.





The
activities in the allowance for doubtful accounts are as follows for the years
ended June 30, 2009 and 2008:





2009
                              
                              
                              2008Beginning
      allowance for doubtful accounts
                              
                              $
                              155,662
                              
                              
                              $
                              166,696Bad
      debt expense (recovery)
                              
                              
                              538,068
                              
                              
                              
                              (27,641
                              )Foreign
      currency translation adjustments
                              
                              
                              640
                              
                              
                              
                              16,607Ending
      allowance for doubtful accounts
                              
                              $
                              694,370
                              
                              
                              $
                              155,662





Inventories





Inventories,
consisting of raw materials and finished goods related to the Company’s
products, are stated at the lower of cost or market utilizing the weighted
average method.


The
Company reviews its inventory periodically for possible obsolescence or to
determine if any reserve is necessary. As of June 30, 2009 and 2008, the Company
determined that no inventory reserves were necessary.





Advances to
suppliers





Advances
to suppliers represent partial payments or deposits for future inventory
purchases. These advances to suppliers are non-interest bearing and unsecured.
From time to time, vendors require a certain amount of monies to be deposited
with them as a guarantee that the Company will receive their purchases on a
timely basis. As of June 30, 2009, and 2008, the Company’s advance to suppliers
amounted to approximately $236,000 and $1,719,000, respectively.





Plant and
equipment





Plant and
equipment are stated at cost less accumulated depreciation. Additions and
improvements to plant and equipment accounts are recorded at cost. 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 the results
of operations in the year of disposition. Maintenance, repairs, and minor
renewals are charged directly to expense as incurred. Major additions and
betterments to plant and equipment accounts are capitalized. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets. The estimated useful lives of the assets are as follows:


Useful LifeBuildings
      and building improvements
                
                
                5 –
      40
                
                YearsManufacturing
      equipment
                
                
                5 –
      20
                
                YearsOffice
      equipment and furniture
                
                
                5 –
      10
                
                YearsVehicles
                
                
                5
                
                Years








F-14




Intangible
assets





All land
in the PRC is owned by the PRC government and cannot be sold to any individual
or company. The Company has recorded the amounts paid to the PRC government to
acquire long-term interests to utilize land underlying the Company’s facilities
as land use rights. This type of arrangement is common for the use of land in
the PRC. The land use rights are amortized on the straight-line method over the
terms of the land use rights, which range from 20 to 50 years. The Company
acquired land use rights in August 2004 and October 2007 in the amounts of
approximately $879,000 and $8,871,000, respectively, which are included in
intangible assets. (See Note 8)





Intangible
assets also consist of purchased technological know-how (“patents”). This
includes secret formulas, manufacturing processes, technical and procedural
manuals, and the certificate of drugs production, and customer list and customer
relationships and are amortized using the straight-line method over the expected
useful life of 3 to 5 years, which reflects the period over which the patents
are kept secret to the Company as agreed between the Company and the selling
parties. (See Note 8)





The
estimated useful lives of intangible assets are as follows:




Useful LifeLand
      use rights
                
                50 YearsPatents
                
                5
      YearsLicenses
                
                5
      YearsCustomer
      list and customer relationships
                
                3
      YearsTrade
      secrets - formulas and know how technology
                
                5
      Years





Impairment of long-lived
assets





Long-lived
assets of the Company are reviewed periodically or more often if circumstances
dictate, to determine whether their carrying values have become impaired. The
Company considers assets to be impaired if the carrying values exceed the future
projected cash flows from related operations. The Company also re-evaluates the
periods of depreciation to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of June 30, 2009, the Company
expects these assets to be fully recoverable.





Beneficial conversion
feature of convertible notes





The
Company accounted for the $5,000,000 and $30,000,000 secured convertible notes
issued pursuant to the subscription agreements discussed in Note 13 under
Emerging Issues Task Force (“EITF”) 00-27, ‘‘Application of Issue 98-5 to
Certain Convertible Instruments.” In accordance with EITF 00-27, the Company has
determined that the convertible notes contained beneficial conversion feature
because on November 6, 2007, the effective conversion price of the $5,000,000
convertible note was $5.81 when the market value per share was $16.00, and on
May 30, 2008, the effective conversion price of the $30,000,000 convertible note
was $5.10 when the market value per share was $12.00. Total value of beneficial
conversion feature of $2,904,092 for the November 6, 2007 convertible
note and $19,111,323 for the May 30, 2008 convertible debt was treated as a
discount to the convertible notes. The beneficial conversion feature is
amortized using the effective interest method over the term of the notes. As of
June 30, 2009 and 2008, a total of $17,955,637 and $20,453,441, respectively,
remained unamortized relating to the beneficial conversion
features.





Income
taxes





The
Company accounts for income taxes in accordance with SFAS No. 109 (“SFAS 109”),
“Accounting for Income Taxes.” Under the asset and liability method as required
by SFAS 109, deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under SFAS 109, the effect on
deferred income taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is recognized if
it is more likely than not that some portion, or all of, a deferred tax asset
will not be realized. As of June 30, 2009 and 2008, the Company did not have any
net deferred tax assets or liabilities, and as such, no valuation allowances
were recorded at June 30, 2009 and 2008.








F-15





The
Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement No. 109,” as of July 1, 2007. FIN 48 clarifies
the accounting and disclosure for uncertain tax positions and prescribes a
recognition threshold and measurement attribute for recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.





Under FIN
48, evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met.





The
Company’s operations are subject to income and transaction taxes in the United
States and in the PRC jurisdictions. Significant estimates and judgments are
required in determining the Company’s worldwide provision for income taxes. Some
of these estimates are based on interpretations of existing tax laws or
regulations, and as a result the ultimate amount of tax liability may be
uncertain. However, the Company does not anticipate any events that would lead
to changes to these uncertainties.





Value added
tax





The
Company is subject to value added tax (“VAT”) for manufacturing products and
business tax for services provided. The applicable VAT rate is 17% for products
sold in the PRC. The amount of VAT liability is determined by applying the
applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT
paid on purchases made with the relevant supporting invoices (input VAT). Under
the commercial practice of the PRC, the Company paysVAT based on tax
invoices issued. The tax invoices may be issued subsequent to the date on which
revenue is recognized, and there may be a considerable delay between the date on
which the revenue is recognized and the date on which the tax invoice is issued.
In the event that the PRC tax authorities dispute the date on which revenue is
recognized for tax purposes, the PRC tax office has the right to assess a
penalty, which can range from zero to five times the amount of the taxes which
are determined to be late or deficient, and will be expensed in the period if
and when a determination is been made by the taxing authorities that a penalty
is due.





VAT on
sales and VAT on purchases amounted to $17,037,463 and $2,918,492, respectively,
for the year ended June 30, 2009. VAT on sales and VAT on purchases amounted to
$16,975,054 and $3,283,855, respectively, for the year ended June 30, 2008. VAT
on sales and VAT on purchases amounted to $5,523,840 and $262,013, respectively,
for the year ended June 30, 2007. Sales and purchases are recorded net of VAT
collected and paid as the Company acts as an agent for the government. VAT taxes
are not impacted by the income tax holiday. The Chinese local government
exempted $1,428,804 and $6,126,464 of the Company’s VAT tax liability at June
30, 2008 and 2007, respectively, and this exemption has been included in the
consolidated statement of income for the year then ended. The Company did not
receive any VAT tax exemption in the year ended June 30, 2009.








F-16





Shipping and
handling





Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative expenses. Shipping and handling costs amounted to
$575,743, $365,327 and $280,099 for the years ended June 30, 2009, 2008, and
2007, respectively.





Advertising





Expenses
incurred in the advertising of the Company and the Company’s products are
charged to operations currently. Advertising expenses amounted to $2,572,631,
$4,653,121 and $1,280,900 for the years ended June 30, 2009, 2008 and 2007,
respectively.





Research and
development





Research
and development costs are expensed as incurred. These costs primarily consist of
cost of material used and salaries paid for the development of the Company’s
products and fees paid to third parties to assist in such efforts. Research and
development costs for the years ended June 30, 2009, 2008, and 2007 were
approximately $4,395,000, $3,236,000, and $11,144,000,
respectively.





Recent accounting
pronouncements





In June
2008, the FASB issued Emerging Issues Task Force Issue No. 07-5 (“EITF 07-5”),
“Determining whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock.” EITF No. 07-5 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. Early application is not permitted.
Paragraph 11(a) of SFAS 133 “Accounting for Derivatives and Hedging Activities”
specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company’s own stock and
(b) classified in stockholders’ equity in the statement of financial
position would not be considered a derivative financial instrument. EITF 07-5
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer’s own stock and thus
able to qualify for the SFAS 133 paragraph 11(a) scope exception. This standard
triggers liability accounting on all warrants exercisable at strike prices
denominated in any currency other than the functional currency of the
operating entity in the PRC (Renminbi). Management is currently evaluating the
impact of adoption of EITF 07-5 on the accounting for related convertible notes
transactions.





On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which
clarifies the application of SFAS 157 when the market for a financial asset is
inactive. Specifically, FSP 157-3 clarifies how (1) management’s internal
assumptions should be considered in measuring fair value when observable data
are not present, (2) observable market information from an inactive market
should be taken into account, and (3) the use of broker quotes or pricing
services should be considered in assessing the relevance of observable and
unobservable data to measure fair value. The adoption of FSP 157-3 did not have
a material impact on the Company’s consolidated financial
statements.




In
November 2008, the FASB issued EITF Issue No. 08-7, “Accounting for
Defensive Intangible Assets.” EITF No. 08-7 discusses that when an entity
acquired in a business combination or an asset acquisition an intangible asset
that it did not intend to actively use, otherwise known as a defensive asset,
the entity historically allocated little or no value to the defensive asset.
However, with the issuance of SFAS 141(R) and SFAS 157 the entity must
recognize a value for the defensive asset that reflects the asset’s highest and
best use based on market assumptions. Upon the effective date of both
SFAS 141(R) and SFAS 157, acquirers will generally assign a greater value
to a defensive asset than would typically have been assigned under
SFAS 141. EITF No. 08-7 will be effective for the first annual
reporting period beginning on or after December 15, 2008. EITF
No. 08-7 will apply prospectively to business combinations for which the
acquisition date is after fiscal years beginning on or after December 15,
2008. The adoption of EITF No. 08-7 is not expected to have a
material impact on the Company’s results of operations or financial
condition.








