UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K




(Mark
One)




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





For the
fiscal year ended:June 30,
2010





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





For the
transition period from _____ to _____





Commission
file number: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.)





25 Haihe Road, Laiyang
Economic Development Zone,


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 Act:


None





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


Common Stock, $0.001 Par
Value





Name of
each exchange on which registered: NASDAQ Global Market





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 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 Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
report), and (2) has been subject to such filing requirements for the past 90
days. YesxNo  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈ No  ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K(§
229.405)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
       ̈
            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, 2009 as reported on the OTC Bulletin
Board was approximately $69.3 million (6,298,038 shares at $11). Approximately
4,872,000 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,
2010 was 12,639,302.











TABLE
OF CONTENTS





PART
      IItem
      1.
                  Description
      of Business
                  3Item
      1A
                  Risk
      Factors
                  16Item
      2.
                  Description
      of Property
                  34Item
      3.
                  Legal
      Proceedings
                  34PART
      IIItem
      4.
                  Market
      for Common Equity , Related Stockholder Matters and Issuer Purchases of
      Equity Securities
                  35Item
      5.
                  Selected
      Financial Data
                  37Item
      6.
                  Management's
      Discussion and Analysis or Plan of Operation
                  37Item
      7.
                  Financial
      Statement and Supplementary Data
                  53Item
      8.
                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  53Item 8A(T).
                  Controls
      and Procedures
                  53Item
      8B
                  Other
      Information
                  56PART
      IIIItem
      9. Directors, Executive Officers, Promoters and Control Persons;
      Compliance with Section 16(a) of the Exchange Act
                  56Item
      10. Executive Compensation
                  61Item
      11. Security Ownership of Certain Beneficial Owners and Management and
      Related Shareholder Matters
                  64Item
      12. Certain Relationships and Related Transactions, and Director
      Independence
                  67Item
      13. Principal Accountant Fees and Services
                  69PART
      IVItem
      14. Exhibits and Financial Statement Schedules
                  69SIGNATURES
                  72EXHIBIT
      INDEXFINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA




2




CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION





Certain
statements in this annual report on Form 10-K 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.





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.




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. Our common stock commenced
trading on The Nasdaq Global Market under the symbol “JGBO” on June 8,
2010.





3




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”):





4




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.




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 , mixture,
pillselectuary and oral solution for both Western medical drugs and Chinese
herbal-based medical drugs. Approximately 33.3% of its current products are
Chinese herbal-based drugs and 66.7% are Western medical
drugs.  Laiyang Jiangbo has several certificates of Good Manufacturing
Practices for Pharmaceutical Products (“GMP”) issued by the Shandong State Drug
Administration (“SDA”) and currently produces thirteen types of
drugs.





Laiyang
Jiangbo’s top four products in fiscal year 2010 include Clarithromycin
sustained-release tablets, Itopride Hydrochloride granules, Baobaole Chewable
tablets and Radix Isatidis Disperable tablets and they accounted for
approximately 99.6% of the Company’s total revenue in fiscal year
2010.





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, is
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 RMB271.5
million (US $39.98 million) with gross margin over 67.7% in fiscal year
2010, 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 year 2008. The
Company anticipates the product will stay in the maturity period through fiscal
year 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 10-12% 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, is a stomach and
intestinal drug for curing digestive system-related diseases. The Company’s
sales for this drug reached RMB 170.3 million (US $25.0 million) with gross
margin over 82.3% in the fiscal year 2010, and the Company has approximately
8-10% 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, is 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 2010. 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.





Paracetamol
tablets





Paracetamol
tablets, Chinese Drug Approval Number H37022733, is a nonprescription
anti-inflammatory  and analgesic drug, mainly used for relief of
fever, headache, and joint pain. The Company’s sale for this drug was less than
1% of the total revenue in the fiscal year 2010. 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.





7




Felodipine
Sustained Release Tablets





Felodipine
Sustain Release Tablets, Chinese Drug Approval Number YBH01622010, is a
prescription Dihydropyridine calcium channel antagonist and used to treat
hypertension and patient with angina. It provides extended release of
Felodipine.  There are six manufactures in China currently approved to
manufacture the drug. The Company recently received FDA approval on this product
in August 2010 and started manufacturing the product in September
2010.





The
Company anticipates generating $8 million to $12 million USD in revenue from
this product in the first twelve months of launching and continuing annual
growth rate at 10-15% through fiscal year 2013. The drug is expected to enter
into its maturity in fiscal year 2014 and approaching its declining period by
late fiscal year 2015. The Company plans to selectively work with large scale
independent distributors to promote and market this drug throughout China and
strengthen the product and brand-name recognition among local hospitals and
doctors.




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 127.4
million (US$18.7 million) with gross margin over 80.9% in the fiscal year 2010.
The product quickly went through its growth period in fiscal year 2008 and 2009
and entered into its declining period in the fiscal year 2010. The Company
expects the sales for this product may experience up to 12-15% 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 intends to strengthen its sales effort for this product and focus
on reducing the product’s declining sales.





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 92.0 million (US$13.5 million) with gross margin
over 73.6% in 2010.




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 product has quickly entered into its
maturity in fiscal year 2010 and the Company anticipates the product sales will
maintain at its current level with approximately 2-5% decline through the fiscal
year 2013. 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




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 Company
plans 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 obtained this product through the
acquisition of Shandong Hongrui Pharmaceutical Factory (“Hongrui”) completed in
February 2009. Due to the full revamped construction work on Hongrui started in
December 2009, the Company had minimal sales generated from this product in
fiscal year 2010. As the Company expects to have Hongrui restart its production
in October 2010 and the product will start generating revenue accordingly.
Laiyang Pear Cough Syrup is a generic drug and faces strong market competition,
the Company anticipates the annual revenue from this product to be insignificant
to the total revenue.





Kang
Gu Sui Yan Pian





Kang Gu
Sui Yan Pian (osteomyelitis treatment tablets) is used to treat bone and bone
marrow inflammations.  It is 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
Company obtained this product through the acquisition of Shandong Hongrui
Pharmaceutical Factory (“Hongrui”) completed in February 2009. Due to the full
revamped construction work on Hongrui started in December 2009, the Company had
minimal sales generated from this product in fiscal year 2010. The Company
expects to have Hongrui restart its production in October 2010 and the product
is expected to start generating revenue accordingly.





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 obtained this
product through the acquisition of Shandong Hongrui Pharmaceutical Factory
(“Hongrui”) completed in February 2009. Due to the full revamped construction
work on Hongrui started in December 2009, the Company had minimal sales
generated from this product in fiscal year 2010. The Company expects to have
Hongrui restart its production in October 2010 and the product is expected to
start generating revenue accordingly. Gan Mao Zhi Ke Ke Li is a generic drug and
faces strong market competition, the Company anticipates the annual revenue
generate from this product to be insignificant to the total
revenue.





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 obtained this product through the
acquisition of Shandong Hongrui Pharmaceutical Factory (“Hongrui”) completed in
February 2009. Due to the full revamped construction work on Hongrui started in
December 2009, the Company had minimal sales generated from this product in
fiscal year 2010. The Company expects to have Hongrui restart its production in
October 2010 and the product is expected to start generating revenue
accordingly. Yi Mu Cao Gao is a generic drug and faces strong market
competition, the Company anticipates the annual revenue generate from this
product to be insignificant to the total revenue.





9




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 obtained this product through
the acquisition of Shandong Hongrui Pharmaceutical Factory (“Hongrui”) completed
in February 2009. Due to the full revamped construction work on Hongrui started
in December 2009, the Company had minimal sales generated from this product in
fiscal year 2010. The Company expects to have Hongrui restart its production in
October 2010 and the product is expected to start generating revenue
accordingly. Ban Lan Gen Ke Li is a generic drug and faces strong market
competition, the Company anticipates the annual revenue generate from this
product to be insignificant to the total revenue.





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 obtained this product through the
acquisition of Shandong Hongrui Pharmaceutical Factory (“Hongrui”) completed in
February 2009. Due to the full revamped construction work on Hongrui started in
December 2009, the Company had minimal sales generated from this product in
fiscal year 2010. The Company expects to have Hongrui restart its production in
October 2010 and the product is expected to start generating revenue
accordingly. Gan Mao Zhi Ke Tang Jiang is a generic drug and faces strong market
competition. The Company anticipates the annual revenue generate from this
product to be insignificant to the total revenue.





New
Compound Foliumisatidis Tablets





New
Compound Foliumisatidis Tablet addresses influenza symptoms and includes both
western chemical ingredients and traditional Chinese herbs. This is a well known
generic drug for Chinese family. The Company obtained this product through the
acquisition of Shandong Hongrui Pharmaceutical Factory (“Hongrui”) completed in
February 2009. Due to the full revamped construction work on Hongrui started in
December 2009, the Company had minimal sales generated from this product in
fiscal year 2010. As the market competition for this product has became severe
and the gross margin has been reduced in the past few years, the Company has
decided to postpone the production on this product until the market condition
changes.





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, 2010, Laiyang Jiangbo spent approximately US$4.4
million or approximately 4.5% of its fiscal year 2010 revenue on research and
development of products. For the fiscal year ended June 30, 2009, Laiyang
Jiangbo spent approximately US$4.4 million or approximately 3.7% of its fiscal
year 2009 revenue on research and development of various pharmaceutical
products.





Laiyang
Jiangbo places 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 has 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





10




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
US$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
US$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.




Laiyang
Jiangbo also has strategic relationships with various other reputable research
and development institutes in PRC developing new drugs.  However,
except for the two CRDAs mentioned above, Laiyang Jiangbo has 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.





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 30 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;




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 and academic
      conferences.





11





CUSTOMERS





Currently,
Laiyang Jiangbo has over 1,200 terminal clients through distributors. Terminal
clients are hospitals and medical institutions which purchase large supplies of
pharmaceutical drugs as well as over the counter retail pharmacies.





For
the years ended June 30, 2010 and 2009, top two customers accounted for
approximately 20.4% and 13.3% of the Company's sales, respectively. These two
customers represented 19.2% and 16.2% of the Company’s total accounts receivable
as of June 30, 2010 and 2009, 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. With approximately one-fifth of the
world’s population and a fast-growing gross domestic
product, China presents significant potential for the pharmaceutical industry.According to the Freedonia Group, the total pharmaceutical expenditure in
China has been grown at 13.6% annually between 2005 and 2010. Such growth rate
is significantly higher as compared to the rest of the world, where growth of
the pharmaceutical industry is projected to be at a compound annual growth rate
of 5.0% to 8.0% between 2004 and 2009 according to IMS Health. According to IMS
forecasts, China will become the seventh largest pharmaceutical market in the
world in 2009 and the second largest in 2020, with a market capacity of US$220
billion.




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.  The quality and production control standards must be in
compliance with PRC’s GMP requirements .  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.





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.





13




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. 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 operating permit from the relevant provincial or local
SFDA branches. After the operating permit is obtained, the distributor must
follow the Good Supply Practice (“GSP”) requirements to establish a complete
quality assurance system included product management, personnel, equipments,
purchasing, storage and sales processes. Distributors will have to apply for
accreditation to the provincial FDA. The provincial FDA will engage experts to
conduct on-side inspection in accordance with the
standards of
pharmaceutical quality management specifications. The GSP certification will be
granted to the distributor after it passes the inspections and the GSPcertificate is valid for 5 years. Pharmaceutical distributors must obtain
Drug dealers must
obtain operating
permits and GSP certificate of drugs prior to starting the distribution.Otherwise, it is a violation of the Drug Administration Law and the
distributor will be prosecuted accordingly.





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.





Good Supply
Practice Standards. The SFDA applies 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.





14




Price
Controls. The retail prices of prescription and over-the-counter
medicines sold in China, primarily those included in the national and provincial
medical insurance catalogs and those pharmaceutical products whose production or
distribution are deemed to constitute monopolies, are subject to price controls
in the form of fixed prices or price ceilings administered by the Price Control
Office under the National Development and Reform Commission, or the NDRC, and
provincial price control authorities. 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. We have
dedicated staff responsible for thetendering workacross the
country.




Reimbursement
under the National Medical Insurance Program. As of the end of 2009,
approximately 401.7 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.





15




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 and
industrial exhaust 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 1,494 employees, including 82 administrative staff, 412
production crew, 440 full-time salespersons and 560 part-time salespersons.
Majority of our administrative staff and production crew 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
Economic Development Zone, Laiyang City, Yantai, Shandong Province, PRC
265200.




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.





16




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.





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.





17




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.





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.





18




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.





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.





19




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.





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.





20




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 99.6% of our total revenues in 2010 and 98% of
our total revenues in 2009. 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.





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.





21




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.





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.





22




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.





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.





23




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, 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.





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.





24




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.





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.





25




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.





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.





26




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.





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.





27




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.





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.





28




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.





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.





29




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 Our
Convertible Debentures and Convertible Notes





We
are currently delinquent in the payment of interest under our 6% Convertible
Debentures and our 6% Convertible Notes.





As a result of the delay in our ability
to transfer cash out of the PRC, we became delinquent in the payment of interest
on our 6% Convertible Subordinated Debentures dated November 6, 2007 (the “2007
Notes”) and our 6% Convertible Notes dated May 30, 2008 (the “2008 Notes”) in
December 2009. We have been engaged in continuing discussions with the holder of
the 2007 Notes and the holders of the 2008 Notes with respect to this payment
delinquency. In addition, we have made and are continuing to make efforts to
seek an adequate remedy to these payment delinquencies. However, to date, we
have remained unable to make these payments. As of September 27. 2010, a total
of $0.9 million in delinquent accrued interest and related penalties was owed to
the holder of the 2007 Notes and a total of $4.1 million in delinquent accrued
interest and related penalties was owed to the holders of the 2008 Notes. To
date, no acceleration notice has been received by the Company from the holder of
the 2007 Notes or the required holders of the 2008 Notes. However, there can be
no assurance that the holder of the 2007 Notes and/or the required holders of
the 2008 Notes will not deliver an acceleration notice to the Company in the
future. As of September 27, 2010, $4 million aggregate principal amount of the
2007 Notes and $14.4 million aggregate principal amount of the 2008 Notes
remained outstanding. In the event that the holder of the 2007 Notes and/or the
required holders of the 2008 Notes deliver an acceleration notice with respect
to the 2007 Notes and/or the 2008 Notes, such Notes will become immediately due
and payable and there will be a cross-default with respect to the other series
of Notes. In the event that we are unable to repay the 2007 Notes and/or the
2008 Notes, upon such an acceleration, we may be forced to seek protection under
the United States Bankruptcy Code.





We
are required to repay the 2007 Notes on or prior to November 7, 2010 and the
2008 Notes on or prior to May 30, 2011.





On November 7, 2010, we will be
required to repay the then outstanding aggregate principal amount of the 2007
Notes, together with all accrued interest and penalties.  On May 30,
2011, we will be required to repay the then outstanding aggregate principal
amount of the 2008 Notes, together with all accrued interest and
penalties.  While we believe that we will be able to timely and
successfully repay or refinance the 2007 Notes and the 2008 Notes, there can be
no assurance that we will be able to do so.In the event that
we are unableto
repay the 2007 Notes, when due, the required holders of the 2008 Notes may
deliver an acceleration notice to the Company with respect to the 2008
Notes.  In the event that we are unable to timely repay the 2007 Notes
and/or the 2008 Notes, we may be forced to seek protection under the United
States Bankruptcy Code.





30




Risks Related to an
Investment in Our  Common Stock





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.





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.





Our
common shares have historically been sporadically or "thinly-traded”, 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.





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.





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:





31




·
            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 39% of
our outstanding common shares, representing approximately 39% 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.





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.





32




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
conjunction with the issuance of the 2008 Notes, we issued Class A warrants to
purchase, collectively, up to 1,875,000 shares of our common stock, subject
to adjustment at an exercise price of $10 per share (the “2008
Warrants”). In conjunction with the issuance of the 2007 Notes, we issued,
warrants to purchase, collectively, up to 400,000 shares of our common stock at
an exercise price of $8 per share (the “2007 Warrants”). Any issuances of shares
upon any exercise of these warrants will cause dilution in the interests of our
shareholders. As of September 27, 2010, no shares of common stock had been
issued in connection with the exercise of the 2008 Warrants and the exercise of
the 2007 Warrants.





33




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





We
are  subject to reporting obligations under the U.S. securities laws.
The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted
rules requiring every public company to include a management report on such
company's internal controls over financial reporting in its annual report, which
contains management's assessment of the effectiveness of our internal controls
over financial reporting. In addition, for issuers that are not “smaller
reporting companies”, 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.  As of June 30, 2010, we
were a smaller reporting company.  However, our status may change in
the future.  In any case, our management may conclude that our
internal controls over our financial reporting are not effective. Moreover, in
the event that our status changes from that of a smaller reporting company and
we are required to provide an auditor attestation report, 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
incur increased costs as a result of being a public company.





