Attached files
file | filename |
---|---|
EX-31.1 - Jiangbo Pharmaceuticals, Inc. | v184709_ex31-1.htm |
EX-32.2 - Jiangbo Pharmaceuticals, Inc. | v184709_ex32-2.htm |
EX-32.1 - Jiangbo Pharmaceuticals, Inc. | v184709_ex32-1.htm |
EX-31.2 - Jiangbo Pharmaceuticals, Inc. | v184709_ex31-2.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Amendment
No. 1
FORM
10-K/A
(Mark
One)
x ANNUAL REPORT PURSUANT
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended: June 30,
2009
o TRANSITION REPORT
PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _____ to _____
Commission
file number:
000-53037
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
Laiyang
City, Yantai, Shandong Province, People’s Republic of China 265200
(Address
of principle executive offices)
(0086)
535-7282997
(Issuer's
telephone number)
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $0.001 Par Value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such report(s)), and (2) has been subject to such filing requirements
for the past 90 days. Yes x
No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and smaller
reporting companies in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
|
Accelerated filer ¨
|
Non-accelerated filer (Do not check if a smaller reporting company) ¨
|
Smaller reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based upon the closing sale price of the
registrant’s common stock on December 31, 2008 as reported on the OTC Bulletin
Board was approximately $18.2 million (4,844,009 shares at $3.75). Approximately
4,880,460 shares of common stock held by each officer and director and by each
person who owns 10% or more of the outstanding common stock have been excluded
because such persons may be deemed to be affiliates.
The
number of outstanding shares of the registrant’s common stock on May 12,
2010 was 12,078,552.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
Explanatory
Note:
This
Annual Report on Form 10-K/A is being filed as Amendment No. 1 to our Annual
Report on Form 10-K (the “Amendment”) for the
year ended June 30, 2009 to restate the diluted earnings (loss) per share for
the year ended June 30, 2008 included in the consolidated Statements of
Income for the year ended June 30, 2009 as originally filed with the
Securities and Exchange Commission on September 28, 2009. This
Amendment is filed solely to include revision in Part IV, Item 15 in the
“Exhibit, Financial Statement Schedules” to revise and update diluted earnings
(loss) per share calculation for the year ended June 30, 2008 on page F-3 and
certain disclosure in paragraph 1 of Note 2- Summary of significant
accounting policies, pro forma consolidated results of operations for the years
ended June 30, 2008 in Note 3- Acquisition, and Note 4 – “Earnings (loss)
per share”. In addition, new officer certifications are filed as exhibits to
this Amendment. Except as specifically referenced herein, this
Amendment does not reflect any event occurring subsequent to September 28,
2009, the filing date of the original report.
2
Table of
Contents
PART
IV
Item
15. Exhibits and Financial Statement Schedules
|
4
|
SIGNATURES
|
6
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
7
|
3
PART IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The
following exhibits are filed as part of this Amendment:
Exhibit
Number Description
2.1 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)
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)
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
*
4
32.2 Certification
of the Chief Financial Officer pursuant 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
99.1 Consulting
Services Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies Co.,
Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September 21, 2007
(English Translation) (1)
99.2 Equity
Pledge Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies Co.,
Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September 21, 2007
(English Translation) (1)
99.3 Operating
Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies Co., Ltd., and
Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September 21, 2007 (English
Translation) (1)
99.4 Proxy
Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies Co., Ltd., and
Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September 21, 2007 (English
Translation) (1)
99.5 Option
Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies Co., Ltd., and
Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September 21, 2007 (English
Translation) (1)
99.6 Audit
Committee Charter (13)
99.7 Compensation
Committee Charter (13)
(1)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on
October 1, 2007.
(2)
Incorporated by reference to the Company’s Registration Statement on Form SB-2
filed on September 1, 1999.
(3)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on
August 21, 2008.
(4)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on
September 5, 2008.
(5)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on
April 21, 2009.
(6)
Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB filed
on January 22, 2004.
(7)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on
October 9, 2007.
(8)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on
November 9, 2007.
(9)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on
June 3, 2008.
(10)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on
June 12, 2008.
(11)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on
September 12, 2008.
(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.
* Filed
herewith.
5
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 May 14, 2010.