F-17




In April 2009, the FASB issued FSP SFAS
No. 141 (R), “Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies,” or FSP SFAS No. 141
(R). FSP SFAS No. 141 (R) amends and clarifies SFAS No. 141,
“Business Combinations,” in regards to the initial recognition and measurement,
subsequent measurement and accounting, and disclosures of assets and liabilities
arising from contingencies in a business combination. FSP SFAS No. 141
(R) applies to all assets acquired and liabilities assumed in a business combination that
arise from contingencies that would be within the scope of SFAS No. 5,
“Accounting for Contingencies”, if not acquired or assumed in a business
combination, except for assets or liabilities arising from contingencies that
are subject to specific guidance in SFAS No. 141 (R). FSP SFAS No. 141
(R) will be effective for the first annual reporting period beginning on or
after December 15, 2008. FSP SFAS No. 141(R) will apply prospectively
to business combinations for which the acquisition date is after fiscal years
beginning on or after December 15, 2008. The adoption of SFAS No. 141
(R) will not have a material impact on the Company’s results of operations or
financial condition.




In April
2009, the FASB issued FSP FAS 157-4, which provides guidance on how to determine
the fair value of assets and liabilities when the volume and level of activity
for the asset or liability has significantly decreased when compared with normal
market activity for the asset or liability as well as guidance on identifying
circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is
effective for interim and annual periods ending after June 15, 2009. The Company
is currently evaluating the financial impact of FSP FAS 157-4, but expects that
the financial impact, if any, will not be material on its consolidated financial
statements.




In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, which amends the requirements
for the recognition and measurement of other-than-temporary impairments for debt
securities by modifying the current "intent and ability" indicator. Under FSP
FAS 115-2 and FAS 124-2, an other-than-temporary impairment must be recognized
if the Company has the intent to sell the debt security or the Company is more
likely than not will be required to sell the debt security before its
anticipated recovery. In addition, FSP FAS 115-2 and FAS 124-2 requires
impairments related to credit loss, which is the difference between the present
value of the cash flows expected to be collected and the amortized cost basis
for each security, to be recognized in earnings while impairments related to all
other factors to be recognized in other comprehensive income. FSP FAS 115-2 and
FAS 124-2 is effective for interim and annual periods ending after June 15,
2009. The Company is currently evaluating the financial impact of FSP FAS 115-2
and FAS 124-2 , but expects that the financial impact, if any, will not be
material on its consolidated financial statements.




In April
2009, the FASB issued FSP 107-1 and 28-1. This FSP amends SFAS 107, to require
disclosures about fair value of financial instruments not measured on the
balance sheet at fair value in interim financial statements as well as in annual
financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments. This FSP is effective for interim periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP 157-4 and 115-2 and 124-2. This FSP does not require
disclosures for earlier periods presented for comparative purposes at initial
adoption. In periods after initial adoption, this FSP requires comparative
disclosures only for periods ending after initial adoption. The Company is
currently evaluating the disclosure requirements of this new FSP.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events
(“SFAS 165”).” SFAS 165 provides guidance on management’s assessment
of subsequent events. The new standard clarifies that management must evaluate,
as of each reporting period, events or transactions that occur after the balance
sheet date through the date that the financial statements are issued or are
available to be issued. Management must perform its assessment for both interim
and annual financial reporting periods. SFAS 165 does not significantly
change the Company’s practice for evaluating such events. SFAS 165 is
effective prospectively for interim and annual periods ending after
June 15, 2009 and requires disclosure of the date subsequent events are
evaluated through.








F-18





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“FAS 167”), which modifies how a company determines when an entity that
is insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. SFAS 167 clarifies that the determination of
whether a company is required to consolidate an entity is based on, among other
things, an entity’s purpose and design and a company’s ability to direct the
activities of the entity that most significantly impact the entity’s economic
performance. SFAS167 requires an ongoing reassessment of whether a company
is the primary beneficiary of a variable interest entity. SFAS167 also requires
additional disclosures about a company’s involvement in variable interest
entities and any significant changes in risk exposure due to that involvement.
SFAS 167 is effective for fiscal years beginning after November 15, 2009. The
Company is currently assessing the impact of the standard on its consolidated
financial statements.





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
Codification (“Codification”) and the Hierarchy of Generally Accepted Accounting
Principles — a replacement of FASB Statement 162” (“SFAS 168”).
SFAS 168 establishes the Codification as the source of authoritative United
States accounting and reporting standards for all non-governmental entities
(other than guidance issued by the SEC). The Codification is a reorganization of
current GAAP into a topical format that eliminates the current GAAP hierarchy
and establishes two levels of guidance — authoritative and
non-authoritative. According to the FASB, all “non-grandfathered, non-SEC
accounting literature” that is not included in the Codification would be
considered non-authoritative. The FASB has indicated that the Codification does
not change current GAAP. Instead, the changes aim to (1) reduce the time
and effort it takes for users to research accounting questions and
(2) improve the usability of current accounting standards. The Codification
is effective for interim and annual periods ending on or after
September 15, 2009. The Company will apply the Codification to its
disclosures beginning with the first quarter ending September 30, 2009. As
the Codification is not intended to change the existing accounting guidance, its
adoption will not have an impact on the Company’s results of operations or
financial condition.




Company reporting year
end





For
financial statement reporting purposes in the United States of America, the
Company adopted June 30 as its fiscal year end, beginning in 2007.





Reclassifications





Certain
amounts in the prior year’s consolidated financial statements have been
reclassified to conform to the current period presentation with no impact on the
previously reported net income or cash flows.





Note
3 - Acquisition





On
January 23, 2009, Laiyang Jiangbo entered into an asset acquisition agreement
(the “Agreement”) with Shandong Traditional Chinese Medicine College (the
“Medicine College”) and Shandong Hongrui Pharmaceutical Factory (“Shandong
Hongrui” or “Hongrui”), a wholly-owned subsidiary of Medicine
College,  pursuant to  which Laiyang Jiangbo purchased the
majority of the assets owned by Hongrui, including all tangible assets, all
manufacturing and office buildings, land, equipment and inventories and all
rights to manufacture and distribute Hongrui’s 22 Traditional Chinese Medicines
(“TCMs”), for an original contract purchase price of approximately $12 million
consisting of approximately $9.6 million in cash and 643,651 shares of Jiangbo’s
common stock. The $4.035 fair value of each common share was based on the
weighted average trading price of the common stock of 5 days prior to the
execution of the Agreement and amounted to $2,597,132. On February 10, 2009, the
Agreement was amended to revise the total purchase price to approximately $11.1
million consisting of approximately $8.6 million in cash. The Company is
obligated to issue 643,651 shares of Jiangbo’s stock to Medicine College
within one year of the date of the execution of the Agreement. As of June 30,
2009, Laiyang Jiangbo paid approximately $8.6 million in cash in full. The
643,651 shares of Jiangbo’s common stock issuable to
Medicine College in connection with the acquisition of Hongrui have
been included in the accompanying consolidated balance sheet as outstanding
shares.








F-19


The
Company accounted for this acquisition using the purchase method of accounting
in accordance with SFAS 141, “Business
Combinations.” The purchase price was determined based on an arm's
length negotiation and no finder's fees or commissions were paid in connection
with this acquisition.
 
 The
following represents the allocation of the purchase price to the net assets
acquired based on their respective fair values.  The accompanying
consolidated financial statements include the acquisition of Hongrui, effective
February 5, 2009. The following represents the allocation of the purchase
price to the net assets acquired based on their respective fair
values.
 
 Inventory
                      
                      $
                      147,250Plant
      and equipments
                      
                      
                      3,223,808Intangible
      assets
                      
                      
                      7,810,974Total
      assets acquired
                      
                      
                      11,182,032Net
      assets acquired
                      
                      
                      11,182,032Total
      consideration
                      
                      $
                      11,182,032
 
 The
following pro forma consolidated results of operations for the years ended June
30, 2009 and 2008, as if the acquisition of Hongrui had been completed as of the
beginning of each year presented.  The pro forma information gives
effect to actual operating results prior to the acquisition.  The pro
forma amounts does not purport to be indicative of the results that would have
actually been obtained if the acquisition had occurred as of the beginning
of the years presented and is not intended to be a projection of future
results:
 
 Year Ended
                      June 30, 2009
                    
                    
                    Year Ended
                      June 30, 2008Net
      Revenues
                    
                    $
                    124,729,372
                    
                    
                    $
                    115,573,456Income
      from Operations
                    
                    
                    50,265,379
                    
                    
                    
                    34,244,471Net
      Income
                    
                    
                    29,234,644
                    
                    
                    
                    23,848,737Net
      Income Per SharesBasic
                    
                    $
                    2.80
                    
                    
                    $
                    2.43Diluted
                    
                    $
                    0.11
                    
                    
                    $
                    2.30Weighted
      Average number of shares outstandingBasic
                    
                    
                    10,424,592
                    
                    
                    
                    9,807,778Diluted
                    
                    
                    14,848,096
                    
                    
                    
                    10,381,483
 
 Note
4 - Earnings per share
 
 The
Company reports earnings per share in accordance with the provisions of SFAS No.
128 (“SFAS 128”), “Earnings Per Share.” SFAS 128 requires presentation of basic
and diluted earnings per share in conjunction with the disclosure of the
methodology used in computing such earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock.
 