As a
public company, we 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 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
2. DESCRIPTION OF PROPERTY





Our
principal executive offices are located at 25 Haihe Road, Laiyang Economic
Development Zone,  Laiyang City, Yantai, Shandong Province, PRC
265200. We have developed two manufacturing complexes with approximately 24,000
square meters of production facilities, office, and garage space. Our total
building area is approximately 15,000 square meters, our production workshop
area is more than 6,000 square meters and our warehouses area is approximately
3,000 square meters. Those properties are built on two  lots totaling
78,706 square meters owned by us. Additionally, we also own 50 years of land use
right for two lots located in Laiyang City through Laiyang Jiangbo with a total
area of 652,544 square meters.





In
October  2009, we acquired a land used right with additional 385,880
square meters from Laiyang Bureau of Land and Resources. The property is located
in Laiyang Economic Development Zone, Laiyang City, Yantai, Shandong Province in
China.





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, 2010.





The
following summarizes the Company’s pending legal proceedings as of June 30,
2010:





China West II, LLC and
Genesis Technology Group, Inc., n/k/a Jiangbo Pharmaceuticals, Inc.
(Arbitration)





In April
2010, China West II, LLC (“CW II”) filed a Demand For Arbitration with the
American Arbitration Association the case ofCW II and Genesis
Technology Group, Inc. n/k/a Jiangbo Pharmaceuticals, Inc. In that
matter, CW II seeks repayment and interest of a $142,500 promissory note dated
August 3, 2007 made by Genesis Equity Partners II LLC (“GEP”), a subsidiary of
the Company prior to the October 2007 reverse merger, and guaranteed by the
Company. The Company believes the promissory note has been paid in full by
members of GEP and CWII’s demand is without merit and plans to vigorously defend
its position. As of the date of these consolidated financial statements, the
Company is unable to estimate a loss, if any, the Company may incur related
expenses to this lawsuit.





34




PART II





Item 4. MARKET FOR COMMON EQUITY, RELATED
SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES





Market
Information





Our
common stock has been traded on the Nasdaq Global Market under the symbol “
JGBO” since June 8, 2010. The following table sets forth the price representing
the range of high and low closing sale prices for our common stock as reported
during the fiscal years ended June 30, 2009 and 2010.




LOW
                          
                          
                          HIGH2010Quarter
      ended September 30, 2010*
                          
                          $
                          7.40
                          
                          
                          $
                          10.98Quarter
      ended June 30, 2010
                          
                          $
                          7.00
                          
                          
                          $
                          11.10Quarter
      ended March 31, 2010
                          
                          $
                          7.75
                          
                          
                          $
                          14.09Quarter
      ended December 31, 2009
                          
                          $
                          9.62
                          
                          
                          $
                          14.14Quarter
      ended September 30, 2009
                          
                          $
                          9.50
                          
                          
                          $
                          14.252009Quarter
      ended June 30, 2010
                          
                          $
                          3.75
                          
                          
                          $
                          13.75Quarter
      ended March 31, 2010
                          
                          $
                          8.5
                          
                          
                          $
                          14.14Quarter
      ended December 31, 2009
                          
                          $
                          10.01
                          
                          
                          $
                          12.8Quarter
      ended September 30, 2009
                          
                          $
                          9.8
                          
                          
                          $
                          12.25





* Through
September 24, 2010.





As of
September 24, 2010, the closing sales price for shares of our common stock was
$8.35 per share on the Nasdaq Global Market.





Holders





As of
September 24, 2010, there were 955 registered shareholders of record of our
common stock based upon the shareholders’ listing provided by our transfer
agent.  Such number of record owners was determined from our
shareholder records and does not include beneficial owners whose shares are held
in nominee accounts with brokers, dealers, banks and clearing agencies. Our
transfer agent is Computershare Trust Company, 350 Indiana Street, Suite #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."





35




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.





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
2009, the Company issued 1,009 shares of common stock to a director of the
Company 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. For the year ended
June 30, 2010, the Company recorded stock based compensation of $10,000
accordingly.





In August
2009, the Company issued 82,500 shares of its common stock, in lieu of a cash
interest payment of $660,000, to Pope Investments LLC (“Pope”) in payment
of the interest  on the Company’s  6% Convertible
Subordinated Debentures  issued in November 2007 and the Company’s 6%
Convertible Notes issued in  May 2008 ( the “May 2008 Notes”) held by
Pope that was due on May 30, 2009.





In
September 2009, the Company issued 62,500 shares of its common stock to a holder
of its May 2008 Notes in connection with the conversion, of $500,000 aggregate
principal amount  of May 2008 Notes pursuant to the terms thereof by
the holder.





In
October 2009, the Company issued 462,500 shares of its common stock to certain
holders of its 2008 Notes in connection with the conversion of $3,700,000
aggregate principal amount of such Notes pursuant to the terms thereof by such
holders.





In
November 2009, the Company issued 62,500 shares of its common stock in
connection with the conversion of $500,000 of convertible debt.





In
December 2009, the Company issued 62,500 shares of its common stock in
connection with the conversion of $500,000 of convertible debt.





In
January 2010, the Company issued 301,250 shares of its common stock in
connection with the conversions of $2,410,000 of convertible debt. In connection
with one of the conversions, the Company issued 577 shares of its common stock
for the final interest payment.





In March
2010, the Company issued 1,143 shares of common stock to a Company’s current
director, Mr. John Wang as part of his compensation for services and 2,286
shares of common stock to a Company’s officer, Ms. Elsa Sung to pay off
part of her accrued compensation.





In April
2010, the Company issued 43,750 shares of its common stock in connection with
the conversion of $350,000 of convertible debt.





In June
2010, the Company issued 125,000 shares of its common stock in connection with
the conversion of $1,000,000 of convertible debt.





In June
2010, the Company issued 25,000 shares of common stock to a Company’s Chairman
and then Chief Executive Officer as his compensation for annual
bonus.





36




In June
2010, the Company’s Board approved to issue 33,250 shares of common stock to
several of the Company’s directors and officers as their compensation for
services and bonus pending on shareholders’ vote to approve an S-8 plan for
employee incentive stock option plan.





Issuer
Purchases of Equity Securities.





None.





ITEM
5. 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.





ITEM
6. 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, 2010, 2009 and 2008, 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 2010" means our fiscal year ended June 30, 2010 and "fiscal 2009" means
our fiscal year ended June 30, 2009.





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.





37




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.





FINANCIAL
PERFORMANCE HIGHLIGHTS:





Net
Revenues





2010
                  
                  
                  2009
                  
                  
                  2008Net
      Revenues (in '000)
                  
                  $
                  97,444
                  
                  
                  $
                  117,388
                  
                  
                  $
                  99,547%
      change year over year
                  
                  
                  (17.0)
                  %
                  
                  
                  17.9
                  %
                  
                  
                  30.7
                  %





Net
revenues for fiscal 2010 of $97.4 million reflected a decrease of 17.0%
over fiscal 2009 net revenues of $117.4 million. Our net revenues experienced
17.9% growth from fiscal 2008, $ 99.5 million, to fiscal 2009, $ 117.4
million.





Gross
margin




2010
                  
                  
                  2009
                  
                  
                  2008Cost
      of Goods Sold (in '000)
                  
                  $
                  26,097
                  
                  
                  $
                  27,909
                  
                  
                  $
                  22,507Gross
      Margin
                  
                  
                  73.2
                  %
                  
                  
                  76.2
                  %
                  
                  
                  77.4
                  %





Gross
margin decreased to 73.2% in 2010 compared with 76.2% in 2009 and 77.4% in 2008.
This was primarily due to we reduced the per unit sales price as part of the
effort to restructure our distribution and sales system in January
2009.




SG&A




2010
                  
                  
                  2009
                  
                  
                  2008SG&A
      (in ‘000)
                  
                  $
                  18,732
                  
                  
                  $
                  35,316
                  
                  
                  $
                  41,593Percentage
      of Sales
                  
                  
                  19.2
                  %
                  
                  
                  30.1
                  %
                  
                  
                  41.8
                  %





SG&A
as a percentage of sales decreased to 19.2% in 2010 from 30.1% in 2009 and 41.8%
in 2008, as a result of the restructuring our distribution and sales system to
sell our products primarily through 26 large independent regional distributors
and significantly reducing the commission paid to our sales representatives on
those products.




Net
income




2010
                  
                  
                  2009
                  
                  
                  2008Net
      income (in '000)
                  
                  $
                  29,850
                  
                  
                  $
                  28,880
                  
                  
                  $
                  22,451net
      margin
                  
                  
                  30.6
                  %
                  
                  
                  24.6
                  %
                  
                  
                  22.6
                  %





Net
margin increased to 30.6% in 2010 from 24.6% in 2009 and 22.6% in 2008,
primarily due to lower SG&A as a percentage of sales and gain in change
in fair value of derivative liabilities and partially offset by significant
increase in interest expense and amortization on debt discount in
2009.





38




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,
                        
                        
                        % of2010
                        
                        
                        Revenue
                        
                        
                        2009
                        
                        
                        Revenue
                        
                        
                        2008
                        
                        
                        RevenueREVENUES
                        
                        
                        97,444
                        
                        
                        
                        100.00
                        %
                        
                        
                        117,144
                        
                        
                        
                        99.79
                        %
                        
                        
                        93,982
                        
                        
                        
                        94.41
                        %REVENUES
      - RELATED PARTY
                        
                        
                        -
                        
                        
                        
                        -
                        %
                        
                        
                        244
                        
                        
                        
                        0.21
                        %
                        
                        
                        5,564
                        
                        
                        
                        5.59
                        %COST
      OF REVENUES
                        
                        
                        26,097
                        
                        
                        
                        26.8
                        %
                        
                        
                        27,855
                        
                        
                        
                        23.73
                        %
                        
                        
                        21,073
                        
                        
                        
                        21.17
                        %COST
      OF REVENUES-RELATED PARTIES
                        
                        
                        -
                        
                        
                        
                        -
                        %
                        
                        
                        54
                        
                        
                        
                        0.05
                        %
                        
                        
                        1,434
                        
                        
                        
                        1.44
                        %GROSS
      PROFIT
                        
                        
                        71,347
                        
                        
                        
                        73.2
                        %
                        
                        
                        89,479
                        
                        
                        
                        76.22
                        %
                        
                        
                        77,040
                        
                        
                        
                        77.39
                        %SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                        
                        
                        18,732
                        
                        
                        
                        19.2
                        %
                        
                        
                        35,315
                        
                        
                        
                        30.08
                        %
                        
                        
                        41,593
                        
                        
                        
                        41.78
                        %RESEARCH
      AND DEVELOPMENT
                        
                        
                        4,400
                        
                        
                        
                        4.5
                        %
                        
                        
                        4,395
                        
                        
                        
                        3.74
                        %
                        
                        
                        3,236
                        
                        
                        
                        3.25
                        %INCOME
      FROM OPERATIONS
                        
                        
                        48,215
                        
                        
                        
                        49.5
                        %
                        
                        
                        49,769
                        
                        
                        
                        42.40
                        %
                        
                        
                        32,211
                        
                        
                        
                        32.36
                        %OTHER
      EXPENSES(INCOME)
                        
                        
                        5,468
                        
                        
                        
                        5.6
                        %
                        
                        
                        8,108
                        
                        
                        
                        6.91
                        %
                        
                        
                        2,789
                        
                        
                        
                        2.80
                        %INCOME
      BEFORE PROVISION FOR INCOME TAXES
                        
                        
                        42,747
                        
                        
                        
                        43.9
                        %
                        
                        
                        41,660
                        
                        
                        
                        35.49
                        %
                        
                        
                        29,422
                        
                        
                        
                        29.56
                        %PROVISION
      FOR INCOME TAXES
                        
                        
                        12,896
                        
                        
                        
                        13.2
                        %
                        
                        
                        12,780
                        
                        
                        
                        10.89
                        %
                        
                        
                        6,971
                        
                        
                        
                        7.00
                        %NET
      INCOME
                        
                        
                        29,850
                        
                        
                        
                        30.6
                        %
                        
                        
                        28,880
                        
                        
                        
                        24.60
                        %
                        
                        
                        22,451
                        
                        
                        
                        22.56
                        %OTHER
      COMPREHENSIVE INCOME (LOSS)
                        
                        
                        1,093
                        
                        
                        
                        (1.1
                        )%
                        
                        
                        (1,177)
                        
                        
                        
                        (1.00)
                        %
                        
                        
                        6,554
                        
                        
                        
                        6.58
                        %COMPREHENSIVE
      INCOME
                        
                        $
                        30,944
                        
                        
                        
                        31.8
                        %
                        
                        $
                        27,703
                        
                        
                        
                        23.60
                        %
                        
                        $
                        29,005
                        
                        
                        
                        29.14
                        %




39




Comparison
of Years Ended June 30, 2010 and 2009





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





Year Ended June 30,
                
                
                Increase/
                
                
                Increase/Product
                
                2010
                
                
                2009
                
                
                (Decrease)
                
                
                (Decrease)Western
      pharmaceutical medicines
                
                $
                65,005
                
                
                $
                75,814
                
                
                $
                (10,809
                )
                
                
                (14.3
                )%Chinese
      traditional medicines
                
                
                32,439
                
                
                
                41,574
                
                
                
                (9,135
                )
                
                
                (22.0
                )%TOTAL
                
                $
                97,444
                
                
                $
                117,388
                
                
                $
                (19,944
                )
                
                
                (17.0
                )%





During
the year ended June 30, 2010, we had revenues from sales of $97.4 million as
compared to revenues from sales of $117.4 million for the year ended June 30,
2009, a decrease of $19.9 million or approximately 17.0%. During the year ended
June 30, 2010, we did not have any revenues from sales to related parties as
compared to revenues from sales to related parties of $0.2 million for the year
ended June 30, 2009. The decrease in total revenue was primarily attributable to
our distribution and sales system restructure in January 2009.  As
part of the effort to restructure our distribution and sales system to sell our
products primarily through 28 large distributors starting in January 2009, we
reduced the per unit sales price by an average of 25.6% 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%. Additionally, the units sold for Itopride
Hydrochloride granules and Baobaole chewable tables also decreased by 15.2% and
28.6%, respectively. The decrease was partially offset by the increases in units
sold of Clarithromycin Sustained release tablets by approximately 14.1% and
Chinese traditional medicine Radix Isatidis Disperable Tablets by approximately
62.2% ( commercially launched in October 2008).





Although
several of our major products have entered into their maturity, we believe we
will be able to continue to maintain our sales at its current level. In
September 2010, we have commercially launched our newly approved product
Felodipine Sustained Release Tablets and we expect the product to be quickly
accepted by the market. Additionally, we expect to have our Hongrui facility
renovation work fully completed and GMP certified by October 2010 and relaunched
several of the traditional Chinese medicines acquired from Hongrui. The recent
Healthcare Reform program announced by the Chinese government will also have a
real and significant impact on all healthcare related industries in China,
including the pharmaceutical industry.




COST OF REVENUES. Cost of
revenues by product categories were as follows: ($ in thousands)





Year Ended June 30,
                
                
                Increase/
                
                
                Increase/Product
                
                2010
                
                
                2009
                
                
                (Decrease)
                
                
                (Decrease)Western
      pharmaceutical medicines
                
                $
                18,416
                
                
                $
                19,426
                
                
                $
                (1,010
                )
                
                
                (5.2
                )%Chinese
      traditional medicines
                
                
                7,681
                
                
                
                8,483
                
                
                
                (802
                )
                
                
                (9.5
                )%TOTAL
                
                $
                26,097
                
                
                $
                27,909
                
                
                $
                (1,812
                )
                
                
                (6.5
                )%





Our cost
of revenues for the year ended June 30, 2010 was 26.1 million. For the year
ended June 30, 2009, cost of sales and cost of sales to related parties amounted
to $27.9 million and $0.1 million, respectively. Total cost of sales for 2010
decreased $1.8 million or 6.5%, from $27.9 million for the year ended June 30,
2009 to $26.1 million for the year ended June 30, 2010. Cost of sales as a
percentage of net revenue for the year ended June 30, 2010 is approximately
26.8%, compared to the year ended June 30, 2009 at approximately 23.8%. The
decrease in cost of sales as a percentage of net revenue in fiscal 2010 was
primarily attributable to the reduction in the per unit sales price due to our
distribution and sales system restructuring effort in January 2010 and decrease
in sales volume generated from higher margin products Itopride Hydrochloride
granules and Baobaole chewable tablets mentioned above.





40




GROSS PROFIT. Gross profit
was $71.3 million for the year ended June 30, 2010 as compared to $89.5 million
for the year ended June 30, 2009, representing gross margins of approximately
73.2% and 76.2%, respectively. The decrease in the gross profit in fiscal 2010
was primarily due to the lower unit price charged as a result of sales net work
restructure and decrease in sales volume generated from higher margin products
Itopride Hydrochloride granules and Baobaole chewable tablets mentioned
above.





SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES. Selling, general and administrative expenses totaled $18.8
million for the year ended June 30, 2010, as compared to $35.3 million for the
year ended June 30, 2009, a decrease of approximately 46.8% as summarized below
($ in thousands):





Years Ended June 30,2010
                  
                  
                  2009Shipping
      and handling
                  
                  $
                  575
                  
                  
                  $
                  576Advertisement,
      marketing and promotion spending
                  
                  
                  5,566
                  
                  
                  
                  7,573Travel
      and entertainment- sales related
                  
                  
                  571
                  
                  
                  
                  1,571Depreciation
      and amortization
                  
                  
                  1,911
                  
                  
                  
                  1,068Salaries,
      commissions, wages and related benefits
                  
                  
                  8,171
                  
                  
                  
                  22,229Travel
      and entertainment- non sales related
                  
                  
                  178
                  
                  
                  
                  274Other
                  
                  
                  1,760
                  
                  
                  
                  2,024Total
                  
                  $
                  18,732
                  
                  
                  $
                  35,315





The
changes in these expenses during the year ended June 30, 2010, as compared to
the corresponding period in 2009 included the following:




·
            Shipping and handling expenses
      remained materially consistent in the year ended June 30, 2010 as compared
      to the corresponding period of fiscal
  2009.





·
            A decrease of $2.0 million or
      approximately 26.5% in advertising, marketing and promotional spending for
      the year ended June 30, 2010 was primarily due to less marketing and
      promotional spending and better managed advertising and promotional costs
      in fiscal year 2010.





·
            Travel and entertainment -sales
      related expenses decreased by $1.0 million or approximately 63.7% for the
      year ended June 30, 2010 as compared to the corresponding period in fiscal
      2009; as a result of the distribution system restricting, we rely more on
      the distributors to work with us to promote our products and the traveling
      and entertainment activities incurred by our sales representatives
      decreased accordingly.





·
            Depreciation and amortization
      increased by $0.8 million or 78.9% for the year ended June 30, 2010 as
      compared to the corresponding period of fiscal 2009, primarily due to
      intangible assets acquired through Hongrui acquisition in February 2009
      started being amortized since
then.





·
            Salaries, wages, commissions and
      related benefits decreased by $14.1 million or 63.2% for the year ended
      June 30, 2010 as compared to the corresponding period of fiscal 2009. 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; we reduced the commission
      paid to our sales representatives on these top three selling products by
      80-83%.





·
            The travel and entertainment -non
      sales related expenses for the year ended June 30, 2010 decreased by $0.1
      million or 35.0% for the year ended June 30, 2010  as compared
      to the corresponding period of fiscal 2009 primarily de to better expense
      spending controls in fiscal
2010.





41





·
            Other selling, general and
      administrative expenses, which includes professional fees, utilities,
      office supplies and expenses decreased by $0.3 million or 13.0% for the
      year ended June 30, 2010 as compared to the corresponding period in fiscal
      2009 primarily due to less legal fees
  spending.





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, 2010,
consistent with the $4.4 million for the year ended June 30, 2009.





OTHER EXPENSES. Our other
expenses consisted of financial expense, change in fair value of derivative
liabilities, gain/loss on trading securities, loss from discontinued operations,
other non-operating expenses. We had net other expense of $5.5 million for the
year ended June 30, 2010 as compared to net other expense of $8.1 million for
the year ended June 30, 2009, a decrease of 2.6 million or 32.6%. The decrease
in net other expenses was primarily attributable to the gain in change of fair
value of derivative liabilities of $14.6 million and partially offset by the
interest expense, interest penalty, debt discount amortization expense and
financing cost amortization related to our financing in November 2007 and May
200 of $19.8 million.





NET INCOME. Our net income
for the year ended June 30, 2010 was $29.8 million as compared to $28.9 million
for the year ended June 30, 2009, an increase of $0.9 million or 3.4%. The
increase in net income is primarily attributable to decrease in other expenses
in fiscal year 2010.





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
                
                
                $
                (10,587
                )
                
                
                (12.24
                )%Chinese
      traditional medicines
                
                
                41,574
                
                
                
                13,145
                
                
                
                28,429
                
                
                
                216.27
                %Total
                
                $
                117,388
                
                
                $
                99,546
                
                
                $
                17,842
                
                
                
                17.92
                %





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.





42




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
                    
                    
                    7,573
                    
                    
                    
                    13,695Travel
      and entertainment- sales related
                    
                    
                    1,571
                    
                    
                    
                    982Depreciation
      and amortization
                    
                    
                    1,068
                    
                    
                    
                    458Salaries,
      commissions, wages and related benefits
                    
                    
                    22,229
                    
                    
                    
                    24,614Travel
      and entertainment- non sales related
                    
                    
                    274
                    
                    
                    
                    325Other
                    
                    
                    2,024
                    
                    
                    
                    1,154Total
                    
                    $
                    35,315
                    
                    
                    $
                    41,593





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.





43




·
            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.





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 $28.9 million 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.





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 2010 and 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
      convertible notes (the “2007 Notes”). 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.





·
            In
      May 2008, we raised $30,000,000 in gross proceeds through the sale of
      convertible notes (the “2008 Notes”). 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.





44




As a
result of the delay in our ability to transfer cash out of the PRC, we became
delinquent in the payment of interest on the 2007 Notes and the 2008
Notes  in December 2009.  We have been engaged in continuing
discussions with the holder of the 2007 Notes and the holders of the 2008 Notes
with respect to this payment delinquency.  In addition, we have made
and are continuing to make efforts to seek an adequate remedy to these payment
delinquencies.  However, to date, we have remained unable to make
these payments.  As of September 27, 2010, a total of $0.9 million in
delinquent accrued interest and related penalties  was owed to the
holder of the 2007 Notes and a total of $4.1 million in delinquent accrued
interest and related penalties was owed to the holders of the 2008
Notes.  To date, no acceleration notice has been received by the
Company from the holder of the 2007 Notes or the required holders of the 2008
Notes.  On November 7, 2010, we will be required to repay the then
outstanding aggregate principal amount of the 2007 Notes, together with all
accrued interest and penalties.  On May 30, 2011, we will be required
to repay the then outstanding aggregate principal amount of the 2008 Notes,
together with all accrued interest and penalties.





Cash
Flows





2010 Compared to
2009





As of
June 30, 2010, the company has cash and cash equivalents of approximately $108.6
million, which represents 53.6% of total assets as compared to approximately
$104.4 million in the same period for fiscal 2009, which represented 61.8% of
the total assets,  an increase of $4.3 million.





Net cash
flow provided by operating activities was $20.3 million in fiscal 2010, compared
with $62.9 million in fiscal 2009, a decrease of $42.7 million. The 2010
cash provided by operating activities was primarily due to the followings: 1)
decrease in our inventories amount of $1.1 million 2) increase in accrued
liabilities of $4.2 million 3) increase in other payables of $1.7 million 4)
add-back of depreciation and amortization expenses of $2.4 million 5) add-back
of amortization of debt issuance costs and amortization of debt discount of
$15.6 million partially offset by the gain in change of fair value of derivative
liabilities of $14.6 million, increase in accounts receivable of $14.5 million,
decrease of accounts payable of $2.1 million, and decrease in taxes payable of
$5.0 million.





Net cash
flow used in investing activities was $16.6 million in fiscal 2010 and $8.3
million in fiscal 2009, an $8.3 million increase. The primarily uses of cash
flow for investing activities in 2010 was a purchase of a land use right of
$17.0 million and partially offset by the proceeds from sales of investments of
$0.5 million.





Net cash
flow provided by financing activities was $0 in fiscal 2010 and while net cash
flow provided by financing activities was $1.4 million in fiscal 2009. The
decrease of net cash flow provided by financing activities was mainly due
to the increase in change in restricted cash and partially offset by the net
proceeds from notes payable.





We
reported a net increase in cash for the year ended June 30, 2010 of $4.3 million
as compared to a net increase in cash of $56.2 million for the year ended June
30, 2009.





Our
working capital position decreased by $11.3 million to $88.5 million at June 30,
2010 from $99.8 million at June 30, 2009. This decrease in working capital
is primarily attributable to the reclassification of convertible debt of $12.2
million from long term liabilities to short term liabilities, additional
derivative liabilities associated with the convertible debentures of $18.5
million, increase in accrued liabilities of $3.5 million, increase in notes
payable of $3.8 million, increase in other payable of $1.7 million and decrease
in inventories of $1.1 million  in fiscal year 2010 and partially
offset by the increase in accounts receivable of $14.0 million, increase in cash
of $4.3 million, increase in restricted cash of $3.8 million, decrease in
accounts payable of $2.0 million, decrease in liabilities assumed from
reorganization of $1 million and decrease in taxes payable of $5.0
million.





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.





45




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.





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, 2010, 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, 2010, and
the effect these obligations are expected to have on our liquidity and cash
flows in future periods.





46




Payments Due by PeriodTotal
                      
                      
                      Less than 1
                        year
                      
                      
                      1-3 Years
                      
                      
                      3-5 Years
                      
                      
                      5 Years +Contractual
      Obligations:Lease
      commitment
                      
                      
                      44,190
                      
                      
                      
                      44,190Convertible
      Debenture, Related Interest and Penalty
                      
                      $
                      30,559,787
                      
                      
                      $
                      30,559,787
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Bank
      Indebtedness and Related Interest
                      
                      $
                      2,277,553
                      
                      
                      $
                      2,277,553
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Research
      and Development Contract Obligations
                      
                      $
                      3,368,333
                      
                      
                      $
                      2,116,283
                      
                      
                      $
                      1,252,050
                      
                      
                      $
                      -
                      
                      
                      $
                      -Total
      Contractual Obligations:
                      
                      $
                      36,249,863
                      
                      
                      $
                      34,997,813
                      
                      
                      $
                      1,252,050
                      
                      
                      $
                      -
                      
                      
                      $
                      -





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, 2010, we had approximately $108.6 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 $ 1.0 million
and $0.3 million for the years ended June 30, 2010 and 2009, 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.





47




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
through December, CPI was up average 6.5% from the same month a year earlier. In
July 2010, China’s CPI again rose up 3.3$ from a year earlier. 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.





48




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, 2010. 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 2010, 2009 and 2008 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.





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.





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.





49




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





The
Company records stock-based compensation expense pursuant to the governing
accounting standard which 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 awards using the Black-Scholes option pricing
model. Under this accounting standard, 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.





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 the accounting standards
using an option-pricing model, that value may not be indicative of the fair
value observed in a willing buyer/willing seller market
transaction.





Revenue
recognition





Revenue
from product sales is generally recognized when title to the product has
transferred to customers in accordance with the terms of the sale. 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.





50




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. Therefore, 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.





Income
taxes





The
Company accounts for income taxes in accordance with the accounting standard for
income taxes. 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 this accounting
standard, 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.





The
accounting standards clarify the accounting and disclosure for uncertain tax
positions and prescribe a recognition threshold and measurement attribute for
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The accounting standards also provide guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.





Under
this accounting standard, 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.
Penalties and interest incurred related to underpayment of income tax are
classified as income tax expense in the year incurred.  No significant
penalties or interest relating to income taxes have been incurred during the
years ended June 30, 2010 and 2009.  GAAP also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosures and transition.





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.





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.





51




Laiyang
Jiangbo is 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
January 2010, FASB issued ASU No. 2010-01 Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. This ASU did not have a material impact on
its consolidated financial statements.





In
January 2010, FASB issued ASU No. 2010-02 Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity.  The amendments in this update are
effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date
the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15, 2009. The
amendments in this update should be applied retrospectively to the first period
that an entity adopted SFAS No. 160. The adoption of this ASU did not have a
material impact on the Company’s consolidated financial statements.





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





52




In
February 2010, the FASB issued Accounting Standards Update 2010-09, “Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements,” or ASU 2010-09. ASU 2010-09 primarily rescinds the requirement
that, for listed companies, financial statements clearly disclose the date
through which subsequent events have been evaluated. Subsequent events must
still be evaluated through the date of financial statement issuance; however,
the disclosure requirement has been removed to avoid conflicts with other SEC
guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted
in February 2010. The adoption of ASU 2010-09 did not have a material impact on
our consolidated financial statements.





In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. This Update provides amendments to
Topic 718 to clarify that an employee share-based payment award with an exercise
price denominated in currency of a market in which a substantial porting of the
entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. The Company does not expect the adoption of ASU 2010-17 to have a
significant impact on its consolidated financial statements.




In April
2010, the FASB issued Accounting Standard Update 20-10-17, “Revenue
Recognition—Milestone Method (Topic 605): Milestone Method of Revenue
Recognition” or ASU 2010-17. This Update provides guidance on the recognition of
revenue under the milestone method, which allows a vendor to adopt an accounting
policy to recognize all of the arrangement consideration that is contingent on
the achievement of a substantive milestone (milestone consideration) in the
period the milestone is achieved. The pronouncement is effective on a
prospective basis for milestones achieved in fiscal years and interim periods
within those years, beginning on or after June 15, 2010. The adoption of
ASU 2010-17 does not have a significant impact on its consolidated financial
statements.





ITEM
7. 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
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE





We were
notified that, effective January 1, 2010, certain partners of Moore Stephens
Wurth Frazer and Torbet, LLP (“MSWFT”) and Frost, PLLC (“Frost”) formed Frazer
Frost, LLP (“Frazer Frost”), a new partnership. Pursuant to the terms of a
combination agreement by and among MSWFT, Frazer Frost and Frost, each of MSWFT
and Frost contributed substantially all of their assets and certain of their
liabilities to Frazer Frost, resulting in Frazer Frost assuming MSWFT’s
engagement letter with us and becoming our new independent accounting
firm. Frazer Frost is currently registered with the Public Company
Accounting and Oversight Board (PCAOB).





The audit
reports of MSWFT on the financial statements of the Company as of and for the
years ended December 31, 2008 and December 31, 2007 did not contain an
adverse opinion or a disclaimer of opinion, and were not qualified or modified
as to uncertainty, audit scope or accounting principles.





ITEM
8A(T). 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.





53




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, 2010, 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, 2010.  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, 2010,
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.





54




During
majority of fiscal year ended June 30, 2010, 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.





3.  Insufficient segregation of duties
in the financial reporting process– As a result of lack of accounting
staff with adequate US GAAP expertise, the Company was unable to meet the
segregation of duties requirements in the US GAAP reporting process to ensure
proper review and approval 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 senior US GAAP
      financial reporting personnel to ensure we have adequate resources to meet
      the requirements of segregation of
  duties.





2.
            We have involved both internal
      accounting and operations personnel and a reputable outside independent
      consultants with US GAAP technical accounting expertise in the evaluation
      process and providing remediation plans for our internal controls a
      complex, non-routine transaction to obtain additional guidance as to the
      application of generally accepted accounting principles to such a proposed
      transaction. As of June 30, 2010, the internal control consultants have
      completed initial evaluation and provide remediation plans to our senior
      management. We are currently in the process of modifying and implementing
      new policies and procedures within the financial reporting
      process.





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, 2010, 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, 2010.





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, 2010.  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.





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.





55




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 2010 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
8B. OTHER INFORMATION





None.




PART III





ITEM
9. 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
                
                Position
                
                Held Office SinceJin
      Linxian (1)
                
                44
                
                Chief
      Executive Officer
                
                July
      2010Elsa
      Sung
                
                36
                
                Chief
      Financial Officer
                
                October
      2007Dong
      Lining
                
                50
                
                Vice
      President, Director of Technology
                
                October
      2007Yang
      Weidong
                
                39
                
                Vice
      President, Director of Sales
                
                October
      2007Cao
      Wubo (2)
                
                45
                
                Chairman
      of the Board
                
                October
      2007Feng
      Xiaowei(3)(4)(5)
                
                43
                
                Director
                
                October
      2007Huang
      Lei (5)
                
                27
                
                Director
                
                October
      2007Ge
      Jian (4)(5)
                
                39
                
                Director
                
                October
      2007Michael
      Marks (3)
                
                39
                
                Director
                
                July
      2008John
      (Yang) Wang(3)(4)
                
                40
                
                Director
                
                September
      2008





56




(1) Mr.
Jin was appointed as the Company’s Chief Executive Officer, effective July 1,
2010, to fill the vacancy caused as a result of resignation of Mr. Cao as the
Company Chief Executive Officer.


(2) Mr.
Cao resigned from his position as the Chief Executive Officer of the Company on
June 29, 2010. Mr. Cao still continues his role as the Chairman of the Board of
Directors of the Company.


(3)
Serves as a member of the Audit Committee.


(4)
Serves as a member of the Compensation Committee.


(5)
Serves as a member of the Nominating and Corporate Governance
Committee.