JIANGBO
PHARMACEUTICALS, INC.
|
/s/ Cao Wubo |
Cao
Wubo, Chief Executive Officer and
|
President
|
In
accordance with the Securities Exchange of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
NAME
|
TITLE
|
DATE
|
||
/s/ Cao Wubo |
Chairman
of the Board, Chief Executive Officer and President
|
May
14, 2010
|
||
Cao
Wubo
|
||||
/s/ Xu Haibo |
Director
|
May
14, 2010
|
||
Xu
Haibo
|
||||
/s/ Elsa Sung |
Chief
Financial Officer and Financial Accounting Officer
|
May
14, 2010
|
||
Elsa
Sung
|
||||
/s/ Feng Xiaowei |
Director
|
May
14, 2010
|
||
Feng
Xiaowei
|
||||
/s/
Huang Lei
|
Director
|
May
14, 2010
|
||
Huang
Lei
|
||||
/s/
Ge Jian
|
Director
|
May
14, 2010
|
||
Ge
Jian
|
||||
/s/
Michael Marks
|
Director
|
May
14, 2010
|
||
Michael
Marks
|
||||
/s/
John (Yang) Wang
|
Director
|
May
14, 2010
|
||
John
(Yang) Wang
|
|
|
6
(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-1
|
|
Consolidated
Balance Sheets - as of June 30, 2009 and 2008
|
F-2
|
|
Consolidated
Statements of Income and Other Comprehensive Income - for the
Years ended June 30, 2009, 2008 and 2007
|
F-3
|
|
Consolidated
Statements of Shareholders’ Equity - for the Years ended June 30, 2009,
2008 and 2007
|
F-4
|
|
Consolidated
Statements of Cash Flows - for the Years ended June 30, 2009, 2008 and
2007
|
F-5
|
|
Notes
to Consolidated Financial Statements
|
F-6
- F-39
|
7
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Jiangbo
Pharmaceuticals, Inc. and Subsidiaries
We have
audited the consolidated balance sheets of Jiangbo Pharmaceuticals, Inc. and
Subsidiaries (the "Company") as of June 30, 2009 and 2008, and the consolidated
statements of income and other comprehensive income, shareholders’ equity, and
cash flows for each of the years in the three-year period ended June 30, 2009.
Jiangbo Pharmaceuticals, Inc.’s management is responsible for these consolidated
financial statements. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Jiangbo
Pharmaceuticals, Inc and Subsidiaries as of June 30, 2009 and 2008, and the
consolidated results of its operations and its cash flows for each of the years
in the three-year period ended June 30, 2009 in conformity with accounting
principles generally accepted in the United States of America.
/S/
Frazer Frost, LLP (successor entity of Moore Stephens Wurth Frazer and Torbet,
LLP, see Form 8-K filed on January 7, 2009)
Brea,
California
September
28, 2009
Except
for paragraph 1 of Note 2, as to which the date is May 11, 2010
F-1
JIANGBO
PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY
KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)
CONSOLIDATED
BALANCE SHEETS
AS OF
JUNE 30, 2009 AND 2008
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$ | 104,366,117 | $ | 48,195,798 | ||||
Restricted
cash
|
7,325,000 | 7,839,785 | ||||||
Investments
|
879,228 | 2,055,241 | ||||||
Accounts
receivable, net of allowance for doubtful accounts of $694,370 and
$155,662
|
||||||||
as
of June 30, 2009 and 2008, respectively
|
19,222,707 | 24,312,077 | ||||||
Accounts
receivable - related parties
|
- | 673,808 | ||||||
Inventories
|
3,277,194 | 3,906,174 | ||||||
Other
receivables
|
167,012 | 152,469 | ||||||
Advances
to suppliers
|
236,496 | 1,718,504 | ||||||
Financing
costs - current
|
680,303 | 680,303 | ||||||
Total
current assets
|
136,154,057 | 89,534,159 | ||||||
PLANT
AND EQUIPMENT, net
|
13,957,397 | 11,225,844 | ||||||
OTHER
ASSETS:
|
||||||||
Restricted
investments
|
1,033,463 | 2,481,413 | ||||||
Financing
costs, net
|
556,365 | 1,236,641 | ||||||
Intangible
assets, net
|
17,041,181 | 9,916,801 | ||||||
Total
other assets
|
18,631,009 | 13,634,855 | ||||||
Total
assets
|
$ | 168,742,463 | $ | 114,394,858 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 6,146,497 | $ | 2,341,812 | ||||
Short
term bank loans
|
2,197,500 | 2,772,100 | ||||||
Notes
payable
|
7,325,000 | 5,843,295 | ||||||
Other
payables
|
2,152,063 | 3,510,864 | ||||||
Refundable
security deposits due to distributors
|
4,102,000 | - | ||||||
Other