 All share
and per share amounts used in the Company’s financial statements and notes
thereto have been retroactively restated to reflect the 40-to-1 reverse stock
split, which occurred on September 4, 2008.
    F-20
 
 The
following is a reconciliation of the basic and diluted earnings per share
computations for the years ended June 30, 2009, 2008, and 2007:
 
 Basic
earning per share
 
 2009
                            
                            
                            2008
                            
                            
                            2007For
      the years ended June 30, 2009, 2008 and 2007Net
      income for basic earnings per share
                            
                            $
                            28,880,264
                            
                            
                            $
                            22,451,060
                            
                            
                            $
                            22,053,056Weighted
      average shares used in basic computation
                            
                            
                            10,061,326
                            
                            
                            
                            9,164,127
                            
                            
                            
                            7,494,740Earnings
      per share – Basic
                            
                            $
                            2.87
                            
                            
                            $
                            2.45
                            
                            
                            $
                            2.94
 
 Diluted
earnings per share
 2009
                              
                              
                              2008
                              
                              
                              2007For
      the years ended June 30, 2009, 2008 and 2007Net
      income for basic earnings per share
                              
                              $
                              28,880,264
                              
                              
                              $
                              22,451,060
                              
                              
                              $
                              22,053,056Add:
      interest expense
                              
                              
                              2,124,340
                              
                              
                              
                              195,833
                              
                              
                              
                              -Add:
      financing cost amortization
                              
                              
                              680,276
                              
                              
                              
                              71,708Add: note
      discount amortization
                              
                              
                              4,004,868
                              
                              
                              
                              545,359Subtract:
      unamortized financing cost at beginning of the period
                              
                              
                              (1,916,944
                              )
                              
                              
                              (349,000
                              )
                              
                              
                              -Subtract:
      unamortized debt discount at beginning of the period
                              
                              
                              (32,499,957
                              )
                              
                              
                              (5,000,000
                              )
                              
                              
                              -Net
      income for diluted earnings per share
                              
                              
                              1,274,847
                              
                              
                              
                              17,914,960
                              
                              
                              
                              22,053,056Weighted
      average shares used in basic computation
                              
                              
                              10,061,326
                              
                              
                              
                              9,164,127
                              
                              
                              
                              7,494,740Diluted
      effect of stock options
                              
                              
                              48,504
                              
                              
                              
                              87,910
                              
                              
                              
                              -Diluted
      effect of warrants
                              
                              
                              -
                              
                              
                              
                              79,973
                              
                              
                              
                              -Diluted
      effect of convertible notes
                              
                              
                              4,375,000
                              
                              
                              
                              405,822
                              
                              
                              
                              -Weighted
      average shares used in diluted computation
                              
                              
                              14,484,830
                              
                              
                              
                              9,737,832
                              
                              
                              
                              7,494,740Earnings
      per share:Basic
                              
                              $
                              2.87
                              
                              
                              $
                              2.45
                              
                              
                              $
                              2.94Diluted
                              
                              $
                              0.09
                              
                              
                              $
                              1.84
                              
                              
                              $
                              2.94
 
 For the
year ended June 30, 2009, 2,275,000 warrants at an average exercise price of
$9.65 and 7,500 options at an average exercise price of $17.93 were not included
in the diluted earnings per share calculation due to the anti-diluted
effect.
 
 For the
year ended June 30, 2008, the $30,000,000 convertible debt, 2,275,000 warrants
at an average exercise price of $9.65 and 7,500 options at an average exercise
price of $17.93 were not included in the diluted earnings per share calculation
due to the anti-diluted effect.
 
 For the
year ended June 30, 2007, all options and warrants were excluded in the diluted
earnings per share calculation due to the anti-diluted effect.
    F-21
  Note
5 - Discontinued operations
 
 In
connection with the reverse merger with Karmoya on October 1, 2007, the Company
determined to discontinue its operations of business development and marketing,
as it no longer supported its core business strategy. The discontinuance of
these operations did not involve any sale of assets of assumption of liabilities
by another party. In conjunction with the discontinuance of operations, the
Company determined that the assets related to the Company’s business development
and marketing operations were subject to the recognition of impairment. However,
since the related assets are continuing to be used by the Company’s Karmoya and
subsidiaries, the Company determined that there had been no impairment. The
remaining liabilities of the discontinued operations are reflected in the
consolidated balance sheets under the caption "liabilities assumed from
reorganization" which amounted to approximately $1,565,000 and $1,084,000 as of
June 30, 2009 and 2008, respectively.
 
 In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the results of operations of a component of entity that has
been disposed of or is classified as held for sale shall be reported in
discontinued operations. Accordingly, the results of operations of the business
development and marketing operation segment are reported as discontinued
operations in the accompanying consolidated statements of income for the years
ended June 30, 2009 and 2008. As the accompanying consolidated statements of
income for the year ended June 30, 2007 reflect the results of operations for
Karmoya and its subsidiaries, the discontinued operations of Genesis did not
have any impact on the consolidated statements of income for those periods
presented.
 
 The
following is a summary of the components of the loss from discontinued
operations for the years ended June 30, 2009 and 2008:
 
 2009
                            
                            
                            2008Revenues
                            
                            
                            
                            
                            $
                            -Cost
      of sales
                            
                            
                            
                            
                            
                            -Gross
      profit
                            
                            
                            
                            
                            
                            -Operating
      and other non-operating expenses
                            
                            
                            1,781,946
                            
                            
                            
                            380,027Loss
      from discontinued operations before other expenses and income
      taxes
                            
                            
                            1,781,946
                            
                            
                            
                            380,027Income
      tax benefit
                            
                            
                            -
                            
                            
                            
                            -Loss
      from discontinued operations
                            
                            $
                            1,781,946
                            
                            
                            $
                            380,027
 
 Note
6 - Inventories
 
 Inventories
consisted of the following:
 
 June 30, 2009
                  
                  
                  June 30, 2008Raw
      materials
                  
                  $
                  1,539,612
                  
                  
                  $
                  2,164,138Work-in-process
                  
                  
                  55,992
                  
                  
                  
                  531,076Packing
      materials
                  
                  
                  483,297
                  
                  
                  
                  204,763Finished
      goods
                  
                  
                  1,198,303
                  
                  
                  
                  1,006,197Total
                  
                  $
                  3,277,194
                  
                  
                  $
                  3,906,174
 
 Note
7 - Plant and equipment
 
 Plant and
equipment consist of the following at June 30, 2009 and 2008:
  2009
                                      
                                      
                                      2008Buildings
      and building improvements
                                      
                                      $
                                      12,798,375
                                      
                                      
                                      $
                                      10,926,369Manufacturing
      equipment
                                      
                                      
                                      2,603,114
                                      
                                      
                                      
                                      1,188,643Office
      equipment and furniture
                                      
                                      
                                      291,061
                                      
                                      
                                      
                                      298,137Vehicle
                                      
                                      
                                      477,396
                                      
                                      
                                      
                                      380,485Total
                                      
                                      
                                      16,169,946
                                      
                                      
                                      
                                      12,793,634Less:
      accumulated depreciation
                                      
                                      
                                      (2,212,549
                                      )
                                      
                                      
                                      (1,567,790
                                      )Total
                                      
                                      $
                                      13,957,397
                                      
                                      
                                      $
                                      11,225,844
    F-22
 
 For the
years ended June 30, 2009, 2008, and 2007, depreciation expense amounted to
$679,507, $517,863, and $364,417, respectively.
 
 Note
8 - Intangible assets
 
 At June
30, 2009 and 2008, intangible assets consist of the following:
  2009
                                          
                                          
                                          2008Land
      use rights
                                          
                                          $
                                          11,245,939
                                          
                                          
                                          $
                                          9,930,157Patents
                                          
                                          
                                          4,937,050
                                          
                                          
                                          
                                          539,830Customer
      lists and customer relationships
                                          
                                          
                                          1,123,580Trade
      secrets- formulas and manufacture process know-how
                                          
                                          
                                          1,025,500Licenses
                                          
                                          
                                          23,368
                                          
                                          
                                          
                                          23,271Total
                                          
                                          
                                          18,355,436
                                          
                                          
                                          
                                          10,493,258Less:
      accumulated amortization
                                          
                                          
                                          (1,314,255
                                          )
                                          
                                          
                                          (576,457
                                          )Total
                                          
                                          $
                                          17,041,181
                                          
                                          
                                          $
                                          9,916,801
 
 The
estimated amortization expense for the next five years and thereafter
are
 
 Years ending June 30:2010
                      
                      $
                      1,743,2992011
                      
                      
                      1,682,6062012
                      
                      
                      1,518,9842013
                      
                      
                      1,300,7542014
      and thereafter
                      
                      
                      10,795,537Total
                      
                      $
                      17,041,181
 
 For the
years ended June 30, 2009, 2008, and 2007, amortization expense relating to the
above intangible assets amounted to $735,427, $184,465, and $122,126,
respectively.
 
 Note
9 - Debt
 
 Short term bank
loans
 
 Short
term bank loan represents an amount due to a bank that is due within one year.
This loan can be renewed with the bank upon maturity. The Company’s short term
bank loan consisted of the following:
  June 30, 2009
                  
                  
                  June 30,2008Loan
      from Bank of Communication; due December 2009 and September2008;
      interest rates of 6.37% and 8.64% per annum; monthly interestpayment; guaranteed by
      related party, Jiangbo Chinese-Western
      Pharmacy.
                  
                  $
                  2,197,500
                  
                  
                  $
                  2,772,100Total
                  
                  $
                  2,197,500
                  
                  
                  $
                  2,772,100
  Interest
expense related to the bank loans amounted to $116,649, $436,818, and $280,628
for the years ended June 30, 2009, 2008, and 2007,
respectively.
    F-23
 
 Notes
Payable
  Notes
payable represent amounts due to a bank which are normally secured and are
typically renewed. All notes payable are secured by the Company’s restricted
cash. The Company’s notes payables consist of the following:
 
 June 30, 2009
                        
                        
                        June 30, 2008Commercial
      Bank, various amounts, due from April 2009 to September 2009; 100% of
      restricted cash deposited.
                        