Jin Linxian has served as our
Chief Executive Officer since July 1, 2010. He served as deputy general manager
of Production Technology of Laiyang Jiangbo since April 2008. Prior to joining
in Jiangbo, Mr. Jin was a Deputy General Manager of Shandong Quancheng
Pharmaceutical Co., Ltd, from July 2006 to July 2008, and was responsible for
production and operations management, assessment and establishment of quality
assurance system, and also production registration and on-site audit
coordination and management for domestic and foreign clients. From January 2004
to June 2006, Mr. Jin was a Deputy General Manager in Jinan Yongning
Pharmaceutical Co., Ltd., a state-owned, wholly acquired by one of the national
largest private enterprise, Linuo Group. Prior to joining Jinan Yongning, he was
a Deputy General Manager at Zibo Hualong Pharmaceutical Co., Ltd, from 2000 to
2004. Between July 1990 to September 2000, Mr. Jin was the head of Quality
Inspection department, Production Manager, Marketing Manager and Plant Manager
Assistant at Shandong Zaozhuang First Pharmaceutical Factory. Mr. Jin holds a
bachelor degree with a marjor in Chemical Pharmaceutical from East China
University of Science and Technology.





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.





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.





Cao Wubohas served as our
chairman of the board since October 2007. From October 2007 to June 2010, Mr.
Cao also served as our chief executive officer. 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.





57




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.





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.





58




Director
Qualifications





We seek
directors with established strong professional reputations and experience in
areas relevant to the strategy and operations of our businesses.  We
seek directors who possess the qualities of integrity and candor, who have
strong analytical skills and who are willing to engage management and each other
in a constructive and collaborative fashion.  We also seek directors
who have the ability and commitment to devote significant time and energy to
service on the Board and its committees.  We believe that all of our
directors meet the foregoing qualifications.





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.





Based
solely on our review of such forms furnished to us and written representations
from certain reporting persons, we believe that during fiscal year June 30,
2010, Mr. Wubo Cao, Ms. Elsa Sung, Mr. Michael Marks, and Mr. John Wang did not
timely file a Form 4 and Mr. Linxian Jin did not timely file a Form
3.





Codes
of Ethics and Business Conduct.





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.





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





Meetings
and Committees of the Board of Directors





The Board
of Directors held four board meetings during the fiscal year 2010. 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.





59





Committees
of the Board of Directors





The Board
of Directors has formed an Audit Committee, Compensation Committee and
Nominating and Governance Committee.





Audit
Committee.





The Audit
Committee is comprised of Messrs. John (Yang) Wang, Feng Xiaowei and Michael
Marks. Mr. Marks is the Chairman of the Audit Committee.  The Board of
Directors has determined that each of the members of the Audit Committee is
independent as defined in Rule 5605 of the Nasdaq Marketplace Rules, and that
Mr. Marks qualifies as an ‘‘audit committee financial expert,’’ as that term is
defined in Item 407(d)(5)(ii) of Regulation S-K. The Audit Committee adopted a
written charter on July 18, 2008. The charter is available on our website, www.jiangbopharma.com.





The
committee assists the Board of Directors 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 Audit 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
2010 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 Messrs. John (Yang) Wang, Ge Jian and
Feng Xiawei, each of whom is independent as defined in Rule 5605 of the Nasdaq
Marketplace Rules. Mr. Feng Xiaowei is the Chairman of the Compensation
Committee. The board of directors adopted a written charter of the Compensation
Committee on July 18, 2008. The charter is available on our website, www.www.jiangbopharma.com.The charter sets forth responsibilities, authority and specific duties of
the Compensation Committee.





The
purpose of our compensation committee is to discharge the responsibilities of
our Board of Directors relating to compensation of our executive officers.




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; and


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





No member
of our Compensation Committee has at any time been an officer or employee of
ours or our subsidiaries. No interlocking relationship exists between our Board
of Directors or Compensation Committee and the Board of Directors or
Compensation Committee of any other company, nor has any interlocking
relationship existed in the past.


60





The
Compensation Committee held one meeting in fiscal year 2010.





Nominating
and Corporate Governance Committee.





The
Nominating and Governance Committee is comprised of Mr. Ge Jian, Ms. Huang Lei
and Mr. Feng Xiaowei each of whom is independent as defined in Rule 5605 of the
Nasdaq Marketplace Rules. Mr. Feng Xiaowei is the Chairman of the Nominating and
Governance Committee. The board of directors adopted a charter for the
Nominating and Governance Committee on February 27, 2010. The charter is
available on our website, www.www.jiangbopharma.com.





The
purpose of our Nominating and Corporate Governance Committee is to assist our
Board of Directors in identifying qualified individuals to become board members,
in determining the composition of the Board of Directors and in monitoring a
process established to assess Board of Directors effectiveness. Specific
responsibilities of our Compensation Committee include:





· Making recommendation to
the Board of Directors regarding the size and composition of the Board of
Directors, establish procedures for the nomination process and screen and
recommend candidates for election to the Board of Directors;


· Reviewing with the Board
of Directors from time to time the appropriate skills and characteristics
required of Board members.;


· Establishing and
administering a periodic assessment procedure relating to the performance of the
Board of Directors as a whole and its individual members; and


· Making recommendations to
the Board of Directors regarding corporate governance matters and practices,
including formulating and periodically reviewing corporate governance guidelines
to be adopted by the Board of Directors.





The
Compensation Committee did not hold  meetings in fiscal year
2010.





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
10. 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.


61





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, 2010. The compensation for each of our executive officers who also served as
a director during fiscal year ended June 30, 2010 is fully reflected under our
“Summary Compensation of Named Executive Officers” disclosure
below.





Director
Compensation of Non-Employee Directors


for
Fiscal Year Ended June 30, 2010





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
                
                $
                —
                
                
                
                98,100
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                98,100Huang
      Lei
                
                $
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                —Ge
      Jian
                
                $
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                —Michael
      Marks
                
                $
                35,000
                
                
                
                10,000
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                45,000John
      (Yang) Wang
                
                $
                22,500
                
                
                
                10,000
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                32,500





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, 2010, 2009 and 2008, 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,
                                                  
                                                  2010
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  368,500
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  368,500Chairman
      of the
                                                  
                                                  2009
                                                  
                                                  
                                                  $
                                                  156,000
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  156,000Board,
      formal Chief
                                                  
                                                  2008
                                                  
                                                  
                                                  $
                                                  117,000
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  117,000Executive
      Officer, andPresidentJin
      Linxiang,
                                                  
                                                  2010
                                                  (1)
                                                  
                                                  $
                                                  8,800
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  8,800Chief
      Executive Officer
                                                  
                                                  2009
                                                  (1)
                                                  
                                                  $
                                                  8,790
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  8,7902008
                                                  (1)
                                                  
                                                  $
                                                  6,276
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  6,275Elsa
      Sung,
                                                  
                                                  2010
                                                  
                                                  
                                                  $
                                                  120,000
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  65,000
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  185,000Chief
      Financial Officer
                                                  
                                                  2009
                                                  
                                                  
                                                  $
                                                  120,000
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  120,0002008
                                                  (2)
                                                  
                                                  
                                                  $67,500
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  27,000
                                                  
                                                  
                                                  
                                                  10,847
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  26,296
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  131,642


62


(1) Mr.
Jin was newly appointed as our Chief Executive Officer on July 1, 2010. Prior to
June 30, 2010, Mr. Jin was employed as deputy general manager of Production
Technology of Laiyang Jiangbo.





(2)
Ms. Sung’s compensation for fiscal 2008 included $94,500 salary payable under
the terms of her 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.




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, 2010 for the named executive officers below:





Outstanding
Equity Awards at Fiscal Year Ended


June
30, 2010





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 Sung
                              
                              
                              2,000
                              
                              
                              
                              –
                              
                              $
                              12
                              
                              6/10/2013
                              
                              
                              –
                              
                              
                              
                              –
                              
                              
                              
                              –
                              
                              
                              
                              –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
                              
                              
                              –
                              
                              
                              
                              –
                              
                              
                              
                              –
                              
                              
                              
                              –


63





(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”.





ITEM
11. 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 September 23, 2010, 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 12,639,302 shares of common stock outstanding on
September 23, 2010. 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 3,235,000 shares of our common stock issuable upon
conversion of our standing convertible debts.


64




Name and Address of Beneficial Owners
                
                Number of
                  Shares of
                  Common Stock
                  Beneficially
                  Owned (1) (2)
                
                
                Percentage
                  Of ClassCao
      Wubo, Chairman of the Board†
                
                
                4,898,942
                (3)
                
                
                38.76
                %Jin
      Linxian, Chief Executive Officer
                
                
                –
                
                
                
                –Elsa
      Sung, Chief Financial Officer†
                
                
                6,414
                
                
                
                *Dong
      Lining, Vice President, Director of Technology†
                
                
                –
                
                
                
                –Yang
      Weidong, Vice President, Director of Sales†
                
                
                –
                
                
                
                –Xin
      Jingsheng, Director of Equipment†
                
                
                –
                
                
                
                –Feng
      Xiaowei, Director†
                
                
                10,900
                
                
                
                *Huang
      Lei, Director†
                
                
                –
                
                
                
                –Ge
      Jian, Director†
                
                
                9,993
                
                
                
                *Michael
      Marks†
                
                
                2,259
                
                
                
                *John
      (Yang) Wang†
                
                
                2,393
                
                
                
                *Total
      Held by Directors and Executive Officers (eleven
    individuals)
                
                
                4,930,901
                
                
                
                39.01
                %5% ShareholdersVerda
      International Limited (4)
                  A-1
      Building Dasi Street
                  Laiyan
      City, Shandong Province, PRC
                
                
                4,856,592
                
                
                
                38.42
                %Gold
      Stand Goal Ltd
                  10/F
      Unite 10B East Hope Plaza
                  1777
      Century Avenue
                  Pudong
      District Shanghai China 200122
                
                
                643,651
                
                
                
                5.09
                %Pope
      Investments LLC(5)(6)
                  5100
      Poplar Avenue, Suite 805
                  Memphis,
      Tennessee 38137
                
                
                1,262,666
                
                
                
                9.99
                %





* Represents
less than one percent (1%).





(1)
            Based on 12,639,302 outstanding
      shares of Common Stock as of September 23,
  2010.




(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.


65





(5)
            Includes (i) 500,000 shares of
      Common Stock issuable to Pope Investments LLC, upon conversion of
      $4,000,000 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 1,500,000 shares of Common Stock of
      Common Stock issuable to Pope Investments upon conversion of $12,000,000
      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, 2010 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, 2010.




Equity Compensation as of
June 30, 2010





Plan Category
                  
                  Number of
                    securities to be
                    Issuedupon exercise
                    of outstandingoptions,
                    warrants and rights
                  
                  
                  Weighted
                    average exerciseprice
                    of outstanding options,
                    warrants and rights
                  
                  
                  Number of securities
                    remaining
                    available for future
                    issuance
                    under equity
                    compensation plans
                    (excluding securities
                    reflected in
                    column 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
                  
                  
                  $
                  4.93
                  
                  
                  
                  -





(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.


66





ITEM
12. 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.





Other receivable - related
parties





The
Company leases two of its buildings to Jiangbo Chinese-Western Pharmacy, a
company owned by the Company’s Chief Executive Officer and other majority
shareholders. For the years ended June 30, 2010, 2009 and 2008, the Company
recorded other income of approximately $323,000, 383,000and $110,000 from
leasing the two buildings to this related party. As of June 30, 2010 and 2009,
amount due from this related party was approximately $324,000 and $0,
respectively. Other receivable – related parties outstanding amount at June 30,
2010 was fully received in September 2010.





Other payables - related
parties





The
Company leases two warehouses from Shandong Hilead Biotechnology Co., Ltd., a
company majority owned by the Company’s Chairman and formal Chief Executive
Officer, in fiscal year 2010. For the years ended June 30, 2010, the Company
recorded rent expenses related to this lease of approximately $103,000 which are
included in the Company’s selling, general and administrative expensess. As of
June 30, 2010, amount due to this related party was approximately
$49,000.


67





Other
payables-related parties primarily consist of accrued salary payable to the
Company’s officers and directors, and advances from the Company’s Chairman and
formal 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,
                  2010
                
                
                June 30,
                  2009Payable
      to Wubo Cao, Chairman of the Board and formal Chief Executive
      Officer
                
                $
                154,866
                
                
                $
                184,435Payable
      to Shandong Hilead Biotechnology Co., Ltd., majority owned by Wubo, Cao,
      Chairman of the Board and formal Chief Executive Officer
                
                
                48,609
                
                
                
                -Payable
      to Haibo Xu, formal Chief Operating Officer and Director
                
                
                33,688
                
                
                
                33,688Payable
      to Elsa Sung, Chief Financial Officer
                
                
                5,932
                
                
                
                18,333Payable
      to John Wang, Director
                
                
                12,500
                
                
                
                2,500Total
      other payable - related parties
                
                $
                255,595
                
                
                $
                238,956





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




Five of
our directors, Messrs. Michael Marks, John (Yang) Wang, Feng Xiaowei, Ge Jian
and Ms. Huang Lei, have been determined to be independent as defined by Rule
5605(a)(2) of the Marketplace Rules of The NASDAQ Stock Market, LLC and Section
10A(m)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”).


68




No
transactions, relationships or arrangements were considered by the Board of
Directors in determining that these directors were independent.





ITEM
13 PRINCIPAL ACCOUNTANT FEES AND SERVICES





Aggregate
fees billed by our current principal accountants, Frazer Frost, LLP (a successor
entity of 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 2010
                      
                      
                      Fiscal 2009
                      
                      
                      Fiscal 2008Audit
      Fees
                      
                      $
                      265,250
                      
                      
                      $
                      268,600
                      
                      
                      $
                      245,000Audit-Related
      Fees
                      
                      
                      25,000
                      
                      
                      
                      26,000
                      
                      
                      
                      20,000Tax
      Fees
                      
                      
                      10,000
                      
                      
                      
                      8,000
                      
                      
                      
                      -All
      Other Fees
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      
                      300,250
                      
                      
                      $
                      302,600
                      
                      
                      $
                      265,000




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, 2010 and 2009
                
                F-2Consolidated
      Statements of Income and Other Comprehensive Income - for the
      Years ended June 30, 2010, 2009 and 2008
                
                F-3Consolidated
      Statements of Shareholders’ Equity - for the Years ended June 30, 2010,
      2009 and 2008
                
                F-4Consolidated
      Statements of Cash Flows - for the Years ended June 30, 2010, 2009 and
      2008
                
                F-5Notes
      to Consolidated Financial Statements
                
                F-6
      - F-35


69




(b) Exhibits




ExhibitNumber
                
                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)10.14
                
                Letter
      Agreement between the Company and Pope Investments LLC dated August 10,
      2009. (17)


70




10.15
                
                Unofficial
      Summary Translation of the Technology Cooperation Agreement between
      Shangdon University and Laiyang Jiangbo Pharmaceutical Co., Ltd.
      dated  September 16, 2007 (18)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
      (18)10.17
                
                Letter
      Agreement Between the Company and Pope Investments LLC dated August 10,
      2009. (19)10.18
                
                Letter
      Agreement Between the Company and Pope Investments LLC dated February 15,
      2010. (20)10.19
                
                Contract
      for Transfer of State-Owned Construction Land Use Right by and between
      Laiyang Jiangbo Pharmaceuticals, Co., Ltd. and the Land and Resources
      Bureau of Laiyang City, dated October 27, 2009. (21)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)99.8
                
                Nominating
      and Corporate Governance Committee Charter
*





*Filed
herewith.





(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.


(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.


(18)
Incorporated by reference to the Company’s Annual Report on Form 10-K filed on
September 28, 2009.


(19)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on
August 14, 2009.


(20)
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed
on February 19, 2010.


(21)Incorporated
by reference to the Company’s current report on Form 8-K filed March 18,
2010.




71





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, 2010.




JIANGBO
PHARMACEUTICALS, INC.





/s/Jin
      LinxianJin
      Linxian, Chief Executive
Officer




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/ Jin Linxian
                        
                        Chief
      Executive Officer
                        
                        September 28, 2010Jin
      Linxian/s/ Elsa Sung
                        
                        Chief
      Financial Officer and Principal
                          Accounting
      Officer
                        
                        September
      28, 2010Elsa
      Sung/s/
      Cao Wubo
                        
                        Chairman
      of the Board
                        
                        September
      28, 2010Cao
      Wubo/s/ Feng Xiaowei
                        
                        Director
                        
                        September
      28, 2010Feng
      Xiaowei/s/ Huang Lei
                        
                        Director
                        
                        September
      28, 2010Huang
      Lei/s/ Ge Jian
                        
                        Director
                        
                        September
      28, 2010Ge
      JianDirector
                        
                        September
      28, 2010Michael
      Marks/s/John (Yang) Wang
                        
                        Director
                        
                        September
      28, 2010John
      (Yang) Wang


72


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders of


Jiangbo
Pharmaceuticals, Inc. and Subsidiaries




We have
audited the accompanying consolidated balance sheets of Jiangbo Pharmaceuticals,
Inc. and Subsidiaries (the “Company”) as of June, 2010 and 2009, and the related
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, 2010.  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, 2010 in conformity with accounting
principles generally accepted in the United States of America.