payables - related parties
|
238,956 | 324,976 | ||||||
Accrued
liabilities
|
1,356,898 | 334,439 | ||||||
Liabilities
assumed from reorganization
|
1,565,036 | 1,084,427 | ||||||
Taxes
payable
|
11,248,226 | 166,433 | ||||||
Total
current liabilities
|
36,332,176 | 16,378,346 | ||||||
CONVERTIBLE
DEBT, net of discount $28,493,089 and $32,499,957
|
||||||||
as
of June 30, 2009 and 2008, respectively
|
6,346,911 | 2,500,043 | ||||||
Total
liabilities
|
42,679,087 | 18,878,389 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
SHAREHOLDERS'
EQUITY:
|
||||||||
Convertible
preferred stock Series A ($0.001 par value; 0 and
20,000,000
|
||||||||
shares
authorized as of June 30, 2009 and 2008, respectively; 0 shares issued and
outstanding as of June 30, 2009 and 2008)
|
- | - | ||||||
Common
stock ($0.001 par value, 22,500,000 and 15,000,000 shares
authorized,
|
||||||||
10,435,099
and 9,767,844 shares issued and outstanding as of June 30, 2009 and 2008,
respectively)
|
10,435 | 9,770 | ||||||
Paid-in-capital
|
48,397,794 | 45,554,513 | ||||||
Captial
contribution receivable
|
(11,000 | ) | (11,000 | ) | ||||
Retained
earnings
|
67,888,667 | 39,008,403 | ||||||
Statutory
reserves
|
3,253,878 | 3,253,878 | ||||||
Accumulated
other comprehensive income
|
6,523,602 | 7,700,905 | ||||||
Total
shareholders' equity
|
126,063,376 | 95,516,469 | ||||||
Total
liabilities and shareholders' equity
|
$ | 168,742,463 | $ | 114,394,858 |
See
report of indepdendent registered public accounting firm.
The
accompanying notes are an integral part of these consolidated financial
statements.
F-2
JIANGBO
PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY
GENESIS PHARMACEUTICALS ENTERPRISES, INC.)
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE
YEARS ENDED JUNE 30, 2009, 2008 AND 2007
2009
|
2008
|
2007
|
||||||||||
RESTATED
|
||||||||||||
REVENUES:
|
||||||||||||
Sales
|
$ | 117,143,950 | $ | 93,982,407 | $ | 72,259,812 | ||||||
Sales
- related parties
|
244,026 | 5,564,098 | 3,933,881 | |||||||||
TOTAL
REVENUE, net
|
117,387,976 | 99,546,505 | 76,193,693 | |||||||||
Cost
of sales
|
27,854,747 | 21,072,674 | 19,961,439 | |||||||||
Cost
of sales - related parties
|
54,519 | 1,433,873 | 1,200,091 | |||||||||
COST
OF SALES
|
27,909,266 | 22,506,547 | 21,161,530 | |||||||||
GROSS
PROFIT
|
89,478,710 | 77,039,958 | 55,032,163 | |||||||||
RESEARCH
AND DEVELOPMENT EXPENSE
|
4,395,000 | 3,235,715 | 11,143,830 | |||||||||
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
35,315,529 | 41,593,197 | 25,579,361 | |||||||||
INCOME
FROM OPERATIONS
|
49,768,181 | 32,211,046 | 18,308,972 | |||||||||
OTHER
(INCOME) EXPENSE, NET
|
||||||||||||
Non-operating
expense
|
894,014 | 708,338 | - | |||||||||
Non-operating
income
|
(89,453 | ) | (1,281,149 | ) | (6,484,484 | ) | ||||||
Non-operating
income - related party
|
(382,970 | ) | (110,152 | ) | (102,472 | ) | ||||||
Interest
expense, net
|
5,904,511 | 3,092,183 | 211,616 | |||||||||
Loss
from discontinued operations
|
1,781,946 | 380,027 | - | |||||||||
OTHER
EXPENSE (INCOME), NET
|
8,108,048 | 2,789,247 | (6,375,340 | ) | ||||||||
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
41,660,133 | 29,421,799 | 24,684,312 | |||||||||
PROVISION
FOR INCOME TAXES
|
12,779,869 | 6,970,739 | 2,631,256 | |||||||||
NET
INCOME
|
28,880,264 | 22,451,060 | 22,053,056 | |||||||||
OTHER
COMPREHENSIVE INCOME:
|
||||||||||||
Unrealized
gain (loss) on marketable securities
|
(1,514,230 | ) | 1,347,852 | - | ||||||||
Foreign
currency translation adjustment
|
336,927 | 5,206,612 | 1,018,130 | |||||||||
COMPREHENSIVE
INCOME
|
$ | 27,702,961 | $ | 29,005,524 | $ | 23,071,186 | ||||||
WEIGITED
AVERAGE NUMBER OF SHARES:
|
||||||||||||
Basic
|
10,061,326 | 9,164,127 | 7,494,740 | |||||||||
Dilulted
|
14,484,830 | 9,900,428 | 7,494,740 | |||||||||
EARNINGS
(LOSS) PER SHARE:
|
||||||||||||
Basic
|
$ | 2.87 | $ | 2.45 | $ | 2.94 | ||||||
Diluted
|
$ | 0.09 | $ | (1.17 | ) | $ | 2.94 |
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
JIANGBO
PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY
KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
Common
Stock
|
||||||||||||||||||||||||||||||||||||||||
Par
Vaule $0.001
|
Treasury
Stock
|
Additional
|
Capital
|
Retained
Earnings
|
Accumulated
other
|
|||||||||||||||||||||||||||||||||||
Number
|
Common
|
Number
|
Treasury
|
Paid-in
|
contribution
|
Statutory
|
Unrestricted
|
comprehensive
|
||||||||||||||||||||||||||||||||
of
shares
|
stock
|
of
shares
|
stock
|
capital
|
receivable
|
reserves
|
earnings
|
income
|
Totals
|
|||||||||||||||||||||||||||||||
BALANCE,
June 30, 2006
|
7,494,740
|
$
|
7,495
|
10,000
|
$
|
(2,805
|
)
|
$
|
13,216,309
|
$
|
(12,011,000
|
)
|
$
|
648,667
|
$
|
7,453,498
|
$
|
128,311
|
$
|
9,440,475
|
||||||||||||||||||||
-
|
||||||||||||||||||||||||||||||||||||||||
Capital
contribution
|
5,128,000
|
5,128,000
|
||||||||||||||||||||||||||||||||||||||
Dividend
distribution
|
(10,344,000
|
)
|
(10,344,000
|
)
|
||||||||||||||||||||||||||||||||||||
Net
income
|
22,053,056
|
22,053,056
|
||||||||||||||||||||||||||||||||||||||
Adjustment
to statutory reserve
|
1,508,970
|
(1,508,970
|
)
|
-
|
||||||||||||||||||||||||||||||||||||
Foreign
currency translation gain
|
1,018,130
|
1,018,130
|
||||||||||||||||||||||||||||||||||||||
BALANCE,
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
|
$
|
27,295,661
|
||||||||||||||||||||
Recapitalization
of Company
|
2,131,603
|
2,132
|
3,815,813
|
3,817,959
|
||||||||||||||||||||||||||||||||||||
Common
stock Issued for conversion of options
|
44,031
|
44
|
(44
|
)
|
0
|
|||||||||||||||||||||||||||||||||||
Issuance
of common stock @ $4.80 per share
|
37,500
|
38
|
179,963
|
180,001
|
||||||||||||||||||||||||||||||||||||
Exercise
of stock options to common stock @ $4.20 per share
|
37,500
|
38
|
157,463
|
157,501
|
||||||||||||||||||||||||||||||||||||
Conversion
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
|
)
|
1,975
|
||||||||||||||||||||||||||||||||||
Grant
of warrants and beneficial conversion feature in connection with
convertible debt
|
35,000,000
|
35,000,000
|
||||||||||||||||||||||||||||||||||||||
Common
stock issued for service @ $8.00 per share
|
5,875
|
6
|
46,994
|
47,000
|
||||||||||||||||||||||||||||||||||||
Stock
option compensation
|
10,847
|
10,847
|
||||||||||||||||||||||||||||||||||||||
Net
income
|
22,451,060
|
22,451,060
|
||||||||||||||||||||||||||||||||||||||
Adjustment
to statutory reserve
|
1,096,241
|
(1,096,241
|
)
|
-
|
||||||||||||||||||||||||||||||||||||
Change
in fair value on restricted marketable equity securities
|
1,347,852
|
1,347,852
|
||||||||||||||||||||||||||||||||||||||
Foreign
currency translation gain
|
5,206,612
|
5,206,612
|
||||||||||||||||||||||||||||||||||||||
BALANCE,
June 30, 2008
|
9,767,844
|
$
|
9,770
|
-
|
$
|
-
|
$
|
45,554,513
|
$
|
(11,000
|
)
|
$
|
3,253,878
|
$
|
39,008,403
|
$
|
7,700,905
|
$
|
95,516,469
|
|||||||||||||||||||||
Shares
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
|
20,000
|
||||||||||||||||||||||||||||||||||||
Common
stock issued for service @ $9 per share
|
2,500
|
2
|
22,498
|
22,500
|
||||||||||||||||||||||||||||||||||||
Common
stock issued to Hongrui @ $4.035 per share
|
643,651
|
644
|
2,596,488
|
2,597,132
|
||||||||||||||||||||||||||||||||||||
Stock-based
compensation
|
64,314
|
64,314
|
||||||||||||||||||||||||||||||||||||||
Conversion
of convertible debt to stock
|
20,000
|
20
|
159,980
|
160,000
|
||||||||||||||||||||||||||||||||||||
Net
income
|
28,880,264
|
28,880,264
|
||||||||||||||||||||||||||||||||||||||
Change
in fair value on restricted marketable equity securities
|
(1,514,230
|
) |
(1,514,230
|
) | ||||||||||||||||||||||||||||||||||||
Foreign
currency translation gain
|
336,927
|
336,927
|
||||||||||||||||||||||||||||||||||||||
BALANCE,
June 30, 2009
|
10,435,099
|
$
|
10,435
|
$
|
-
|
$
|
-
|
$
|
48,397,794
|
$
|
(11,000
|
)
|
$
|
3,253,878
|
$
|
67,888,667
|
$
|
6,523,602
|
$
|
126,063,376
|
See
report of indepdendent registered public accounting firm.