                        $
                        7,325,000
                        
                        
                        $
                        5,843,295Total
                        
                        $
                        7,325,000
                        
                        
                        $
                        5,843,295
 
 Note
10 - Related party transactions
 
 Accounts receivable -
related parties
 
 The
Company had engaged in business activities with three related parties, Jiangbo
Chinese-Western Pharmacy, Laiyang Jiangbo Medicals, Co., Ltd, and Yantai Jiangbo
Pharmaceuticals Co., Ltd. The Company’s Chief Executive Officer and other
related parties have majority ownership of these entities. At June 30, 2009 and
2008, accounts receivable from the Company’s product sales to these related
entities were $0 and $673,808, respectively. Accounts receivable due from
related parties are receivable in cash and due within three to six months. For
the years ended June 30, 2009, 2008, and 2007, the Company recorded sales to
related parties as follows:
  Name of Related Party
                                      
                                      Relationship
                                      
                                      Net Sales2009
                                      
                                      
                                      2008
                                      
                                      
                                      2007Jiangbo
      Chinese-Western Pharmacy
                                      
                                      90%
      owned by Chief Executive Officer
                                      
                                      $
                                      108,176
                                      
                                      
                                      $
                                      1,622,935
                                      
                                      
                                      $
                                      3,018,502Laiyang
      Jiangbo Medicals, Co. Ltd
                                      
                                      100%
      owned by Chief Executive Officer and his spouse
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,185,183
                                      
                                      
                                      
                                      436,909Yantai
      Jiangbo Pharmaceuticals Co., Ltd.
                                      
                                      Owned
      by Other Related Party
                                      
                                      
                                      135,850
                                      
                                      
                                      
                                      2,755,980
                                      
                                      
                                      
                                      478,470Total
                                      
                                      
                                      
                                      $
                                      244,026
                                      
                                      
                                      $
                                      5,564,098
                                      
                                      
                                      $
                                      3,933,881
    F-24
 
 Other income
from related parties
 
 The
Company leases two of its buildings to Jiangbo Chinese-Western Pharmacy. For the
years ended June 30, 2009, 2008, and 2007, the Company recorded other income of
$382,970, $110,152, and $102,472 from leasing the two aforementioned
buildings.
  Other payables - related
parties
 
 Other
payables-related parties primarily consist of accrued salary payable to the
Company’s officers and directors, and advances from the Company’s Chief
Executive Officer. These advances are short-term in nature and bear no interest.
The amounts are expected to be repaid in the form of cash.  Other
payables - related parties consisted of the following:
 
 June 30,
                              2009
                            
                            
                            June 30,
                              2008Payable
      to Wubo Cao, Chief Executive Officer and Chairman of the Board
                            
                            $
                            184,435
                            
                            
                            $
                            281,137Payable
      to Haibo Xu, Chief Operating Officer and Director
                            
                            
                            33,688
                            
                            
                            
                            43,839Payable
      to Elsa Sung, Chief Financial Officer
                            
                            
                            18,333
                            
                            
                            
                            -Payable
      to John Wang, Director
                            
                            
                            2,500
                            
                            
                            
                            -Total
      other payable - related parties
                            
                            $
                            238,956
                            
                            
                            $
                            324,976
 
 Note
11 - Concentration of major customers, suppliers, and products
 
 For the
years ended June 30, 2009, 2008 and 2007, three products accounted for 88%, 95%
and 95%, respectively, of the Company’s total sales.
 
 For the
years ended June 30, 2009, 2008, and 2007, five customers accounted for
approximately 25.6%, 18.1%, and 33.3%, respectively, of the Company's sales.
These five customers represented 31.4% and 11.8% of the Company’s total accounts
receivable as of June 30, 2009 and 2008, respectively.
 
 For the
years ended June 30, 2009, 2008 and 2007, five suppliers accounted for
approximately 63.3%, 67.7% and 87.2%, respectively, of the Company’s purchases.
These five suppliers represented 82.4% and 63.8% of the Company’s total accounts
payable as of June 30, 2009 and 2008, respectively.
 
 Note
12 - Taxes
 
 Income
taxes
 
 The
Company is subject to the United States federal income tax at a tax rate of 34%.
No provision for income taxes in the U.S. has been made as the company had no
U.S. taxable income during the years ended June 30, 2009, 2008, and
2007.
 
 The
Company’s wholly-owned subsidiaries, Karmoya and Union Well were incorporated in
the British Virgin Islands and Cayman Islands, respectively. Under the current
laws of the BVI and Cayman Islands, the two entities are not subject to income
taxes.
    F-25
 
 Prior to
January 1, 2008, companies established in the PRC were generally subject to an
enterprise income tax ("EIT") rate of 33.0%, which included a 30.0% state income
tax and a 3.0% local income tax. The PRC local government has provided various
incentives to companies in order to encourage economic development. Such
incentives include reduced tax rates and other measures. On March 16, 2007, the
National People's Congress of China passed the new Enterprise Income Tax Law
("EIT Law"), and on November 28, 2007, the State Council of China passed the
Implementing Rules for the EIT Law ("Implementing Rules") which took effect on
January 1, 2008. The EIT Law and Implementing Rules impose a unified EIT of
25.0% on all domestic-invested enterprises and Foreign Investment Enterprises
(“FIEs”), unless they qualify under certain limited exceptions. Therefore,
nearly all FIEs are subject to the new tax rate alongside other domestic
businesses rather than benefiting from the foreign enterprise income tax, and
its associated preferential tax treatments, beginning January 1,
2008.
  In
addition to the changes to the current tax structure, under the EIT Law, an
enterprise established outside of China with "de facto management bodies" within
China is considered a resident enterprise and will normally be subject to an EIT
of 25.0% on its global income. The Implementing Rules define the term "de facto
management bodies" as "an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise." If the PRC tax authorities subsequently
determine that the Company should be classified as a resident enterprise, then
the organization’s global income will be subject to PRC income tax of rate
25.0%. Laiyang Jiangbo and GJBT were subject to 25% income tax rate since
January 1, 2008, and 33% income tax rate prior to January 1, 2008.
  Liangyang
Jiangbo was subject to 33% income tax rate from January 1, 2007, to December 31,
2007, and 25% from January 1, 2008, to June 30, 2009. In 2007 and 2008, the
Chinese local government granted Laiyang Jiangbo special tax waivers to exempt
and release certain corporate income tax, value added tax, and other
miscellaneous tax liabilities; the PRC local government has provided various
incentives to local companies in order to encourage economic development. Such
incentives include reduced tax rates and other measures. The tax waivers were
provided on a non-recurring basis. For the  year ended June 30, 2009,
the Company did not receive any tax exemptions. For the  year ended
June 30, 2008, the Company received $5,256,634 in tax exemption. Of that amount,
$2,114,983 was reflected as reduction of the provision for income taxes;
$1,695,671 was reflected as reduction of sales tax and miscellaneous fees; and
$1,445,980 was recorded as non-operating income. The Chinese local government
exempted all of the Company's taxes due for the period from January 1, 2007
to  June 30, 2007. For that period, the Company received $9,931,919
tax exemption as of June 30, 2007, of which $3,338,774 was reflected as
reduction of the provision for income taxes, and $6,593,145 was recorded as
non-operating income.
 
 Total tax
exemptions for the years ended June 30, 2008 and 2007 is summarized as
follows:
 
 June 30, 2008
                        
                        
                        June 30, 2007VAT
      tax exemption
                        
                        $
                        1,428,804
                        
                        
                        $
                        6,126,464Income
      tax exemption
                        
                        
                        2,114,983
                        
                        
                        
                        2,986,806City
      construction tax exemption
                        
                        
                        1,079,063
                        
                        
                        
                        510,362Others
                        
                        
                        633,784
                        
                        
                        
                        308,287Total
                        
                        $
                        5,256,634
                        
                        
                        $
                        9,931,919
 
 The table
below summarizes the differences between the U.S. statutory federal rate and the
Company’s effective tax rate and are as follows for the fiscal years ended June
30, 2009, 2008 and 2007:
  2009
                                    
                                    
                                    2008
                                    
                                    
                                    2007U.S.
      statutory rates
                                    
                                    
                                    34.0
                                    %
                                    
                                    
                                    34.0
                                    %
                                    
                                    
                                    34.0
                                    %Foreign
      income not recognized in the U.S.
                                    
                                    
                                    (34.0
                                    )
      %
                                    
                                    
                                    (34.0
                                    )
      %
                                    
                                    
                                    (34.0
                                    )
      %China
      income taxes
                                    
                                    
                                    25.0
                                    %
                                    
                                    
                                    25.0
                                    %
                                    
                                    
                                    33.0
                                    %China
      income tax exemptions
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (5.6
                                    )
      %
                                    
                                    
                                    (18.6
                                    )
      %Other
      Items(a)
                                    
                                    
                                    5.7
                                    %
                                    
                                    
                                    4.3
                                    %
                                    
                                    
                                    (3.7
                                    )
      %Total
      provision for income taxes
                                    
                                    
                                    30.7
                                    %
                                    
                                    
                                    23.7
                                    %
                                    
                                    
                                    10.7
                                    %
  
 F-26
 
 (a)  The
5.7% and 4.3% represent the expenses incurred by the Company that are not
deductible for PRC income tax purpose for the years ended June 30, 2009 and 2008
respectively. The 3.7% represents the non-operating income generated by the
Company that is not taxable for the year ended June 30, 2007.
  Taxes
Payable
 
 Taxes
payable as of June 30, 2009 and 2008 are as follows:
 2009
                          
                          
                          2008Value
      added tax
                          
                          $
                          4,090,492
                          
                          
                          $
                          83,775Income
      taxes
                          
                          
                          6,689,199
                          
                          
                          
                          62,733Other
      taxes
                          
                          
                          468,535
                          
                          
                          
                          19,925Total
                          
                          $
                          11,248,226
                          
                          
                          $
                          166,433
 
 Jiangbo
incurred net operating losses of $9,327,288 for income tax purposes for the year
ended June 30, 2009.  The estimated net operating loss carry forwards
for US income taxes amounted to $1,177,231 which may be available to reduce
future years’ taxable income. These carry forwards will expire, if not utilized,
from 2026 through 2029.  Management believes that the realization of
the benefits from these losses appears uncertain due to the Company’s limited
operating history and continuing losses for US income tax
purposes.  Accordingly, the Company has provided a 100% valuation
allowance on the deferred tax asset benefit to reduce the asset to
zero.  The net change in the valuation allowance for the period ended
June 30, 2009 was $400,259 and the accumulated valuation allowance as of June
30, 2009 amounted to $761,368. Management reviews this valuation allowance
periodically and makes adjustments as necessary.
 
 The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $81,041,000 as of June 30, 2009, and is included in consolidated
retained earnings and will continue to be indefinitely reinvested in
international operations.  Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if the Company concluded that such earnings will be remitted in the
future.
 