/s/
Frazer Frost, LLP (Successor Entity of Moore Stephens Wurth Frazer and Torbet,
LLP, see Form 8-K filed on January 7, 2010)




Brea,
California




September
28, 2010


F-1


JIANGBO
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
KNOWN AS GENESIS PHARMACEUTICALS ENTERPRISES, INC.)
 CONSOLIDATED
BALANCE SHEETS
 AS OF
JUNE 30, 2010 AND 2009
 
 2010
                    
                    
                    2009ASSETSCURRENT
      ASSETS:Cash
                    
                    $
                    108,616,735
                    
                    
                    $
                    104,366,117Restricted
      cash
                    
                    
                    11,135,880
                    
                    
                    
                    7,325,000Investments
                    
                    
                    168,858
                    
                    
                    
                    879,228Accounts
      receivable, net of allowance for doubtful accounts of $1,343,421 and
      $694,370 as of June 30, 2010 and 2009, respectively
                    
                    
                    33,195,201
                    
                    
                    
                    19,222,707Inventories
                    
                    
                    2,200,614
                    
                    
                    
                    3,277,194Other
      receivables
                    
                    
                    13,241
                    
                    
                    
                    167,012Other
      receivable - related party
                    
                    
                    324,060
                    
                    
                    
                    -Advances
      to suppliers
                    
                    
                    260,688
                    
                    
                    
                    236,496Financing
      costs - current
                    
                    
                    435,634
                    
                    
                    
                    680,303Total
      current assets
                    
                    
                    156,350,911
                    
                    
                    
                    136,154,057PLANT
      AND EQUIPMENT, net
                    
                    
                    13,284,312
                    
                    
                    
                    13,957,397OTHER
      ASSETS:Long
      Term Perpayments
                    
                    
                    110,725
                    
                    
                    
                    -Restricted
      investments
                    
                    
                    -
                    
                    
                    
                    1,033,463Financing
      costs, net
                    
                    
                    -
                    
                    
                    
                    556,365Intangible
      assets, net
                    
                    
                    32,594,326
                    
                    
                    
                    17,041,181Total
      other assets
                    
                    
                    32,705,051
                    
                    
                    
                    18,631,009Total
      assets
                    
                    $
                    202,340,274
                    
                    
                    $
                    168,742,463LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                    
                    $
                    4,113,219
                    
                    
                    $
                    6,146,497Short
      term bank loans
                    
                    
                    2,209,500
                    
                    
                    
                    2,197,500Notes
      payable
                    
                    
                    11,135,880
                    
                    
                    
                    7,325,000Other
      payables
                    
                    
                    3,888,034
                    
                    
                    
                    2,152,063Refundable
      security deposits due to distributors
                    
                    
                    3,829,800
                    
                    
                    
                    4,102,000Other
      payables - related parties
                    
                    
                    255,595
                    
                    
                    
                    238,956Accrued
      liabilities
                    
                    
                    4,899,829
                    
                    
                    
                    1,356,898Liabilities
      assumed from reorganization
                    
                    
                    524,614
                    
                    
                    
                    1,565,036Taxes
      payable
                    
                    
                    6,259,271
                    
                    
                    
                    11,248,226Derivative
      liabilities
                    
                    
                    18,497,227
                    
                    
                    
                    -Convertible
      debt, net of discount $13,669,752 as of June 30, 2010
                    
                    
                    12,210,248
                    
                    
                    
                    -Total
      current liabilities
                    
                    
                    67,823,217
                    
                    
                    
                    36,332,176Convertible
      debt, net of discount $28,493,089 as of June 30, 2009
                    
                    
                    -
                    
                    
                    
                    6,346,911Total
      liabilities
                    
                    
                    67,823,217
                    
                    
                    
                    42,679,087COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Convertible
      preferred stock Series A ($0.001 par value; 20,000,000 shares authorized
      as of June 30, 2010 and 2009, respectively; 0 shares issued and
      outstanding as of June 30, 2010 and 2009)
                    
                    
                    -
                    
                    
                    
                    -Common
      stock ($0.001 par value, 22,500,000 shares authorized, 11,701,802 and
      10,435,099 shares issued and outstanding as of June 30, 2010 and 2009,
      respectively)
                    
                    
                    11,702
                    
                    
                    
                    10,435Paid-in-capital
                    
                    
                    30,846,915
                    
                    
                    
                    48,397,794Captial
      contribution receivable
                    
                    
                    (11,000
                    )
                    
                    
                    (11,000
                    )Retained
      earnings
                    
                    
                    92,797,859
                    
                    
                    
                    67,888,667Statutory
      reserves
                    
                    
                    3,253,878
                    
                    
                    
                    3,253,878Accumulated
      other comprehensive income
                    
                    
                    7,617,703
                    
                    
                    
                    6,523,602Total
      shareholders' equity
                    
                    
                    134,517,057
                    
                    
                    
                    126,063,376Total
      liabilities and shareholders' equity
                    
                    $
                    202,340,274
                    
                    
                    $
                    168,742,463
 
 See
report of independent 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 PHARMACEUTICALS ENTERPRISES, INC.)
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR THE
YEARS ENDED JUNE 30, 2010, 2009 AND 2008
 
 2010
                  
                  
                  2009
                  
                  
                  2008RESTATEDREVENUE:Sales
                  
                  $
                  97,443,897
                  
                  
                  $
                  117,143,950
                  
                  
                  $
                  93,982,407Sales
      - related parties
                  
                  
                  -
                  
                  
                  
                  244,026
                  
                  
                  
                  5,564,098TOTAL
      REVENUE, net
                  
                  
                  97,443,897
                  
                  
                  
                  117,387,976
                  
                  
                  
                  99,546,505Cost
      of sales
                  
                  
                  26,097,103
                  
                  
                  
                  27,854,747
                  
                  
                  
                  21,072,674Cost
      of sales - related parties
                  
                  
                  -
                  
                  
                  
                  54,519
                  
                  
                  
                  1,433,873COST
      OF SALES
                  
                  
                  26,097,103
                  
                  
                  
                  27,909,266
                  
                  
                  
                  22,506,547GROSS
      PROFIT
                  
                  
                  71,346,794
                  
                  
                  
                  89,478,710
                  
                  
                  
                  77,039,958RESEARCH
      AND DEVELOPMENT EXPENSE
                  
                  
                  4,400,100
                  
                  
                  
                  4,395,000
                  
                  
                  
                  3,235,715SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                  
                  
                  18,731,844
                  
                  
                  
                  35,315,529
                  
                  
                  
                  41,593,197INCOME
      FROM OPERATIONS
                  
                  
                  48,214,850
                  
                  
                  
                  49,768,181
                  
                  
                  
                  32,211,046OTHER
      (INCOME) EXPENSE, NETChange
      in fair value of derivative liabilities
                  
                  
                  (14,631,455
                  )
                  
                  
                  -
                  
                  
                  
                  -Non-operating
      expense (income), net
                  
                  
                  382,122
                  
                  
                  
                  804,561
                  
                  
                  
                  (572,811
                  )Non-operating
      income - related party
                  
                  
                  (322,674
                  )
                  
                  
                  (382,970
                  )
                  
                  
                  (110,152
                  )Interest
      expense, net
                  
                  
                  19,796,531
                  
                  
                  
                  5,904,511
                  
                  
                  
                  3,092,183Loss
      from discontinued operations
                  
                  
                  243,792
                  
                  
                  
                  1,781,946
                  
                  
                  
                  380,027OTHER
      EXPENSE, NET
                  
                  
                  5,468,316
                  
                  
                  
                  8,108,048
                  
                  
                  
                  2,789,247INCOME
      BEFORE PROVISION FOR INCOME TAXES
                  
                  
                  42,746,534
                  
                  
                  
                  41,660,133
                  
                  
                  
                  29,421,799PROVISION
      FOR INCOME TAXES
                  
                  
                  12,896,179
                  
                  
                  
                  12,779,869
                  
                  
                  
                  6,970,739NET
      INCOME
                  
                  
                  29,850,355
                  
                  
                  
                  28,880,264
                  
                  
                  
                  22,451,060OTHER
      COMPREHENSIVE INCOME:Unrealized
      gain (loss) on marketable securities
                  
                  
                  166,378
                  
                  
                  
                  (1,514,230
                  )
                  
                  
                  1,347,852Foreign
      currency translation adjustment
                  
                  
                  927,723
                  
                  
                  
                  336,927
                  
                  
                  
                  5,206,612COMPREHENSIVE
      INCOME
                  
                  $
                  30,944,456
                  
                  
                  $
                  27,702,961
                  
                  
                  $
                  29,005,524WEIGHTED
      AVERAGE NUMBER OF SHARES:Basic
                  
                  
                  11,104,025
                  
                  
                  
                  10,061,326
                  
                  
                  
                  9,164,127Dilulted
                  
                  
                  15,135,130
                  
                  
                  
                  14,484,830
                  
                  
                  
                  9,900,428EARNINGS
      PER SHARE:Basic
                  
                  $
                  2.69
                  
                  
                  $
                  2.87
                  
                  
                  $
                  2.45Diluted
                  
                  $
                  1.36
                  
                  
                  $
                  0.09
                  
                  
                  $
                  (1.17
                  )
 
 See
report of independent registered public accounting firm.
 The
accompanying notes are an integral part of these consolidated financials
statements.
  F-3
 
 JIANGBO
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
KNOWN AS GENESIS PHARMACEUTICALS 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, 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 feature in 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
                            
                            
                            
                            643
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            2,596,488
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            2,597,131Stock-based
      compensation
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            64,315
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            64,315Conversion
      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
                            
                            
                            $
                            126,063,376Cumulative
      effect of reclassification of warrants
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (34,971,570
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (4,941,163
                            )
                            
                            
                            
                            
                            
                            
                            (39,912,733
                            )10,435,099
                            
                            
                            
                            10,435
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            13,426,224
                            
                            
                            
                            (11,000
                            )
                            
                            
                            3,253,878
                            
                            
                            
                            62,947,504
                            
                            
                            
                            6,523,602
                            
                            
                            
                            86,150,643Common
      stock issued for payment for other payable-related party @$8.75 per
      share
                            
                            
                            2,286
                            
                            
                            
                            2
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            19,998
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            20,000Common
      stocked issued for services @$8.75 per share
                            
                            
                            1,143
                            
                            
                            
                            1
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            9,999
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            10,000Common
      stock issued for services @$9,91 per share
                            
                            
                            1,009
                            
                            
                            
                            1
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            9,999
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            10,000Common
      stock issued for interest payment @ $8 per share
                            
                            
                            84,015
                            
                            
                            
                            85
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            990,968
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            991,053Common
      stock issued for services @$9 per share
                            
                            
                            17,350
                            
                            
                            
                            17
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            156,133
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            156,150Common
      stock issuable for bonuses @ 8.5 per share
                            
                            
                            25,000
                            
                            
                            
                            25
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            212,475
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            212,500Common
      stock issuable for bonuses @ 9 per share
                            
                            
                            15,900
                            
                            
                            
                            16
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            143,084
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            143,100Conversion
      of convertible debt to stock @ $8 per share
                            
                            
                            1,120,000
                            
                            
                            
                            1,120
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            8,958,880
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            8,960,000Stock
      based compensation
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            135,104
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            135,104Reclassification
      of derivative liabilities to APIC due to conversion of convertible
      debt
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            6,784,051
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            6,784,051Net
      Income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            29,850,355
                            
                            
                            
                            
                            
                            
                            
                            29,850,355Change
      in fair value on restricted marketable equity securities
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            166,378
                            
                            
                            
                            166,378Foreign
      currency translation gain
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            927,723
                            
                            
                            
                            927,723BALANCE,
      June 30, 2010
                            
                            
                            11,701,802
                            
                            
                            
                            11,702
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            30,846,915
                            
                            
                            
                            (11,000
                            )
                            
                            
                            3,253,878
                            
                            
                            
                            92,797,859
                            
                            
                            
                            7,617,703
                            
                            
                            
                            134,517,057
 
 See
report of independent 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 PHARMACEUTICALS ENTERPRISES, INC.)
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
YEARS ENDED JUNE 30, 2010, 2009 AND 2008
 
 2010
                                
                                
                                2009
                                
                                
                                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                
                                $
                                29,850,355
                                
                                
                                $
                                28,880,264
                                
                                
                                $
                                22,451,060Loss
      from discontinued operations
                                
                                
                                243,792
                                
                                
                                
                                1,781,946
                                
                                
                                
                                380,027Income
      from continued operations
                                
                                
                                30,094,147
                                
                                
                                
                                30,662,210
                                
                                
                                
                                22,831,087Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
                                
                                
                                823,087
                                
                                
                                
                                679,507
                                
                                
                                
                                517,863Amortization
      of intangible assets
                                
                                
                                1,585,141
                                
                                
                                
                                735,427
                                
                                
                                
                                184,465Amortization
      of debt issuance costs
                                
                                
                                801,034
                                
                                
                                
                                680,276
                                
                                
                                
                                123,964Amortization
      of debt discount
                                
                                
                                14,823,337
                                
                                
                                
                                4,006,868
                                
                                
                                
                                2,500,043Loss
      from issuance of shares for in lieu of interest
                                
                                
                                318,936
                                
                                
                                
                                -
                                
                                
                                
                                -Interest
      payment with shares in lieu of cash
                                
                                
                                4,457
                                
                                
                                
                                -
                                
                                
                                
                                -Bad
      debt (recovery) expense
                                
                                
                                642,499
                                
                                
                                
                                538,069
                                
                                
                                
                                (27,641
                                )Loss
      on sale of marketable securities
                                
                                
                                406,346
                                
                                
                                
                                473,303
                                
                                
                                
                                -Unrealized
      (gain) loss on investments
                                
                                
                                (150,525
                                )
                                
                                
                                229,425
                                
                                
                                
                                696,528Other
      non-cash settlement (income) expense
                                
                                
                                -
                                
                                
                                
                                (20,000
                                )
                                
                                
                                -Change
      in fair value of derivative liabilities
                                
                                
                                (14,631,455
                                )
                                
                                
                                -
                                
                                
                                
                                -Stock
      based compensation
                                
                                
                                531,750
                                
                                
                                
                                -
                                
                                
                                
                                46,994Amortization
      of stock option compensation
                                
                                
                                135,104
                                
                                
                                
                                106,815
                                
                                
                                
                                10,847Gain
      on forgiveness of debt
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (86,752
                                )Changes
      in operating assets and liabilitiesAccounts
      receivable
                                
                                
                                (14,450,712
                                )
                                
                                
                                4,651,284
                                
                                
                                
                                (10,534,270
                                )Accounts
      receivable - related parties
                                
                                
                                -
                                
                                
                                
                                676,579
                                
                                
                                
                                (113,465
                                )Notes
      receivables
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                60,694Inventories
                                
                                
                                1,089,795
                                
                                
                                
                                792,293
                                
                                
                                
                                1,686,090Other
      receivables
                                
                                
                                154,018
                                
                                
                                
                                (21,038
                                )
                                
                                
                                (111,571
                                )Other
      receivables - related parties
                                
                                
                                (322,674
                                )
                                
                                
                                -
                                
                                
                                
                                -Advances
      to suppliers
                                
                                
                                (22,856
                                )
                                
                                
                                1,495,805
                                
                                
                                
                                (1,259,254
                                )Other
      assets
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                92,996Accounts
      payable
                                
                                
                                (2,057,625
                                )
                                
                                
                                3,795,084
                                
                                
                                
                                55,085Refundable
      security deposits due to distributors
                                
                                
                                (293,340
                                )
                                
                                
                                4,102,000
                                
                                
                                
                                -Other
      payables
                                
                                
                                1,716,847
                                
                                
                                
                                (1,534,740
                                )
                                
                                
                                2,033,689Other
      payables - related parties
                                
                                
                                16,571
                                
                                
                                
                                (86,692
                                )
                                
                                
                                (822,155
                                )Accrued
      liabilities
                                
                                
                                4,221,119
                                
                                
                                
                                1,182,018
                                
                                
                                
                                211,362Liabilities
      assumed from reorganization
                                
                                
                                (150,407
                                )
                                
                                
                                (1,301,337
                                )
                                
                                
                                (1,172,816
                                )Taxes
      payable
                                
                                
                                (5,028,760
                                )
                                
                                
                                11,081,110
                                
                                
                                