 Note
13 - Convertible Debt
 
 November 2007 Convertible
Debentures
 
 On
November 7, 2007, the Company entered into a Securities Purchase Agreement (the
“November 2007 Purchase Agreement”) with Pope Investments, LLC (the “November
2007 Investor”). Pursuant to the November 2007 Purchase Agreement, the Company
issued and sold to the November 2007 Investor, $5,000,000 consisting of: (a) 6%
convertible subordinated debentures due November 30, 2010 (the “November 2007
Debenture”) and (b) a three-year warrant to purchase 250,000 shares of the
Company’s common stock, par value $0.001 per share, at an exercise price of
$12.8 per share, subject to adjustment as provided therein. The November 2007
Debenture bears interest at the rate of 6% per annum and the initial conversion
price of the debentures is $10 per share. In connection with the offering, the
Company placed in escrow 500,000 shares of its common stock. In connection with
the May 2008 financing, the November 2007 Debenture conversion price was
subsequently adjusted to $8 per share (Post 40-to-1 reverse split).
  
 F-27
 
 The
Company evaluated the application of EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,” and EITF 00-27, “Application of Issue No. 98-5 to Certain
Convertible Instruments,” and concluded that the convertible debenture has a
beneficial conversion feature.  The Company estimated the fair value
of the beneficial conversion feature of the November 2007 Debenture at
$2,904,093 as a discount to par value. The fair value of the warrants was
estimated at $2,095,907. The two amounts are recorded together as debt discount
and amortized using the effective interest method over the three-year term of
the debenture.
 
 The fair
value of the warrants granted with this private placement was computed using the
Black-Scholes option-pricing model. Variables used in the option-pricing model
include (1) risk-free interest rate at the date of grant (4.5%),
(2) expected warrant life of 3 years, (3) expected volatility of
197%, and (4) zero expected dividends. The total estimated fair value of
the warrants granted and beneficial conversion feature of the November 2007
Debenture should not exceed the $5,000,000 Debenture, and the calculated warrant
value was used to determine the allocation between the fair value of the
beneficial conversion feature of the November 2007 Debenture and the fair value
of the warrants.
 
 In
connection with the private placement, the Company paid the placement agents a
fee of $250,000 and incurred other expenses of $104,408, which were capitalized
as deferred debt issuance costs and is being amortized to interest expense over
the life of the debenture. During the years ended June 30, 2009 and 2008,
amortization of debt issuance costs related to the November 2007 Purchase
Agreement was $118,136 and $77,116, respectively. The remaining balance of debt
issuance costs of the November 2007 Purchase Agreement at June 30, 2009 and 2008
was $159,155 and $277,291, respectively. The amortization of debt discounts was
$817,564 and $545,359 for the years ended June 30, 2009 and 2008, respectively,
which has been included in interest expense on the accompanying consolidated
statements of income. The balance of the debt discount was $3,637,077 and
$4,454,641 at June 30, 2009 and 2008, respectively.
 
 The
November 2007 Debenture bears interest at the rate of 6% per annum, payable in
semi-annual installments on May 31 and November 30 of each year, with the first
interest payment due on May 31, 2008. The initial conversion price (“November
2007 Conversion Price”) of the November 2007 Debentures is $10 per share. If the
Company issues common stock at a price that is less than the effective November
2007 Conversion Price, or common stock equivalents with an exercise or
conversion price less than the then effective November 2007 Conversion Price,
the November 2007 Conversion Price of the November 2007 Debenture and the
exercise price of the warrants will be reduced to such price. The November 2007
Debenture may not be prepaid without the prior written consent of the Holder, as
defined. In connection with the Offering, the Company placed in escrow 500,000
shares of common stock issued by the Company in the name of the escrow agent. In
the event the Company’s consolidated Net Income Per Share (as defined in the
Purchase Agreement), for the year ended June 30, 2008, is less than $1.52, the
escrow agent shall deliver the 500,000 shares to the November 2007 Investor. The
Company has concluded its fiscal 2008 Net Income Per Share has met the required
amount and no shares were delivered to the November 2007 Investor.
  Pursuant
to the November 2007 Purchase Agreement, the Company entered into a Registration
Rights Agreement. In accordance with the Registration Rights Agreement, the
Company must file on each Filing Date (as defined in the Registration Rights
Agreement) a registration statement to register the portion of the Registrable
Securities (as defined therein) as permitted by the SEC’s guidance. The initial
registration statement must be filed within 90 days of the Closing Date and
declared effective within 180 days following the Closing Date. Any subsequent
registration statements that are required to be filed on the earliest practical
date on which the Company is permitted by the SEC’s guidance to file such
additional registration statement, these statements must be effective 90 days
following the date on which it is required to be filed. In the event that the
registration statement is not timely filed or declared effective, the Company
will be required to pay liquidated damages. Such liquidated damages shall be, at
the investor’s option, either $1,643.83 or 164 shares of common stock per day
that the registration statement is not timely filed or declared effective as
required pursuant to the Registration Rights Agreement, subject to an amount of
liquidated damages not exceeding either $600,000, and 60,000 shares of common
stock, or a combination thereof based upon 12% liquidated damages in the
aggregate. In December 2006, the FASB issued FSP EITF 00-19-2, "Accounting for
Registration Payments," which was effective immediately. This FSP amended EITF
00-19 to require potential registration payment arrangements be treated as a
contingency pursuant to SFAS No. 5, “Accounting for Contingencies,” rather than
at fair value. The November 2007 Investor has subsequently agreed to allow the
Company to file the November 2007 registration statement in conjunction with the
Company’s financing in May 2008 and, as such, no liquidated damages were
incurred for the year ended June 30, 2008.
    F-28
  The
financing was completed through a private placement to accredited investors and
is exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended ("Securities Act").
  May 2008 Convertible
Debentures
 
 On May
30, 2008, the “Company entered into a Securities Purchase Agreement (the “May
2008 Securities Purchase Agreement”) with certain investors (the “May 2008
Investors”), pursuant to which, on May 30, 2008, the Company sold to the May
2008 Investors 6% convertible debentures (the “May 2008 Notes”) and warrants to
purchase 1,875,000 shares of the Company’s common stock (“May 2008 Warrants”),
for an aggregate amount of $30,000,000 (the “May 2008 Purchase Price”), in
transactions exempt from registration under the Securities Act of 1933, as
amended (the “May 2008 Financing”). Pursuant to the terms of the May 2008
Securities Purchase Agreement, the Company will use the net proceeds from the
Financing for working capital purposes. Also pursuant to the terms of the May
2008 Securities Purchase Agreement, the Company must, among other things,
increase the number of its authorized shares of common stock to 22,500,000 by
August 31, 2008, and is prohibited from issuing any “Future Priced Securities”
as such term is described by NASD IM-4350-1 for one year following the closing
of the Financing. The Company has satisfied the increase in the number of its
authorized shares of common stock in August 2008 (post 40-to-1 reverse
split).
 
 The May
2008 Notes are due May 30, 2011, and are convertible into shares of the
Company’s common stock at a conversion price equal to $8, subject to adjustment
pursuant to customary anti-dilution provisions and automatic downward
adjustments in the event of certain sales or issuances by the Company of common
stock at a price per share less than $8. Interest on the outstanding principal
balance of the May 2008 Notes is payable at a rate of 6% per annum, in
semi-annual installments payable on November 30 and May 30 of each year, with
the first interest payment due on November 30, 2008. At any time after the
issuance of the May 2008 Note, any May 2008 Investor may convert its May 2008
Note, in whole or in part, into shares of the Company’s common stock, provided
that such May 2008 Investor shall not effect any conversion if immediately after
such conversion, such May 2008 Investor and its affiliates would, in the
aggregate, beneficially own more than 9.99% of the Company’s outstanding common
stock. The May 2008 Notes are convertible at the option of the Company if the
following four conditions are met: (i) effectiveness of a registration statement
with respect to the shares of the Company’s common stock underlying the Notes
and the Warrants; (ii) the Volume Weighted Average Price (“VWAP” of the common
stock has been equal to or greater than 250% of the conversion price, as
adjusted, for 20 consecutive trading days on its principal trading market; (iii)
the average dollar trading volume of the common stock exceeds $500,000 on its
principal trading market for the same 20 days; and (iv) the Company achieves
2008 Guaranteed EBT (as hereinafter defined) and 2009 Guaranteed EBT (as
hereinafter defined). A holder of a May 2008 Note may require the Company to
redeem all or a portion of such May 2008 Note for cash at a redemption price as
set forth in the May 2008 Notes, in the event of a change in control of the
Company, an event of default or if any governmental agency in the PRC challenges
or takes action that would adversely affect the transactions contemplated by the
Securities Purchase Agreement. The May 2008 warrants are exercisable for a
five-year period that is beginning on May 30, 2008 at an initial exercise price
of $10 per share.
 
 The
Company evaluated the application of EITF 98-5 and EITF 00-27, and concluded
that the convertible debenture has a beneficial conversion
feature.  The Company estimated the fair value of the beneficial
conversion feature of the May 2008 Note at $19,111,323 as a discount to par
value. The fair value of the warrants was estimated at $10,888,677. The two
amounts are recorded together as debt discount and amortized using the effective
interest method over the three-year term of the debenture.
    F-29
 
 The fair
value of the warrants granted with this private placement was computed using the
Black-Scholes option-pricing model. Variables used in the option-pricing model
include (1) risk-free interest rate at the date of grant (4.2%),
(2) expected warrant life of 5 years, (3) expected volatility of
95%, and (4) zero expected dividends. The total estimated fair value of the
warrants granted and beneficial conversion feature of the May 2008 Note should
not exceed the $30,000,000 Debenture, and the calculated warrant value was used
to determine the allocation between the fair value of the beneficial conversion
feature of the May 2008 Debenture and the fair value of the
warrants.
 
 In
connection with the private placement, the Company paid the placement agents a
fee of $1,500,000 and incurred other expenses of $186,500, which were
capitalized as deferred debt issuance costs and is being amortized to interest
expense over the life of the debenture. During the years ended June 30, 2009 and
2008, amortization of debt issuance costs related to the May 2008 Purchase
Agreement was $562,140 and $46,848, respectively. The remaining balance of debt
issuance costs of the May 2008 Purchase Agreement at June 30, 2009 and 2008 was
$1,077,513 and $1,639,653, respectively. The amortization of debt discounts was
$3,189,304 and $1,954,684 for the years ended June 30, 2009 and 2008,
respectively, which has been included in interest expense on the accompanying
consolidated statements of income. The balance of the unamortized debt discount
was $24,856,012 and $28,045,316 at June 30, 2009 and 2008,
respectively.
 
 In
connection with the May 2008 Financing, the Company entered into a holdback
escrow agreement (the “Holdback Escrow Agreement”) dated May 30, 2008, with the
May 2008 Investors and Loeb & Loeb LLP, as Escrow Agent, pursuant to which
$4,000,000 of the May 2008 Purchase Price was deposited into an escrow account
with the Escrow Agent at the closing of the Financing. Pursuant to the terms of
the Holdback Escrow Agreement, (i) $2,000,000 of the escrowed funds will be
released to the Company upon the Company’s satisfaction no later than 120 days
following the closing of the Financing of an obligation that the board of
directors be comprised of at least five members (at least two of whom are to be
fluent English speakers who possess necessary experience to serve as a director
of a public company), a majority of whom will be independent directors
acceptable to Pope Investments LLC (“Pope”) and (ii) $2,000,000 of the escrowed
funds will be released to the Company upon the Company’s satisfaction no later
than six months following the closing of the Financing of an obligation to hire
a qualified full-time chief financial officer (as defined in the May 2008
Securities Purchase Agreement). In the event that either or both of these
obligations is not so satisfied, the applicable portion of the escrowed funds
will be released pro rata to the Investors. The Company has satisfied both
requirements and the holdback money was fully released to the Company in July
2008.
  In
connection with the May 2008 Financing, Mr. Cao, the Company’s Chief Executive
Officer and Chairman of the Board, placed 3,750,000 shares of common stock of
the Company owned by him into an escrow account pursuant to a make good escrow
agreement, dated May 30, 2008 (the “Make Good Escrow Agreement”). In the event
that either (i) the Company’s adjusted 2008 earnings before taxes is less than
$26,700,000 USD (“2008 Guaranteed EBT”) or (ii) the Company’s 2008 adjusted
fully diluted earnings before taxes per share is less than $1.6 USD (“2008
Guaranteed Diluted EBT”), 1,500,000 of such shares (the “2008 Make Good Shares”)
are to be released pro rata to the May 2008 Investors. In the event that either
(i) the Company’s adjusted 2009 earnings before taxes is less than $38,400,000
USD (“2009 Guaranteed EBT”) or (ii) the Company’s adjusted fully diluted
earnings before taxes per share is less than $2.32 USD (or $2.24 USD if the
500,000 shares of common stock held in escrow in connection with the November
2007 private placement have been released from escrow) (“2009 Guaranteed Diluted
EBT”), 2,250,000 of such shares (the “2009 Make Good Shares”) are to be released
pro rata to the May 2008 Investors. Should the Company successfully satisfy
these respective financial milestones, the 2008 Make Good Shares and 2009 Make
Good Shares will be returned to Mr. Cao. In addition, Mr. Cao is required to
deliver shares of common stock owned by him to the Investors on a pro rata basis
equal to the number of shares (the “Settlement Shares”) required to satisfy all
costs and expenses associated with the settlement of all legal and other matters
pertaining to the Company prior to or in connection with the completion of the
Company’s October 2007 share exchange in accordance with formulas set forth in
the May 2008 Securities Purchase Agreement (post 40-to-1 reverse split). The
Company has determined that both thresholds for the periods ended June 30, 2008
and June 30, 2009 have been met. The make good shares have yet to be returned to
Mr. Cao.
    F-30
 
 The
security purchase agreement set forth permitted indebtedness which the Company’s
lease obligations and purchase money indebtedness is limited up to $1,500,000
per year in connection with new acquisition of capital assets and lease
obligations. Permitted investment set forth with the security purchase agreement
limits capital expenditure of the Company not to exceed $5,000,000 in any
rolling 12 months.
 
 Pursuant
to a Registration Rights Agreement, the Company agreed to file a registration
statement covering the resale of the shares of common stock underlying the May
2008 Notes and Warrants, (ii) the 2008 Make Good Shares, (iii) the 2009 Make
Good Shares, and (iv) the Settlement Shares. The Company must file an initial
registration statement covering the shares of common stock underlying the Notes
and Warrants no later than 45 days from the closing of the Financing and to have
such registration statement declared effective no later than 180 days from the
closing of the Financing. If the Company does not timely file such registration
statement or cause it to be declared effective by the required dates, then the
Company will be required to pay liquidated damages to the Investors equal to
1.0% of the aggregate Purchase Price paid by such Investors for each month that
the Company does not file the registration statement or cause it to be declared
effective. Notwithstanding the foregoing, in no event shall liquidated damages
exceed 10% of the aggregate amount of the May 2008 Purchase Price. The Company
satisfied its obligations under the Registration Rights Agreement by filing the
required registration statement and causing it to be declared effective within
the time periods set forth in the Registration Rights Agreement.
 
 During
the year ended June 30, 2009, the Company issued 20,000 shares of its common
stock upon conversion of $160,000 convertible debt.
 
 The above
two convertible debenture liabilities are as follows:
 
 June 30, 2009
                    
                    
                    June 30, 2008November
      2007 convertible debenture note payable
                    
                    $
                    5,000,000
                    
                    
                    $
                    5,000,000May
      2008 convertible debenture note payable
                    
                    
                    29,840,000
                    
                    
                    
                    30,000,000Total
      convertible debenture note payable
                    
                    
                    34,840,000
                    
                    
                    
                    35,000,000Less:
      Unamortized discount on November 2007 convertible debenture note
      payable
                    
                    
                    (3,637,077
                    )
                    
                    
                    (4,454,641
                    )Less:
      Unamortized discount on May 2008 convertible debenture note
      payable
                    
                    
                    (24,856,012
                    )
                    
                    
                    (28,045,316
                    )Convertible
      debentures, net
                    
                    $
                    6,346,911
                    
                    
                    $
                    2,500,043
 
 Note
14 - Shareholders’ equity
 
 Common
Stock
 
 In July
2008, the Board of Directors approved a 40-to-1 reverse stock split that became
effective on September 4, 2008. Those holding fractional shares were rounded up
the next whole share. Subsequent to the stock split, the Company had
approximately 9,768,000 shares issued and outstanding. The total number of
authorized shares became 22,500,000. These consolidated financial statements
have been retroactively adjusted to reflect the reverse split. Additionally, all
share representations are on a post-split basis.
 
 In July
2008, in connection with the settlement (see Note 20) with Mr. Fernando Praca
(Fernando Praca, Plaintiff vs. EXTREMA, LLC and Genesis Pharmaceuticals
Enterprises, Inc.- Case No. 50 2005 CA 005317, Circuit Court of the 15th
Judicial Circuit in and for Palm Beach County, Florida), the Company cancelled
2,500 shares of its common stock (post 40-to-1 reverse split) and the cancelled
shares were valued at fair market value on the date of cancellation at $8 per
share or $20,000 in total, based on the trading price of the common stock. For
the year ended June 30, 2009, the Company recorded settlement income of $20,000
related to this settlement.
    F-31
 
 In July
2008, the Company issued 2,500 shares of common stock to two of the Company’s
current and former directors as part of their compensation for services. The
Company valued these shares at the fair market value on the date of grant of $8
per share, or $20,000 in total, based on the trading price of common stock (post
40-to-1 reverse split). In September 2008, the Company issued 2,500 shares of
common stock to two of the Company’s current and ex-directors as part of
compensation for services. The Company valued these shares at the fair market
value on the date of grant of $9 per share, or $22,500 in total, based on the
trading price of common stock (post 40-to-1 reverse split).
 
 In
November 2008, the Board of the Directors of the Company authorized a share
buyback program to purchase the Company’s common stock in the open market with a
$2,000,000 limitation. As of the date of these consolidated financial
statements, no shares were purchased in the open market.
 
 In
December 2008, the Company issued 20,000 shares of its common stock in
connection with the conversion of $160,000 of convertible debt. In connection
with the conversion, the Company recorded $145,524 interest expense to fully
amortize the unamortized discount related to the converted
dentures.
 
 In
January 2009, in connection with the Hongrui acquisition, the Company recorded
643,651 shares of Jiangbo’s common stock issuable to Shandong Traditional
Chinese Medicine College as part of the consideration for
acquisition.  The fair value of the common stock of $4.035 per share
was based on the weighted average trading price of 5 days prior to the date of
the acquisition, and amounted to $2,597,132.
 
 In May
2009, in connection with the Company’s name change to Jiangbo Pharmaceuticals,
Inc., the Company changed the trading symbol for its common stock to
“JGBO.”  This change in trading symbol became effective on May 12,
2009.
 
 Registered capital
contribution receivable
 
 At
inception, Karmoya issued 1,000 shares of common stock to its founder. The
shares were valued at par value. On September 20, 2007, the Company issued 9,000
shares of common stock to nine individuals at par value. The balance of $10,000
is shown in capital contribution receivable on the accompanying consolidated
financial statements. As part of its agreements with the shareholders, the
Company was to receive the entire $10,000 in October 2007. As of June 30, 2009,
the Company has not received the $10,000.
 
 Union
Well was established with a registered capital of $1,000. In connection with
Karmoya’s acquisition of Union Well, the registered capital of $1,000 is
reflected as capital contribution receivable on the accompanying consolidated
financial statements. The $1,000 was due in October 2007; however, as of June
30, 2009, the Company has not received the $1,000.
 
 PRC laws
require the owner of a WOFE to contribute at least 15% of the registered capital
within 90 days of its business license issuance date and the remaining balance
is required to be contributed within two years of the business license issuance
date. In June 2008, the PRC government approved GJBT to increase its registered
capital from $12,000,000 to $30,000,000. By June 30, 2008, the Company had
funded GJBT the entire registered capital required in accordance with PRC laws.
In August 2008, the PRC government approved GJBT to increase its registered
capital from $30,000,000 to $59,800,000. The PRC laws require Union Well, the
100% owner of GJBT to contribute at least 20% of the registered capital within
30 days of the approval, and the remaining balance is required to be contributed
within two years of the approval date. In August 2008, GJBT received additional
registered capital in the amount of approximately $1,966,000. As of June 30,
2009, the Company has not received the remaining contribution receivable in the
amount of $27,845,000. If the remaining contribution receivable cannot be
received by August 2010, the Company may be required to reduce its registered
capital or apply to extend the registered capital due date with the
government.
    F-32
 
 Note
15 - Warrants
 
 In
connection with the May 2008 financing, the exercise price of outstanding
warrants issued in 2004 to purchase 74,085 shares of common stock was reduced to
$8 per share. The 2004 warrants contain full ratchet anti-dilution provisions to
the exercise price, which due to the Company’s May 2008 financing, resulted in
the 2004 warrants to be exercisable at $8 per share. The provisions of the 2004
Warrants which result in the reduction of the exercise price remain in place.
The 74,085 shares of warrants were fully expired as of June 30,
2009.
 