                                169,790Net
      cash provided by operating activities
                                
                                
                                20,255,834
                                
                                
                                
                                62,924,266
                                
                                
                                
                                17,093,573CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of Hongrui
                                
                                
                                -
                                
                                
                                
                                (8,584,900
                                )
                                
                                
                                -Proceeds
      from sale of investments
                                
                                
                                531,750
                                
                                
                                
                                407,005
                                
                                
                                
                                1,034,028Proceeds
      from sale of restricted investments
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                155,000Purchase
      of equipment
                                
                                
                                (76,993
                                )
                                
                                
                                (156,702
                                )
                                
                                
                                (453,718
                                )Prepayments
      made for purchase of equipments
                                
                                
                                (110,251
                                )
                                
                                
                                -
                                
                                
                                
                                -Purchase
      of intangible assets
                                
                                
                                (16,979,106
                                )
                                
                                
                                -
                                
                                
                                
                                (8,870,631
                                )Cash
      proceeds from sale of equipment
                                
                                
                                -
                                
                                
                                
                                15,615
                                
                                
                                
                                -Cash
      proceeds from reverse acquisition
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                534,950Net
      cash used in investing activities
                                
                                
                                (16,634,600
                                )
                                
                                
                                (8,318,982
                                )
                                
                                
                                (7,600,371
                                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Change
      in restricted cash
                                
                                
                                (3,754,752
                                )
                                
                                
                                538,815
                                
                                
                                
                                3,292,168Proceeds
      from notes payable
                                
                                
                                14,843,004
                                
                                
                                
                                13,896,990
                                
                                
                                
                                -Principal
      payments on notes payable
                                
                                
                                (11,088,252
                                )
                                
                                
                                (12,439,315
                                )
                                
                                
                                (3,292,168
                                )Borrowings
      on short term bank loans
                                
                                
                                2,200,050
                                
                                
                                
                                2,197,500
                                
                                
                                
                                2,616,110Principal
      payments on short term bank loans
                                
                                
                                (2,200,050
                                )
                                
                                
                                (2,783,500
                                )
                                
                                
                                (4,819,150
                                )Proceeds
      from sale of common stock
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                337,500Proceeds
      from sale of treasury stock
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,975Payment
      to escrow account
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (1,996,490
                                )Payments
      for dividend
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (10,608,000
                                )Proceeds
      from convertible debt
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                32,974,500Payments
      for debt issuance cost
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (15,408
                                )Net
      cash provided by financing activities
                                
                                
                                -
                                
                                
                                
                                1,410,490
                                
                                
                                
                                18,491,037EFFECTS
      OF EXCHANGE RATE CHANGE IN CASH
                                
                                
                                629,384
                                
                                
                                
                                154,545
                                
                                
                                
                                2,474,351NET
      INCREASE IN CASH
                                
                                
                                4,250,618
                                
                                
                                
                                56,170,319
                                
                                
                                
                                30,458,590CASH,
      beginning of the year
                                
                                
                                104,366,117
                                
                                
                                
                                48,195,798
                                
                                
                                
                                17,737,208CASH,
      end of the year
                                
                                $
                                108,616,735
                                
                                
                                $
                                104,366,117
                                
                                
                                $
                                48,195,798SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid for interest
                                
                                $
                                142,523
                                
                                
                                $
                                2,255,809
                                
                                
                                $
                                493,781Cash
      paid for taxes
                                
                                $
                                14,900,838
                                
                                
                                $
                                6,167,810
                                
                                
                                $
                                7,001,264Non-cash
      investing and financing activities:
                                
                                $
                                
                                
                                
                                $
                                
                                
                                
                                $Common
      stock issued to acquire Hongrui
                                
                                $
                                -
                                
                                
                                $
                                2,597,132
                                
                                
                                $
                                -Common
      stock issued to offset related party payable
                                
                                $
                                20,000
                                
                                
                                
                                -
                                
                                
                                
                                -Common
      stock issued for interest payment
                                
                                $
                                673,929
                                
                                
                                
                                -
                                
                                
                                
                                -Common
      stock issued for convertible notes conversion, net of
    discount
                                
                                $
                                8,960,000
                                
                                
                                
                                16,000
                                
                                
                                
                                -Derivative
      liability reclassified to equity upon conversion
                                
                                $
                                6,784,051
                                
                                
                                
                                -
                                
                                
                                
                                -Transfer
      of investments to settle liabilities assumed from
      reorganization
                                
                                $
                                1,133,807
                                
                                
                                
                                -
                                
                                
                                
                                -
 
 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,
2010




Note
1 – Organization and business





Jiangbo
Pharmaceuticals, Inc. (the “Company” or “Jiangbo”) was originally incorporated
in the state of Florida on August 15, 2001.





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, the Company’s stock symbol changed to "JGBO" with the opening of
trading on May 12, 2009 on the OTCBB. The Company’s stocks have started trading
on Nasdaq Global Market under the symbol “ JGBO” since June 8.
2010.





The
Company’s primary operations consist of the business and operations of its
direct and indirect subsidiaries and Variable Interest Entity (“VIE”), which
produce and sell western pharmaceutical products in China and focuses on
developing innovative medicines to address various medical needs for patients
worldwide.





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 balance
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





In
accordance with the interpretation of US GAPP, Laiyang Jiangbo is considered a
variable interest entity, and the Company is the primary beneficiary. VIEs are
generally entities that lack sufficient equity to finance their activities
without additional financial support from other parties or whose equity holders
lack adequate decision making ability. 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. The Financial Accounting Standards
Board’s (“FASB”) accounting standards address whether certain types of entities,
referred to as VIEs, should be consolidated in a company’s consolidated
financial statements. In accordance with the provisions of the accounting
standard, the Company has determined that Laiyang Jiangbo Pharmaceuticals Co.,
Ltd. (“Laiyang Jiangbo”) is a VIE and that the Company is the primary
beneficiary, and accordingly, the financial statements of Laiyang Jiangbo are
consolidated into the financial statements of the Company.







F-6





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.





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.




F-7





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.




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.





The
carrying amount and classification of the VIE’s assets and liabilities as of
June 30, 2010 are as follows:





Year Ended
                              June 30, 2010Current
      assets
                            
                            $
                            155,613,750Plant
      and equipment, net
                            
                            
                            13,284,312Other
      noncurrent assets
                            
                            
                            32,594,326Total
      assets
                            
                            
                            201,492,388Current
      liabilities
                            
                            
                            67,932,556Total
      liabilities
                            
                            
                            67,932,556Net
      assets
                            
                            
                            133,559,832





Laiyang
Jiangbo has payables to the Company and its wholly owned subsidiary JGBT
amounted to $34,705,277 which was included in Laiyang Jiangbo’s current
liabilities and eliminated in the consolidated financial statements. Creditors
of Laiyang Jiangbo have no recourse to the general credit or assets of the
Company. Laiyang Jiangbo and JGBT are both direct beneficiary of the proceeds of
November 2007 Debentures and May 2008 Notes and jointly and severally guarantee
the payments of the Company’s obligations under the November 2007 Debentures and
May 2008 Notes (see Note 13).





Foreign currency
translation





The
reporting currency of the Company is the U.S. dollar. The functional currency of
the Company is the local currency, the Chinese Renminbi (“RMB”). In accordance
with the FASB’s accounting standard governing 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.




F-8





Asset and
liability accounts at June 30, 2010, were translated at 6.79 RMB to $1.00 USD as
compared to 6.83 RMB to $1.00 USD at June 30, 2009. The average translation
rates applied to income statements for the years ended June 30, 2010, 2009, and
2008 were 6.82 RMB, 6.83 RMB and 7.26 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





Revenue
from product sales is generally recognized when title to the product has
transferred to customers in accordance with the terms of the sale. 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.





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. Therefore, 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





The
accounting standard governing financial instruments adopted on July 1, 2008,
defines financial instruments and requires fair value disclosures about those
instruments.  It defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances
disclosure requirements for fair value measures.Cash, investments,
receivables, payables, short term loans and convertible debt all qualify as
financial instruments.  Management concluded cash, 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 the FASB’s accounting standard for such instruments. Under this
standard, 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.




F-9





Effective
July 1, 2009, as a new accounting standard took effect, the Company’s two
convertible notes with principal amounts totaling $34,840,000 and 2,275,000
warrants previously treated as equity pursuant to the derivative treatment
exemption are no longer afforded equity treatment because the strike price of
the warrants is denominated in US dollar, a currency other than the Company’s
functional currency, the Chinese Renminbi.  As a result, those
financial instruments are not considered indexed to the Company’s own stock, and
as such, all future changes in the fair value of these convertible notes and
warrants are recognized currently in earnings until such time as the
convertible notes and warrants are converted, exercised or expired.





As such,
effective July 1, 2009, the Company reclassified the fair value of the
conversion features on the convertible notes and warrants from equity to
liability, as if these conversion features on the convertible notes and warrants
were treated as a derivative liability since their initial issuance dates. On
July 1, 2009, the Company reclassified approximately $35 million from
additional paid-in capital and approximately $4.9 million from beginning
retained earnings to warrant liabilities, as a cumulative effect adjustment, to
recognize the fair value of the conversion features on the convertible notes and
warrants. For the year ended June 30, 2010, $8,960,000 of convertible notes were
converted into common shares. As of June 30, 2010, the Company has $25,880,000
convertible notes and 2,275,000 warrants related to the convertible debentures
outstanding. The fair value of the conversion features on the convertible notes
was approximately $8.4 million and the fair value of the warrants was
approximately $10.1 million.  The Company recognized $14.6 million
gains from the change in fair value of the conversion features on the
convertible notes and warrants for the year ended June 30, 2010.





These
common stock purchase warrants do not trade in an active securities market, and
as such, the Company estimates the fair value of the conversion features on the
convertible notes and warrants using the Black-Scholes option pricing model
using the following assumptions:





June 30, 2010
                
                
                July 1, 2009Annual
                  dividend
                  yield
                
                
                Expected
                  term
                  (years)
                
                
                Risk-
                  free
                  interest
                  rate
                
                
                Expected
                  volatility
                
                
                Annual
                  dividend
                  yield
                
                
                Expected
                  term
                  (years)
                
                
                Risk-
                  free
                  interest
                  rate
                
                
                Expected
                  volatilityConversion
      feature on the $4 million convertible notes
                
                
                -
                
                
                
                0.35
                
                
                
                0.22
                %
                
                
                57.00
                %
                
                
                -
                
                
                
                1.35
                
                
                
                1.11
                %
                
                
                95.80
                %Conversion
      feature on the $21.9 million convertible notes
                
                
                -
                
                
                
                0.92
                
                
                
                0.32
                %
                
                
                57.00
                %
                
                
                -
                
                
                
                1.92
                
                
                
                1.11
                %
                
                
                102.00
                %400,000
      warrants issued in November 2007
                
                
                -
                
                
                
                0.35
                
                
                
                0.22
                %
                
                
                57.00
                %
                
                
                -
                
                
                
                1.35
                
                
                
                1.11
                %
                
                
                95.80
                %1,875,000
      warrants issued in May  2008
                
                
                -
                
                
                
                2.92
                
                
                
                1.00
                %
                
                
                85.00
                %
                
                
                -
                
                
                
                3.92
                
                
                
                2.54
                %
                
                
                97.51
                %





Expected
volatility is based primarily on historical volatility. Historical volatility
was computed using weekly pricing observations for recent periods that
correspond to the term of the warrants and one year period is used when the
remaining contractual terms of warrants have less than one year. The Company’s
management believes this method produces an estimate that is representative of
the expectations of future volatility over the expected term of these warrants.
The Company has no reason to believe future volatility over the expected
remaining life of these warrants will likely differ materially from
historical volatility. The expected life is based on the remaining term of the
warrants. The risk-free interest rate is based on U.S. Treasury securities
according to the remaining term of the financial instruments.





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.




F-10





Carrying
                      Value at June
                      30, 2010
                    
                    
                    Fair Value Measurements at June 30, 2010, Using
                      Fair Value HierarchyLevel 1
                    
                    
                    Level 2
                    
                    
                    Level 3Investments
                    
                    $
                    168,858
                    
                    
                    $
                    168,858
                    
                    
                    $
                    -
                    
                    
                    $
                    -Conversion
      options - $  4.0M Convertible Debt (November
    2007)
                    
                    
                    1,007,722
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,007,722Conversion
      options - $21.9M Convertible Debt (May 2008)
                    
                    
                    7,358,478
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,358,478400,000
      warrants issued in November 2007
                    
                    
                    806,177
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    806,1771,875,000
      warrants issued in May 2008
                    
                    
                    9,324,850
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    9,324,850Total
                    
                    $
                    18,666,085
                    
                    
                    $
                    168,858
                    
                    
                    $
                    -
                    
                    
                    $
                    18,497,227





Level
3 Valuation Reconciliations:





DerivativeLiabilitiesBalance,
      July 1, 2009
                        
                        
                        39,912,733Reclassification
      to APIC due to conversion of notes
                        
                        
                        (6,784,051
                        )Change
      in fair value for the year ended June 30, 2010
                        
                        
                        (14,631,455
                        )Balance,
      June 30, 2010
                        
                        
                        18,497,227





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 the relevant accounting standards.




An
accounting standard 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 the governing
accounting standard which 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 awards using the Black-Scholes option pricing
model. Under this accounting standard, 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.




F-11





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.





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 the accounting standards
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





FASB’s
accounting standard regarding 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 this accounting standard.





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.





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, 2010 and 2009, the Company’s bank balances,
including restricted cash balances, exceeded government-insured limits by
approximately $119,675,000 and $111,684,000, 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, 2010 and 2009, the Company had restricted cash of $11,135,880 and
$7,325,000, respectively, of which $11,135,880 and $7,325,000, respectively,
were maintained as security deposits for bank acceptance related to the
Company’s notes payable.





Investments and restricted
investments





Investments
are comprised of marketable equity securities of publicly traded companies and
are stated at fair value based on the quoted price of these securities. These
investments are classified as trading securities based on the Company’s intent
and ability 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 certain SEC Rule 144 restrictions on the
securities. These securities are classified as available-for-sale and are
reflected as restricted and noncurrent, as the Company intends to hold them
beyond one year. Restricted investments are carried at fair value based on the
trading price of these securities.




F-12





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.




The
following is a summary of the components of the gain/loss on investments and
restricted investments for the years ended June 30, 2010 and 2009:




For the Year EndedJune 30,2010
                                      
                                      
                                      2009
                                      
                                      
                                      2008Realized
      loss on trading securities
                                      
                                      $
                                      406,346
                                      
                                      
                                      $
                                      473,303
                                      
                                      
                                      $
                                      44,481Unrealized
      (gain) loss on trading securities
                                      
                                      
                                      (150,525
                                      )
                                      
                                      
                                      229,425
                                      
                                      
                                      
                                      696,528Unrealized
      (gain) loss on restricted investments – available-for-sale
      securities
                                      
                                      
                                      (166,378
                                      )
                                      
                                      
                                      1,514,230
                                      
                                      
                                      
                                      (
      1,347,852
                                      )





Accounts
receivable





During
the normal course of business, the Company extends credit to its customers
without requiring collateral or other security interests. Management reviews its
accounts receivable 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
unsuccessful 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, 2010 and 2009:





2010
                
                
                2009Beginning
      allowance for doubtful accounts
                
                $
                694,370
                
                
                $
                155,662Bad
      debt expense (recovery)
                
                
                642,499
                
                
                
                538,068Foreign
      currency translation adjustments
                
                
                6,552
                
                
                
                640Ending
      allowance for doubtful accounts
                
                $
                1,343,421
                
                
                $
                694,370




F-13





Inventories





Inventories,
consisting of raw materials, work-in-process, packing 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 obsolete goods or to determine if any reserves are
necessary. As of June 30, 2010 and 2009, 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, 2010, and 2009, the Company’s advance to suppliers
amounted to approximately $261,000 and $236,000, 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




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 of 50 years.





Patents
and licenses include purchased technological know-how, secret formulas,
manufacturing processes, technical and 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.





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




F-14





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, 2010, the Company
expects these assets to be fully recoverable.





Beneficial conversion
feature of convertible notes





In
accordance with accounting standards governing the beneficial conversion feature
of convertible notes, the Company has determined that the convertible notes
contained a 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 discounted from the
carrying value of the convertible notes. The beneficial conversion feature is
amortized using the effective interest method over the term of the note. As of
June 30, 2010 and 2009, a total of $8,637,647 and $17,955,637, respectively,
remained unamortized for the beneficial conversion feature.





Income
taxes





The
Company accounts for income taxes in accordance with the accounting standard for
income taxes. 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 this accounting
standard, 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.





The
accounting standards clarify the accounting and disclosure for uncertain tax
positions and prescribe a recognition threshold and measurement attribute for
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The accounting standards also provide guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.