 In
connection with the $5,000,000 November 2007 Convertible Debenture, 6%
convertible subordinated debenture note, the Company issued a three-year warrant
to purchase 250,000 shares of common stock, at an exercise price of $12.80 per
share. The calculated fair value of the warrants granted with this private
placement was computed using the Black-Scholes option-pricing model. Variables
used in the option-pricing model include (1) risk-free interest rate at the
date of grant (4.5%), (2) expected warrant life of 3 years,
(3) expected volatility of 197%, and (4) zero expected dividends. In
connection with the May 2008 financing, the exercise price of outstanding
warrants issued in November 2007 was reduced to $8 per share and the total
number of warrants to purchase common stock was increased to
400,000.
  In
connection with the $30,000,000 May 2008 Convertible Debentures, the Company
issued a five-year warrant to purchase 1,875,000 shares of common stock, at an
exercise price of $10 per share. The calculated fair value of the warrants
granted with this private placement was computed using the Black-Scholes
option-pricing model. Variables used in the option-pricing model include
(1) risk-free interest rate at the date of grant (4.5%), (2) expected
warrant life of 5 years, (3) expected volatility of 95%, and
(4) zero expected dividends.
 
 On
February 15, 2009, the Company granted 40,000 stock warrants to a consultant at
an exercise price of $6.00 per share exercisable for a period of three years.
The warrants fully vest on July 15, 2009.  The fair value of this
warrant grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (1) risk-free interest rate
at the date of grant (1.83%), (2) expected warrant life of three years, (3)
expected volatility of 106%, and (4) zero expected dividends. In connection with
these warrants, the Company recorded  stock-based compensation expense
of $46,508 and stock based deferred compensation of $77,400 for the year ended
June 30, 2009.
 
 A summary
of the warrants as of June 30, 2009, and changes during the years ended June 30,
2009 and 2008, respectively, is presented below:
  Number of warrantsOutstanding
      as of June 30, 2007
                            
                            
                            74,085Granted
                            
                            
                            2,275,000Forfeited
                            
                            
                            -Exercised
                            
                            
                            -Outstanding
      as of June 30, 2008
                            
                            
                            2,349,085Granted
                            
                            
                            40,000Forfeited
                            
                            
                            (74,085)Exercised
                            
                            
                            -Outstanding
      as of June 30, 2009
                            
                            
                            2,315,000
 
 The
following is a summary of the status of warrants outstanding at June 30,
2009:
  Outstanding Warrants
                                                            
                                                            
                                                            Exercisable WarrantsAverage
                                                              Exercise Price
                                                            
                                                            
                                                            Number
                                                            
                                                            
                                                            Average
                                                              Remaining
                                                              Contractual Life
                                                            
                                                            
                                                            Average
                                                              Exercise Price
                                                            
                                                            
                                                            Number
                                                            
                                                            
                                                            Average
                                                              Remaining
                                                              Contractual Life$
                                                            6.00
                                                            
                                                            
                                                            
                                                            40,000
                                                            
                                                            
                                                            
                                                            2.63
                                                            
                                                            
                                                            $
                                                            6.00
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -$
                                                            8.00
                                                            
                                                            
                                                            
                                                            400,000
                                                            
                                                            
                                                            
                                                            3.36
                                                            
                                                            
                                                            $
                                                            8.00
                                                            
                                                            
                                                            
                                                            400,000
                                                            
                                                            
                                                            
                                                            3.36$
                                                            10.00
                                                            
                                                            
                                                            
                                                            1,875,000
                                                            
                                                            
                                                            
                                                            3.92
                                                            
                                                            
                                                            $
                                                            10.00
                                                            
                                                            
                                                            
                                                            1,875,000
                                                            
                                                            
                                                            
                                                            3.92Total
                                                            
                                                            
                                                            
                                                            2,315,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            2,275,000
    F-33
 
 The
Company has 2,275,000 warrants outstanding and exercisable at an average
exercise price of $9.65 per share as of June 30, 2009.
 
 Note 16
- Stock options
  On July
1, 2007, 133,400 options were granted and the fair value of this option grant
was estimated on the date of the grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
 
 Expected
                              
                              Expected
                              
                              
                              Dividend
                              
                              
                              Risk Free
                              
                              
                              Grant DateLife
                              
                              Volatility
                              
                              
                              Yield
                              
                              
                              Interest Rate
                              
                              
                              Fair ValueFormer
      officers
                              
                              3.50
      years
                              
                              
                              195
                              %
                              
                              
                              0
                              %
                              
                              
                              4.50
                              %
                              
                              $
                              5.20
 
 On June
10, 2008, 7,500 options were granted and the fair value of this option grant was
estimated on the date of the grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
 
 Expected
                              
                              Expected
                              
                              
                              Dividend
                              
                              
                              Risk Free
                              
                              
                              Grant Date
                                Average FairLife
                              
                              Volatility
                              
                              
                              Yield
                              
                              
                              Interest Rate
                              
                              
                              ValueCurrent
      officer
                              
                              5
      years
                              
                              
                              95
                              %
                              
                              
                              0
                              %
                              
                              
                              2.51
                              %
                              
                              $
                              8.00
 
 As of
June 30, 2009, of the 7,500 options held by the Company’s executives, directors,
and employees, 5,625 were vested.
 
 The
following is a summary of the option activity during the years ended June 30,
2009 and 2008, respectively:
 
 Number of optionsOutstanding
      as of June 30, 2007
                        
                        
                        194,436Granted
                        
                        
                        7,500Forfeited
                        
                        
                        (23,536
                        )Exercised
                        
                        
                        (37,500
                        )Outstanding
      as of June 30, 2008
                        
                        
                        140,900Granted
                        
                        
                        -Forfeited
                        
                        
                        -Exercised
                        
                        
                        -Outstanding
      as of June 30, 2009
                        
                        
                        140,900
 
 The
following is a summary of the status of options outstanding at June 30,
2009:
    F-34
 
 Outstanding options
                                                      
                                                      
                                                      Exercisable optionsAverage
                                                        Exercise price
                                                      
                                                      
                                                      Number
                                                      
                                                      
                                                      Average
                                                        remaining
                                                        contractual life
                                                        (years)
                                                      
                                                      
                                                      Average
                                                        exercise price
                                                      
                                                      
                                                      Number$
                                                      4.20
                                                      
                                                      
                                                      
                                                      133,400
                                                      
                                                      
                                                      
                                                      1.50
                                                      
                                                      
                                                      $
                                                      4.20
                                                      
                                                      
                                                      
                                                      133,40012.00
                                                      
                                                      
                                                      
                                                      2,000
                                                      
                                                      
                                                      
                                                      4.00
                                                      
                                                      
                                                      
                                                      12.00
                                                      
                                                      
                                                      
                                                      2,00016.00
                                                      
                                                      
                                                      
                                                      1,750
                                                      
                                                      
                                                      
                                                      4.00
                                                      
                                                      
                                                      
                                                      16.00
                                                      
                                                      
                                                      
                                                      1,75020.00
                                                      
                                                      
                                                      
                                                      1,875
                                                      
                                                      
                                                      
                                                      4.00
                                                      
                                                      
                                                      
                                                      20.00
                                                      
                                                      
                                                      
                                                      1,87524.00
                                                      
                                                      
                                                      
                                                      1,875
                                                      
                                                      
                                                      
                                                      4.00
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -$
                                                      4.93
                                                      
                                                      
                                                      
                                                      140,900
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      4.40
                                                      
                                                      
                                                      
                                                      139,025
 
 For the
years ended June 30, 2009 and 2008, the Company recorded total stock-based
compensation expense of $104,107 and $57,847, respectively.  As of
June 30, 2009 and 2008, there was approximately $89,000 and $26,000,
respectively, of total unrecognized compensation expense related
to  unvested share-based compensation arrangements granted. That cost
is expected to be recognized over a weight average period of six
months.
 
 Note
17 - Statutory reserves
 
 The
Company is required to make appropriations to reserve funds, comprising the
statutory surplus reserve and discretionary surplus reserve, based on after-tax
net income determined in accordance with generally accepted accounting
principles of the PRC ("PRC GAAP"). Appropriation to the statutory surplus
reserve is required to be at least 10% of the after tax net income determined in
accordance with PRC GAAP until the reserve is equal to 50% of the entities'
registered capital. Appropriations to the discretionary surplus reserve are made
at the discretion of the Board of Directors.
  The
statutory surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years' losses, if any, and may be
utilized for business expansion or converted into share capital by issuing new
shares to existing shareholders in proportion to their shareholding or by
increasing the par value of the shares currently held by them, provided that the
remaining reserve balance after such issue is not less than 25% of the
registered capital.
 
 The
discretionary surplus fund may be used to acquire fixed assets or to increase
the working capital to expend on production and operations of the business. The
Company’s Board of Directors decided not to make an appropriation to this
reserve for 2009, 2008, and 2007.
 
 Pursuant
to the Company's articles of incorporation, the Company should appropriate 10%
of the net profit as statutory surplus reserve up to 50% of the Company’s
registered capital. For the year ended June 30, 2008, the Company appropriated
to the statutory surplus reserve in the amount of $1,096,241. The Company’s
statutory surplus reserve has reached 50% of its registered capital as of June
30, 2008, as such; no additional reserve was recorded during the year ended June
30, 2009.
 
 Note
18 - Employee pension
 
 Employee
pension in the Company generally includes two parts: the first part to be paid
by the Company is 30.6% of $128 for each qualified employee each month. The
other part, paid by the employees, is 11% of $128 each month. For the years
ended June 30, 2009, 2008, and 2007, the Company made pension contributions in
the amount of approximately $146,000, $35,000, and $32,000,
respectively.
 