Under
this accounting standard, 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.
Penalties and interest incurred related to underpayment of income tax are
classified as income tax expense in the year incurred.  No significant
penalties or interest relating to income taxes have been incurred during the
years ended June 30, 2010 and 2009.  GAAP also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosures and transition.





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.




F-15





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 charged to operations in the
period if and when a determination is made by the taxing authorities that a
penalty is due.





VAT on
sales and VAT on purchases amounted to $16,565,462 and $3,542,607, respectively,
for the year ended June 30, 2010. VAT on sales and VAT on purchases amounted to
$17,037,463 and $2,918,492, respectively, for the year ended June 30, 2009.
Sales and purchases are recorded net of VAT collected and paid as the Company
acts as an agent for the government. VAT taxes are not impacted by the income
tax holiday.




Shipping and
handling





Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative expenses. Shipping and handling costs amounted to
$575,357, $575,743 and $365,327 for the years ended June 30, 2010, 2009, and
2008, respectively.





Advertising





Expenses
incurred in the advertising of the Company and the Company’s products are
charged to operations currently. Advertising expenses amounted to $5,566,458,
$2,572,631and $4,653,121 for the years ended June 30, 2010, 2009 and 2008,
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 $4,400,000, $4,395,000, and $3,236,000, respectively.





Recent accounting
pronouncements





In
January 2010, FASB issued ASU No. 2010-01 Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this ASU
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. This ASU did not have a material impact on the accompanying
consolidated financial statements.





In
January 2010, FASB issued ASU No. 2010-02 Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this ASU affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity.  The amendments in this update are
effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date
the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15, 2009. The
amendments in this update should be applied retrospectively to the first period
that an entity adopted SFAS No. 160. The adoption of this ASU did not have a
material impact on the Company’s consolidated financial statements.




F-16





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





In
February 2010, the FASB issued Accounting Standards Update 2010-09, Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements, or ASU 2010-09. This ASU 2010-09 primarily rescinds the
requirement that, for listed companies, financial statements clearly disclose
the date through which subsequent events have been evaluated. Subsequent events
must still be evaluated through the date of financial statement issuance;
however, the disclosure requirement has been removed to avoid conflicts with
other SEC guidelines. This ASU was effective immediately upon issuance and was
adopted in February 2010. The adoption of this ASU did not have a material
impact on the accompanying consolidated financial statements.





In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. This Update provides amendments to
Topic 718 to clarify that an employee share-based payment award with an exercise
price denominated in currency of a market in which a substantial porting of the
entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. The Company does not expect the adoption of ASU 2010-17 to have a
significant impact on its consolidated financial statements.




In April
2010, the FASB issued Accounting Standard Update 20-10-17, “Revenue
Recognition—Milestone Method (Topic 605): Milestone Method of Revenue
Recognition” or ASU 2010-17. This Update provides guidance on the recognition of
revenue under the milestone method, which allows a vendor to adopt an accounting
policy to recognize all of the arrangement consideration that is contingent on
the achievement of a substantive milestone (milestone consideration) in the
period the milestone is achieved. The pronouncement is effective on a
prospective basis for milestones achieved in fiscal years and interim periods
within those years, beginning on or after June 15, 2010. The adoption of
ASU 2010-17 does not have a significant impact on its consolidated financial
statements.




Reclassifications





Non-operating
income and expenses were grossed up and in the prior year’s consolidated
financial statements these amounts have been netted into Non-operating expense
(income) to conform to the current period presentation with no impact on the
previously reported net income or cash flows.




F-17





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.




The
Company accounted for this acquisition using the purchase method of accounting
in accordance with an accounting standard relates to, “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 (loss) Per SharesBasic
                          
                          $
                          2.8
                          
                          
                          $
                          2.43Diluted
                          
                          $
                          0.11
                          
                          
                          $
                          (0.97
                          )Weighted
      Average number of shares outstandingBasic
                          
                          
                          10,424,592
                          
                          
                          
                          9,807,778Diluted
                          
                          
                          14,848,096
                          
                          
                          
                          10,544,079




F-18





Note
4 - Earnings per share





The
FASB’s accounting standard for earnings per share 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
stockholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock.





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.





The
following is a reconciliation of the basic and diluted earnings per share
computations for the years ended June 30, 2010, 2009, and 2008:





Basic
earnings per share








2010
                          
                          
                          2009
                          
                          
                          2008For
      the years ended June 30, 2010, 2009 and 2008Net
      income for basic earnings per share
                          
                          $
                          29,850,355
                          
                          
                          $
                          28,880,264
                          
                          
                          $
                          22,451,060Weighted
      average shares used in basic computation
                          
                          
                          11,104,025
                          
                          
                          
                          10,061,326
                          
                          
                          
                          9,164,127Earnings
      per share – Basic
                          
                          $
                          2.69
                          
                          
                          $
                          2.87
                          
                          
                          $
                          2.45





Diluted
earnings (loss) per share





2010
                
                
                2009
                
                
                2008RESTATEDFor
      the years ended June 30, 2010, 2009 and 2008Net
      income for basic earnings per share
                
                $
                29,850,355
                
                
                $
                28,880,264
                
                
                $
                22,451,060Add:
      interest expense
                
                
                4,887,484
                
                
                
                2,124,340
                
                
                
                345,833Add:
      financing cost amortization
                
                
                801,034
                
                
                
                680,276
                
                
                
                123,963Add: note
      discount amortization
                
                
                14,823,337
                
                
                
                4,004,868
                
                
                
                2,500,043Subtract:
      unamortized financing cost at beginning of the period
                
                
                (1,236,668
                )
                
                
                (1,916,944
                )
                
                
                (2,040,907
                )Subtract:
      unamortized debt discount at beginning of the period
                
                
                (28,493,089
                )
                
                
                (32,499,957
                )
                
                
                (35,000,000
                )Net
      income for diluted earnings per share
                
                
                20,632,453
                
                
                
                1,274,847
                
                
                
                (11,620,008
                )Weighted
      average shares used in basic computation
                
                
                11,104,025
                
                
                
                10,061,326
                
                
                
                9,164,127Diluted
      effect of stock options
                
                
                267,185
                
                
                
                48,504
                
                
                
                -Diluted
      effect of warrants
                
                
                -
                
                
                
                -
                
                
                
                -Diluted
      effect of convertible notes
                
                
                3,763,920
                
                
                
                4,375,000
                
                
                
                736,301Weighted
      average shares used in diluted computation
                
                
                15,135,130
                
                
                
                14,484,830
                
                
                
                9,900,428Earnings
      (loss)  per share:Basic
                
                $
                2.69
                
                
                $
                2.87
                
                
                $
                2.45Diluted
                
                $
                1.36
                
                
                $
                0.09
                
                
                $
                (1.17
                )




F-19





For the
year ended June 30, 2010, 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-dilutive effect.





For the
year ended June 30, 2009, 2,275,000 warrants at an average exercise price of
$9.59 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-dilutive
effect.





For the
year ended June 30, 2008,  2,349,087 warrants at an average exercise
price of $9.60 and 140,900 options at an average exercise price of $4.93 were
not included in the diluted earnings per share calculation due to the
anti-dilutive effect.





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 $525,000and
$1,565,000 as of June 30, 2010 and 2009, respectively.




The
FASB’s accounting standard, “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, 20010, 2009 and 2008. The following is a summary of the
components of the loss from discontinued operations for the years ended June 30,
2010, 2009 and 2008:




F-20




2010
                      
                      
                      2009
                      
                      
                      2008Revenues
                      
                      $
                      
                      
                      
                      $
                      
                      
                      
                      $
                      -Cost
      of sales
                      
                      
                      
                      
                      
                      $
                      
                      
                      
                      
                      -Gross
      profit
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Operating
      and other non-operating expenses
                      
                      
                      243,792
                      
                      
                      
                      1,781,946
                      
                      
                      
                      380,027Loss
      from discontinued operations before other expenses and income
      taxes
                      
                      
                      243,792
                      
                      
                      
                      1,781,946
                      
                      
                      
                      380,027Income
      tax benefit
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Loss
      from discontinued operations
                      
                      $
                      243,792
                      
                      
                      $
                      1,781,946
                      
                      
                      $
                      380,027




Note
6 - Inventories





Inventories
consisted of the following as of June 30, 2010 and 2009:





2010
                  
                  
                  2009Raw
      materials
                  
                  $
                  822,460
                  
                  
                  $
                  1,539,612Work-in-process
                  
                  
                  326,831
                  
                  
                  
                  55,992Packing
      materials
                  
                  
                  140,328
                  
                  
                  
                  483,287Finished
      goods
                  
                  
                  910,995
                  
                  
                  
                  1,198,303Total
                  
                  $
                  2,200,614
                  
                  
                  $
                  3,277,194





Note
7 - Plant and equipment





Plant and
equipment consist of the following at June 30, 2010 and 2009:




2010
                  
                  
                  2009Buildings
      and building improvements
                  
                  $
                  12,891,331
                  
                  
                  $
                  12,798,375Manufacturing
      equipment
                  
                  
                  2,783,090
                  
                  
                  
                  2,603,114Office
      equipment and furniture
                  
                  
                  222,172
                  
                  
                  
                  291,061Vehicle
                  
                  
                  479,999
                  
                  
                  
                  477,396Total
                  
                  
                  16,376,592
                  
                  
                  
                  16,169,946Less:
      accumulated depreciation
                  
                  
                  (3,092,280
                  )
                  
                  
                  (2,212,549
                  )Total
                  
                  $
                  13,284,312
                  
                  
                  $
                  13,957,397




For the
years ended June 30, 2010, 2009, and 2008, depreciation expense amounted to
$823,087, $679,507, and $517,863, respectively.





Note
8 - Intangible assets





At June
30, 2010 and 2009, intangible assets consist of the following:




F-21





2010
                  
                  
                  2009Land
      use rights
                  
                  $
                  28,359,388
                  
                  
                  $
                  11,245,939Patents
                  
                  
                  4,964,010
                  
                  
                  
                  4,937,050Customer
      lists and customer relationships
                  
                  
                  1,129,716
                  
                  
                  
                  1,123,580Trade
      secrets- formulas and manufacture process know-how
                  
                  
                  1,031,100
                  
                  
                  
                  1,025,500Licenses
                  
                  
                  23,494
                  
                  
                  
                  23,367Total
                  
                  
                  35,507,708
                  
                  
                  
                  18,355,436Less:
      accumulated amortization
                  
                  
                  (2,913,382)
                  
                  
                  
                  (1,314,255)Total
                  
                  $
                  32,594,326
                  
                  
                  $
                  17,041,181





The
estimated amortization expenses for the next five years and thereafter
are:





Years ending June 30:2011
                        
                        $
                        2,091,0432012
                        
                        
                        1,907,8692013
                        
                        
                        1,707,1062014
                        
                        
                        1,270,8532015
      and thereafter
                        
                        
                        25,617,455Total
                        
                        $
                        32,594,326





For the
years ended June 30, 2010, 2009, and 2008, amortization expense relating to the
above intangible assets amounted to $1,585,141, $735,427, and $184,465,
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, 2010
                        
                        
                        June 30,2009Loan
      from Communication Bank; due December 2010 and 2009; interest rate of
      6.37% and 6.37% per annum; monthly interest payment; guaranteed by
      related party, Jiangbo Chinese-Western Pharmacy.
                        
                        $
                        2,209,500
                        
                        
                        $
                        2,197,500Total
                        
                        $
                        2,209,500
                        
                        
                        $
                        2,197,500





Interest
expense related to the bank loans amounted to $142,523, $116,649, and $436,818
for the years ended June 30, 2010, 2009, and 2008, respectively.




F-22





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, 2010
                              
                              
                              June 30, 2009Commercial
      Bank, 100% of restricted cash deposited.
                              
                              $
                              11,135,880
                              
                              
                              $
                              7,325,000Total
                              
                              $
                              11,135,880
                              
                              
                              $
                              7,325,000





Note
10 - Related party transactions





Other receivable - related
party





The
Company leases two of its buildings to Jiangbo Chinese-Western Pharmacy, a
company owned by the Company’s Chief Executive Officer and other majority
shareholders. For the years ended June 30, 2010, 2009 and 2008, the Company
recorded other income of approximately $323,000, 383,000and $110,000 from
leasing the two buildings to this related party. As of June 30, 2010 and 2009,
amount due from this related party was approximately $324,000 and $0,
respectively. The other receivable – related party outstanding amount at June
30, 2010 was fully received in September 2010.





Other payables - related
parties





The
Company leases two warehouses from Shandong Hilead Biotechnology Co., Ltd., a
company majority owned by the Company’s Chairman and former Chief Executive
Officer, in fiscal year 2010. For the years ended June 30, 2010, the Company
recorded rent expenses related to this lease of approximately $103,000 which are
included in the Company’s selling, general and administrative expenses. As of
June 30, 2010, amount due to this related party was approximately
$49,000.





Other
payables-related parties primarily consist of accrued salary payable to the
Company’s officers and directors, and advances from the Company’s Chairman and
former 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,
                  2010
                
                
                June 30,
                  2009Payable
      to Wubo Cao, Chairman of the Board and former Chief Executive
      Officer
                
                $
                154,866
                
                
                $
                184,435Payable
      to Shandong Hilead Biotechnology Co., Ltd., majority owned by Wubo, Cao,
      Chairman of the Board and formal Chief Executive Officer
                
                
                48,609
                
                
                
                -Payable
      to Haibo Xu, formal Chief Operating Officer and Director
                
                
                33,688
                
                
                
                33,688Payable
      to Elsa Sung, Chief Financial Officer
                
                
                5,932
                
                
                
                18,333Payable
      to John Wang, Director
                
                
                12,500
                
                
                
                2,500Total
      other payable - related parties
                
                $
                255,595
                
                
                $
                238,956




F-23





Note
11 - Concentration of major customers, suppliers, and products





For the
years ended June 30, 2010, 2009 and 2008, sales from top four products accounted
for 99.6%, 96.42% and 95.9%, respectively, of the Company’s total
sales.





For the
years ended June 30, 2010 and 2009, top two customers accounted for
approximately 20.4% and 13.3%, respectively, of the Company's sales. These two
customers represented 19.2% and 16.2% of the Company’s total accounts receivable
as of June 30, 2010 and 2009, respectively.





For the
years ended June 30, 2010 and 2009, two suppliers accounted for approximately
57.0% and 49.1%, respectively, of the Company’s purchases. These two suppliers
represented 53.0% and 53.0% of the Company’s total accounts payable as of June
30, 2010 and 2009, 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, 2010, 2009, and
2008.





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.




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.





Liangyang
Jiangbo was subject to 25% income tax rate from January 1, 2008, to June 30,
2010. In 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, 2010 and 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.




F-24





Total tax
exemptions for the years ended June 30, 2008 is summarized as
follows:





June 30, 2008VAT
      tax exemption
                  
                  $
                  1,428,804Income
      tax exemption
                  
                  
                  2,114,983City
      construction tax exemption
                  
                  
                  1,079,063Others
                  
                  
                  633,784Total
                  
                  $
                  5,256,634





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, 2010, 2009 and 2008:




2010
                  
                  
                  2009
                  
                  
                  2008U.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
                  %
                  
                  
                  25.0
                  %China
      income tax exemptions
                  
                  
                  -
                  
                  
                  
                  -
                  %
                  
                  
                  (5.6
                  )%Other
      Items(a)
                  
                  
                  5.2
                  %
                  
                  
                  5.7
                  %
                  
                  
                  4.3
                  %Total
      provision for income taxes
                  
                  
                  30.2
                  %
                  
                  
                  30.7
                  %
                  
                  
                  23.7
                  %





(a)  The
5.2%, 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, 2010, 2009
and 2008 respectively.




Taxes
Payable





Taxes
payable as of June 30, 2010 and 2009 are as follows:


2010
                    
                    
                    2009Value
      added tax
                    
                    $
                    1,372,353
                    
                    
                    $
                    4,090,492Income
      taxes
                    
                    
                    4,504,188
                    
                    
                    
                    6,689,199Other
      taxes
                    
                    
                    382,730
                    
                    
                    
                    468,535Total
                    
                    $
                    6,259,271
                    
                    
                    $
                    11,248,226




Jiangbo
incurred net operating losses of approximately $2,729,000 for income tax
purposes for the year ended June 30, 2010.  The estimated net
operating loss carry forwards for US income taxes amounted to approximately
$4,884,000 which may be available to reduce future years’ taxable income. These
carry forwards will expire, if not utilized, from 2027 through
2030.  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, 2010 was approximately $899,000 and
the accumulated valuation allowance as of June 30, 2010 amounted to
approximately $1,661,000. Management reviews this valuation allowance
periodically and makes adjustments as necessary.





The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $116,653,000 as of June 30, 2010, 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.




F-25





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).





The
Company evaluated the FASB’s accounting standard regarding convertible
debentures and concluded that the convertible debenture has a beneficial
conversion feature.  The Company estimated the intrinsic value of the
beneficial conversion feature of the November 2007 Debenture at $2,904,093. 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 debentures.





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, 2010 and 2009,
amortization of debt issuance costs related to the November 2007 Purchase
Agreement was $127,037 and $118,136, respectively. The remaining balance of debt
issuance costs of the November 2007 Purchase Agreement at June 30, 2010 and 2009
was $32,118 and $159,155, respectively. The amortization of debt discounts was
$2,381,647 and $817,564 for the years ended June 30, 2010 and 2009,
respectively, which has been included in interest expense on the accompanying
consolidated statements of income. The balance of the debt discount was
$1,255,430 and $3,637,077 at June 30, 2010 and 2009, 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.
As of June 30, 2010, the 500,000 shares are still in escrow.




F-26





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").





During
the year ended June 30, 2010, the Company issued 125,000 shares of its common
stock upon conversion of $1,000,000 November 2007 Debentures. As of June 30,
2010, a total of $1,000,000 November 2007 Debentures has been converted into
common shares





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 estimated the intrinsic value of the beneficial conversion feature of
the May 2008 Note at $19,111,323. 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
debentures.





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.




F-27





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, 2010 and
2009, amortization of debt issuance costs related to the May 2008 Purchase
Agreement was $673,997 and $562,140, respectively. The remaining balance of
debt issuance costs of the May 2008 Purchase Agreement at June 30, 2010 and
2009 was $403,516 and $1,077,513, respectively. The amortization of debt
discounts was $12,441,691 and $3,189,304 for the years ended June 30, 2010 and
2009, respectively, which has been included in interest expense on the
accompanying consolidated statements of income. The balance of the unamortized
debt discount was $12,414,322 and $24,856,012 at June 30, 2010 and 2009,
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 (“2008 Guaranteed EBT”) or (ii) the Company’s 2008 adjusted fully
diluted earnings before taxes per share is less than $1.60 (“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
(“2009 Guaranteed EBT”) or (ii) the Company’s adjusted fully diluted earnings
before taxes per share is less than $2.32 (or $2.24 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 years ended June 30, 2009
and June 30, 2008 have been met. The Make Good Shares have yet to be returned to
Mr. Cao as of June 30, 2010.





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.




F-28





During
the year ended June 30, 2010, the Company issued 995,000 shares of its common
stock upon conversion of $7,960,000 May 2008 Notes. As of June 30, 2010, a total
of $8,120,000 May 2008 Notes has been converted into common shares.





The above
two convertible debenture liabilities are as follows:





June 30, 2010
                
                
                June 30, 2009November
      2007 convertible debenture note payable
                
                $
                4,000,000
                
                
                $
                5,000,000May
      2008 convertible debenture note payable
                
                
                21,880,000
                
                
                
                29,840,000Total
      convertible debenture note payable
                
                
                25,880,000
                
                
                
                34,840,000Less:
      Unamortized discount on November 2007 convertible debenture note
      payable
                
                
                (1,255,430
                )
                
                
                (3,637,077
                )Less:
      Unamortized discount on May 2008 convertible debenture note
      payable
                
                
                (12,414,322
                )
                
                
                (24,856,012
                )Convertible
      debentures, net
                
                $
                12,210,248
                
                
                $
                6,346,911





Interest and
Penalty





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
interest under the November 2007 Debentures and May 2008 Notes in December 2009.
In February 2010, the Company and the majority November 2007 Debentures and May
2008 Notes holders entered to a waiver agreement regarding to the delinquent
interest payment; the waiver agreement required the Company to make the
delinquent interest payments by February 25, 2010 and to have its common stock
listed on the Nasdaq Stock market on or prior to April 15, 2010. The Company was
not able to meet the waiver letter requirements and has continued dialogue with
the November 2007 Debentures and May 2008 Notes holders. As of June 30, 2010 and
through the date of this filling, no formal event of default notice has been
presented by the November 2007 Debentures and May 2008 Notes holders. Accrued
interest and related interest penalty as of June 30, 2010 amounted to
$4,679,787.





Note
14 - Shareholders’ equity





Common
Stock





In July
2009, the Company issued 1,009 shares of common stock to a Company’s current
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. For the year ended
June 30, 2010, the Company recorded stock based compensation expense of $10,000
accordingly.





In August
2009, the Company issued 82,500 shares to Pope as interest payment for the
interest due on May 30, 2009 on the November 2007 Debentures and the May 2008
Notes at $8 per share. The Company valued these shares at the fair market value
on the date of grant of $11.81 per share based on the trading price of common
stock, or $974,325 in total, of which $660,000 was recorded as interest expense
for the year ended June 30, 2009 and $314,325 was recorded as additional
interest expense in the year ended June 30, 2010.




F-29


In August
2009, the Company issued 82,500 shares of its common stock to Pope, the majority
holder of the Company’s November 2007 Debentures and May 2008 Notes. As a result
of the delay in its ability to transfer cash out of the PRC (partially due to
the stricter foreign exchange restrictions and regulations imposed in the PRC
starting in December 2008), the Company was delinquent on the payment of
interests under the November 2007 Debentures and May 2008 Notes Due on May 30,
2009.  On August 10, 2009, the Company and Pope entered into a Letter
Agreement (the “Letter Agreement”). Pursuant to the Letter Agreement, Pope (i)
agreed to waive  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  (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 valued the 82,500 shares at the fair market value on the
date of issuance of $11.81 and recorded additional $314,325 interest expense
accordingly.





In
September 2009, the Company issued 62,500 shares of its common stock in
connection with the conversion of $500,000 of convertible debt. In connection
with the conversion, the Company recorded $402,112 of interest expense to fully
amortize the unamortized discount and deferred financing costs related to the
converted dentures. In connection with the conversion, the Company issued 938
shares of its common stock for the final interest payment at $8 per share. The
Company valued the 938 shares at the fair market value on the date of issuance
of $11 per share and recorded $10,300 interest expense in total.





In
October 2009, the Company issued 462,500 shares of its common stock in
connection with the conversion of $3,700,000 of convertible debt. In connection
with the conversion, the Company recorded $3,032,668 of interest expense to
fully amortize the unamortized discount and deferred financing costs related to
the converted dentures.





In
November 2009, the Company issued 62,500 shares of its common stock in
connection with the conversion of $500,000 of convertible debt. In connection
with the conversion, the Company recorded $326,425 of interest expense to fully
amortize the unamortized discount and deferred financing costs related to the
converted dentures.





In
December 2009, the Company issued 62,500 shares of its common stock in
connection with the conversion of $500,000 of convertible debt. In connection
with the conversion, the Company recorded $309,373 of interest expense to fully
amortize the unamortized discount and deferred financing costs related to the
converted dentures.





In
January 2010, the Company issued 301,250 shares of its common stock in
connection with the conversions of $2,410,000 of convertible debt. In connection
with the conversion, the Company recorded $1,822,111 of interest expense to
fully amortize the unamortized discount and deferred financing costs related to
the converted dentures. In connection with one of the conversions, the Company
issued 577 shares of its common stock for the final interest payment at $8 per
share. The Company valued the 577 shares at the fair market value on the date of
issuance of $11.14 per share and recorded $6,429 interest expense in
total.





In March
2010, the Company issued 1,143 shares of common stock to a Company’s current
director as part of his compensation for services and 2,286 shares of common
stock to a Company’s officer to pay off part of her accrued compensation. The
Company valued these shares at the fair market value on the date of grant of
$8.75 per share, or $30,000 in total, based on the trading price of common
stock. For the year ended June 30, 2010, the Company recorded stock based
compensation expense of $10,000 and reduced $20,000 of other
payable-related parties accordingly.





In April
2010, the Company issued 43,750 shares of its common stock in connection with
the conversion of $350,000 of convertible debt. In connection with the
conversion, the Company recorded $237,846 of interest expense to fully amortize
the unamortized discount and deferred financing costs related to the converted
dentures.




F-30





In June
2010, the Company issued 125,000 shares of its common stock in connection with
the conversion of $1,000,000 of convertible debt. In connection with the
conversion, the Company recorded $618,976 of interest expense to fully amortize
the unamortized discount and deferred financing costs related to the converted
dentures.





In June
2010, the Company issued 25,000 shares of common stock to a Company’s Chairman
and then Chief Executive Officer as his compensation for annual bonus. The
Company valued these shares at the fair market value on the date of grant of
$8.50 per share, or $212,500 in total, based on the trading price of common
stock. For the year ended June 30, 2010, the Company recorded stock based
compensation expense of $212,500 for the issunace accordingly.





In June
2010, the Company’s Board approved to issue 33,250 shares of common stock to
several of the Company’s directors and officers as their compensation for
services and bonus pending on shareholders’ vote to approve an S-8 plan for
employee incentive stock option plan. The Company valued these shares at the
fair market value of $9.0 per share, or $299,250 in total, based on the trading
price of common stock. For the year ended June 30, 2010, the Company recorded
stock based compensation expense of $143,100 and reduced $156,150 of other
payable-related parties accordingly.





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, 2010,
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, 2010, the Company has not received the $1,000.





Note
15 – Warrants





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.




F-31





A summary
of the warrants as of June 30, 2010, and changes during the years ended June 30,
2010 and 2009, respectively, is presented below:




Number of warrantsOutstanding
      as of June 30, 2008
                  
                  
                  2,349,085Granted
                  
                  
                  40,000Forfeited
                  
                  
                  (74,085)Exercised
                  
                  
                  -Outstanding
      as of June 30, 2009
                  
                  
                  2,315,000Granted
                  
                  
                  -Forfeited
                  
                  
                  -Exercised
                  
                  
                  -Outstanding
      as of June 30, 2010
                  
                  
                  2,315,000





The
following is a summary of the status of warrants outstanding at June 30,
2010:




Outstanding Warrants
                        
                        
                        Exercisable WarrantsAverage
                          Exercise Price
                        
                        Number
                        
                        
                        Average
                          Remaining
                          Contractual Life
                        
                        
                        Average
                          Exercise Price
                        
                        
                        Number
                        
                        
                        Average
                          Remaining
                          Contractual Life$
                        6.00
                        
                        
                        40,000
                        
                        
                        
                        1.63
                        
                        
                        $
                        6.00
                        
                        
                        
                        40,000
                        
                        
                        
                        1.63$
                        8.00
                        
                        
                        400,000
                        
                        
                        
                        0.35
                        
                        
                        $
                        8.00
                        
                        
                        
                        400,000
                        
                        
                        
                        0.35$
                        10.00
                        
                        
                        1,875,000
                        
                        
                        
                        2.92
                        
                        
                        $
                        10.00
                        
                        
                        
                        1,875,000
                        
                        
                        
                        3.17Total
                        
                        
                        2,315,000
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        2,315,000




The
Company has 2,315,000 warrants outstanding and exercisable at an average
exercise price of $9.59 per share as of June 30, 2010.





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, 2010, of the 7,500 options held by the Company’s executives, directors,
and employees, are fully vested.





The
following is a summary of the option activity during the years ended June 30,
2010 and 2009, respectively:





Number of optionsOutstanding
      as of June 30, 2008
                
                
                140,900Granted
                
                
                -Forfeited
                
                
                -Exercised
                
                
                -Outstanding
      as of June 30, 2009
                
                
                140,900Granted
                
                
                -Forfeited
                
                
                -Exercised
                
                
                -Outstanding
      as of June 30, 2010
                
                
                140,900





F-32




Outstanding options
                        
                        
                        Exercisable optionsAverage
                          Exercise
                          price
                        
                        Number
                        
                        
                        Average
                          remaining
                          contractual life
                          (years)
                        
                        
                        Average
                          Exercise
                          price
                        
                        
                        Number
                        
                        
                        Average
                          remaining
                          contractual life
                          (years)$
                        4.2
                        
                        
                        133,400
                        
                        
                        
                        0.5
                        
                        
                        $
                        4.2
                        
                        
                        
                        133,400
                        
                        
                        
                        0.5012
                        
                        
                        2,000
                        
                        
                        
                        2.95
                        
                        
                        
                        12
                        
                        
                        
                        2,000
                        
                        
                        
                        2.9516
                        
                        
                        1,750
                        
                        
                        
                        2.95
                        
                        
                        
                        16
                        
                        
                        
                        1,750
                        
                        
                        
                        2.9520
                        
                        
                        1,875
                        
                        
                        
                        2.95
                        
                        
                        
                        20
                        
                        
                        
                        1,875
                        
                        
                        
                        2.9524
                        
                        
                        1,875
                        
                        
                        
                        2.95
                        
                        
                        
                        24
                        
                        
                        
                        1,875
                        
                        
                        
                        2.95$
                        4.93
                        
                        
                        140,900
                        
                        
                        
                        
                        
                        
                        $
                        4.93
                        
                        
                        
                        140,900




For the
years ended June 30, 2010 and 2009, the Company recorded total stock-based
compensation expense of $666,854 and $104,107, respectively.  As of
June 30, 2010 and 2009, there was approximately $0 and $89,000, respectively, of
total unrecognized compensation expense related to unvested share-based
compensation arrangements granted.





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 2010, 2009, and 2008.





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, 2010 and 2009.




F-33





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, 2010, 2009, and 2008, the Company made pension contributions in
the amount of approximately $178,000, $146,000, and $35,000,
respectively.





Note
19 - Accumulated other comprehensive income





The
components of accumulated other comprehensive income for the years ended June
30, 2010 and 2009 are as follows:





June 30,
                  
                  
                  June 30,2010
                  
                  
                  2009Beginning
      Balance
                  
                  $
                  6,523,602
                  
                  
                  $
                  7,700,905Foreign
      currency translation gain
                  
                  
                  927,723
                  
                  
                  
                  336,927Unrealized
      gain (loss) on restricted marketable securities
                  
                  
                  166,378
                  
                  
                  
                  (1,514,230
                  )Ending
      Balance
                  
                  $
                  7,617,703
                  
                  
                  $
                  6,523,602




Note
20 - Commitments and contingencies





Commitment





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, 2010 and 2009, approximately $4,400,000 and $4,395,000
related to the two CRADAs, respectively, was incurred as research and
development expenses. As of June 30, 2010, the Company’s future estimated
payments to those CRADAs amounted to approximately $3.4 million.




F-34





Contingencies





Delinquent
in the Payment of Interest and required to repay November 2007 Debenture and May
2008 Notes


As
discussed on note 13, the Company became delinquent in the payment of interest
on its 2007 Debenture and May 2008 Notes in December 2009. To date, the Company
has remained unable to make these payments. Additionally, the Company will be
required to repay the then outstanding aggregate principal amount of the 2007
Debentures, together with all accrued interest and penalties, on November 7,
2010 and repay the 2008 Notes then outstanding aggregate principal amount,
together with all accrued interest and penalties, on May 30, 2011. The Company
has been engaged in continuing discussions with the holders of the 2007
Debenture and the 2008 Notes with respect to this payment delinquency. As of the
date of this report the Company has not received a formal acceleration notice
under the terms of the 2007debentures and May 2008 Notes, nor have any actions
been taken against the Company to secure the obligations. In the event that the
Company is unable to repay the 2007 Debentures and/or the 2008 Notes, upon such
an acceleration, or in the event that the Company is unable to repay the 2007
Debentures and the 2008 Notes, when due, it is likely that the debenture holders
will institute legal proceedings against the Company to collect the amounts due
under the 2007 Debentures and/or the 2008 Notes.  The occurrence of
any of these events would be materially adverse to the Company’s ability to
continue its business as it is presently conducted.


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.





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, 2010:





China West II, LLC and
Genesis Technology Group, Inc., n/k/a Jiangbo Pharmaceuticals, Inc.
(Arbitration)





In April
2010, China West II, LLC (“CW II”) filed a Demand For Arbitration with the
American Arbitration Association the case ofCW II and Genesis
Technology Group, Inc. n/k/a Jiangbo Pharmaceuticals, Inc. In that
matter, CW II seeks repayment and interest on a $142,500 promissory note dated
August 3, 2007 made by Genesis Equity Partners II LLC (“GEP”), a subsidiary of
the Company prior to the October 2007 reverse merger, and guaranteed by the
Company. The Company believes the promissory note has been paid in full by
members of GEP and CWII’s demand is without merit and plans to vigorously defend
its position. As of the date of these consolidated financial statements, the
Company is unable to estimate a loss, if any, the Company may incur related
expenses to this lawsuit.




Note
21- Subsequent event





In July
2010, the Company issued 562,500 shares of its common stock in connection with
the conversion of $4,500,000 of May 2008 Convertible Debentures.





In August
2010, the Company issued 125,000 shares of its common stock in connection with
the conversion of $1,000,000 of May 2008 Convertible Debentures.





In
September 2010, the Company issued 250,000 shares of its common stock in
connection with the conversion of $2,000,000 of May 2008 Convertible
Debentures.




F-35