 Note
19 - Accumulated other comprehensive income
 
 The
components of accumulated other comprehensive income for the years ended June
30, 2009 and 2008 are as follows:
    F-35
 
 June 30,
                        
                        
                        June 30,2009
                        
                        
                        2008Beginning
      Balance
                        
                        $
                        7,700,905
                        
                        
                        $
                        1,146,441Foreign
      currency translation gain
                        
                        
                        336,926
                        
                        
                        
                        5,206,612Unrealized
      gain (loss) on restricted marketable securities
                        
                        
                        (1,514,230
                        )
                        
                        
                        1,347,852Ending
      Balance
                        
                        $
                        6,523,601
                        
                        
                        $
                        7,700,905
  Note
20 - Commitments and contingencies
 
 Operations based in the
PRC
 
 The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, and by the general
state of the PRC's economy.
 
 The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic, and legal environments, and foreign currency exchange. The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among
others.
 
 R&D
Agreement
  In September 2007, the Company entered
into a three year Cooperative Research and Development Agreement (“CRADA”) with
Pharmaceutical Institute of Shandong University (the “University”). Pursuant to
the CRADA, the University is responsible for designing, researching and
developing designated pharmaceutical projects for the Company. Additionally, the
University will also provide technical services and training to the
Company.  As part of the CRADA, the Company will pay approximately
$3,500,000 (RMB 24,000,000) plus out-of-pocket expenses to the University
annually, and provide internship opportunities for students of the University.
 The Company will have the primary ownership of the designated research and
development project results.
 
 In
November 2007, the Company entered into a five year CRADA with Institute of
Microbiology (Chinese Academy of Sciences) (the “Institute”). Under the CRADA,
the Institute is responsible for designing, researching and developing
designated pharmaceutical projects for the Company. Additionally, the Institute
will also provide technical services and trainings to the Company.  As part
of the CRADA, the Company will pay approximately $880,000 (RMB 6,000,000) to the
Institute annually.  The Company will have the primary ownership of the
designated research and development project results.
 
 For the
years ended June 30, 2009 and 2008, approximately $4,395,000 and $3,236,000
related to the two CRADAs, respectively, was incurred as research and
development expenses. As of June 30, 2009, the Company’s future estimated
payments to those CRADAs amounted to approximately $4,100,000.
 
 Legal
proceedings
 
 The
Company is involved in various legal matters arising in the ordinary course of
business. The following summarizes the Company’s pending and settled legal
proceedings as of June 30, 2009:
 
 Fernando Praca, Plaintiff
vs. EXTREMA, LLC and Genesis Pharmaceuticals Enterprises, Inc.- Case No. 50 2005
CA 005317, Circuit Court of the 15 th
Judicial Circuit in
and for Palm Beach County, Florida
 
 Fernando
Praca, former Director and former President of the Company’s discontinued
subsidiary, Extrema LLC, filed an action in Dade County, Florida against
Extrema, LLC and the Company in June 2005 relating to damages arising from the
sale of Extrema LLC to Genesis Technology Group, Inc. Fernando Praca had filed a
Motion of Temporary Injunction but had not proceeded to move this case forward.
The plaintiff has decided to reinitiate the legal action in March 2008. In July
2008, the Company and Fernando Praca entered into a Settlement Agreement whereby
Fernando Praca agreed to dismiss this action against the Company and to
surrender to the Company for cancellation, 100,000 shares of common stock in the
Company held by him. The Company agreed to provide Fernando Praca with a legal
opinion of its counsel removing the restrictive legend on the 1,269,607 shares
of common stock held by Fernando Praca.  This matter was settled in
July 2008.  (See Note 14)
    F-36
 
 CRG Partners, Inc. and
Capital Research Group, Inc. and Genesis Technology Group, Inc., n/k/a Genesis
Pharmaceuticals Enterprises, Inc. (Arbitration) - Case No. 32 145 Y 00976 07,
American Arbitration Association, Southeast Case Management
Center
 
 On
December 4, 2007, CRG Partners, Inc. (“CRGP”), a former consultant of the
Company, filed a demand for arbitration against the Company alleging breach of
contract and seeking damages of approximately $10 million as compensation for
consulting services rendered to the Company. The amount of damages sought by the
claimant was equal to the dollar value of 29,978,900 shares of the Company’s
common stock (Pre 40-to-1 reverse split) in November 2007, in which the claimant
alleged were due and owing to CRGP. On December 5, 2007, the Company gave
notice of termination of the relationship with CRG under the consulting
agreement. CRGP subsequently filed an amendment to the demand for arbitration to
include Capital Research Group, Inc. (“CRG”) as an added claimant and increased
the damage amount sought under this matter to approximately $13.8 million. The
Company subsequently filed counter claims in reference to the aforementioned
allegations of breach of contract.
 
 In
February 2009, the Company was notified by the arbitration panel of American
Arbitration Association (the “Panel”) that the Panel awarded CRG and CRGP
jointly, a net total of $980,070 (the “Award”) to be paid by the Company on or
before February 27, 2009. Once the Award is satisfied, CRG and CRGP would have
no further claims against the Company’s common stock or other property that were
the subject of the arbitration. The amount has been charged to operations for
year ended June 30, 2009, and is included in liabilities assumed from
reorganization as of June 30, 2009.
 
 On March
6, 2009, CRG Partners, Inc. (“CRGP”) and Capital Research Group, Inc. (“CRG”),
former consultants of the Company, filed a motion to confirm the arbitration
award conferred by a panel of arbitrators of the American Arbitration
Association on February 2, 2009. On July 15, 2009, the Circuit Court of the 11th
Judicial Circuit in and for Miami-Dade County confirmed the arbitration award
and entered judgment against Genesis Technology Group, Inc. At June 30, 2009,
the award has not been paid and the Company is in the process of appealing the
case.
 
 China West II, LLC and
Genesis Technology Group, Inc., n/k/a Genesis Pharmaceuticals Enterprises, Inc.
(Arbitration)
 
 In June
2008, China West II, LLC (“CW II”) filed a Demand For Arbitration with the
American Arbitration Association (“AAA”) the case of CW II and Genesis Technology Group,
Inc. n/k/a Genesis Pharmaceuticals Enterprises, Inc. and Joshua Tan. In
that matter, CW II sought breach of contract damages in connection with the
Company’s October 2007 reverse merger from the Company and Joshua Tan, former
director of the Company, jointly and severally for approximately $6,700,000
estimated by CW II.
 
 In
January 2009, the Company received a written notice from the
Panel that CW II had withdrawn the Demand for Arbitration without
prejudice.     F-37
 China West, LLC and Genesis
Technology Group, Inc., n/k/a Genesis Pharmaceuticals Enterprises, Inc.
(Arbitration)
 
 In
November 2008, China West, LLC (“CW”) filed a Demand For Arbitration with the
American Arbitration Association the case of CW and Genesis Technology Group,
Inc. n/k/a Genesis Pharmaceuticals Enterprises, Inc. and Joshua Tan. In
that matter, CW sought from the Company in the amount of approximately
$7,500,000 for breach of contract and fiduciary duty damages in connection with
the Company’s October 2007 reverse merger.
 
 In
February 2009, the Company received a written notice from the
Panel that CW II had withdrawn the arbitration without
prejudice.
 
 Note
21 - Subsequent events
 
 In July
2009, the Company issued 1,009 share of common stock to a director as part of
his compensation for services. The Company valued these shares at the fair
market value on the date of grant of $9.91 per share, or $10,000 in total, based
on the trading price of common stock (post 40-to-1 reverse split).
 
 As a
result of the delay in its ability to transfer cash out of PRC (partially due to
the stricter foreign exchange restrictions and regulations imposed in the PRC
starting in December 2008), the Company became delinquent on the payment of
interests under the November 2007 Debentures and May 2008 Notes in June 2008. On
August 10, 2009, the Company and Pope Investments LLC (“Pope”) entered into a
Letter Agreement (the “Letter Agreement”), whereby Pope agreed (i) to waive
certain provisions set forth in the November 2007 Purchase Agreement, by and
between the Company and Pope with respect to the November 2007 Debentures
of the Company issued to Pope, and (ii) to waive certain provisions set forth in
the May 2008 Securities Purchase Agreement, by and between the Company and the
investors who are parties thereto (collectively, the “Investors”) with respect
to the May 2008 Notes issued to the Investors. Pope is the holder of $5,000,000
principal amount of the November 2007 Debentures and the holder of $17,000,000
aggregate principal amount of the May 2008 Notes (collectively, the “Pope
Notes”).
  Pursuant
to the Letter Agreement, Pope (i) agreed to waive until August 17, 2009 the
Events of Default (as defined in the November 2007 Debentures and May 2008
Notes) that have occurred as a result of the Company’s failure to timely make
interest payments on the November 2007 Debentures and May 2008 Notes that
were due and payable on May 30, 2009, and agreed not to provide written notice
to the Company with respect to the occurrence of either of such Events of
Default provided that the Company has made such interest payment to the holders
of the November 2007 Debentures and the holders of the May 2008 Notes on or
prior to August 17, 2009, (ii) agreed that in lieu of payment of the $660,000 in
cash interest with respect to the Pope Notes that was due and payable to Pope on
May 30, 2009, that the Company shall issue to Pope on or prior to August 17,
2009, 82,500 shares (the “Shares”) of its Common Stock (such payment shall be
referred to herein as the “Special Interest Payment”), and (iii) waived each and
every applicable provision of the 2007 Purchase Agreement, the 2008 Securities
Purchase Agreement (including, without limitation Section 4.17 (Right of First
Refusal) and 4.21(c) (Additional Negative Covenants of the Company)), the
November 2007 Debentures and the May 2008 Notes, each to the extent necessary in
order to permit the Company to make the Special Interest Payment.
 
 The
Company subsequently satisfied its interest payment obligations to the investors
and the 82,500 shares of Special Interest Payment were issued on August 10,
2009.
 
 In
September 2009, the Company issued 62,500 shares of its common stock in
connection with the conversion of $500,000 of May 2008 Convertible
Debentures.
   
 F-38