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
JIANGBO
PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY
KNOWN AS GENESIS PHARMACEUTICAL ENTERPRISES, INC.)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
YEARS ENDED JUNE 30, 2009, 2008 AND 2007
2009
|
2008
|
2007
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
Net
income
|
$
|
28,880,264
|
$
|
22,451,060
|
$
|
22,053,056
|
||||||
Loss
from discontinued operations
|
1,781,946
|
380,027
|
-
|
|||||||||
Income
from continued operations
|
30,662,210
|
22,831,087
|
22,053,056
|
|||||||||
Adjustments
to reconcile net income to cash
|
||||||||||||
provided
by operating activities:
|
||||||||||||
Depreciation
|
679,507
|
517,863
|
364,417
|
|||||||||
Amortization
of intangible assets
|
735,427
|
184,465
|
122,126
|
|||||||||
Amortization
of debt issuance costs
|
680,276
|
123,964
|
-
|
|||||||||
Amortization
of debt discount
|
4,006,868
|
2,500,043
|
-
|
|||||||||
Bad
debt (recovery) expense
|
538,069
|
(27,641
|
)
|
-
|
||||||||
Loss
on sale of marketable securities
|
473,303
|
-
|
-
|
|||||||||
Unrealized
loss on investments
|
229,425
|
696,528
|
-
|
|||||||||
Other
non-cash settlement income expense
|
(20,000
|
)
|
-
|
-
|
||||||||
Common
stock issued for services
|
-
|
46,994
|
||||||||||
Amortization
of stock option compensation
|
106,815
|
10,847
|
-
|
|||||||||
Gain
on forgiveness of debt
|
-
|
(86,752
|
)
|
-
|
||||||||
Changes
in operating assets and liabilities
|
||||||||||||
Accounts
receivable
|
4,651,284
|
(10,534,270
|
)
|
(1,534,814
|
)
|
|||||||
Accounts
receivable - related parties
|
676,579
|
(113,465
|
)
|
(62,599
|
)
|
|||||||
Notes
receivables
|
-
|
60,694
|
(26,626
|
)
|
||||||||
Inventories
|
792,293
|
1,686,090
|
1,727,215
|
|||||||||
Other
receivables
|
(21,038
|
)
|
(111,571
|
)
|
(20,889
|
)
|
||||||
Advances
to suppliers
|
1,495,805
|
(1,259,254
|
)
|
(66,821
|
)
|
|||||||
Other
assets
|
-
|
92,996
|
1,563,800
|
|||||||||
Accounts
payable
|
3,795,084
|
55,085
|
(2,027,968
|
)
|
||||||||
Accrued
liabilities
|
1,182,018
|
211,362
|
45,567
|
|||||||||
Other
payables
|
(1,534,740
|
)
|
2,033,689
|
(827,498
|
)
|
|||||||
Other
payables - related parties
|
(86,692
|
)
|
(822,155
|
)
|
(3,848,086
|
)
|
||||||
Refundable
security deposits due to distributors
|
4,102,000
|
-
|
-
|
|||||||||
Liabilities
assumed from reorganization
|
(1,301,337
|
)
|
(1,172,816
|
)
|
-
|
|||||||
Taxes
payable
|
11,081,110
|
169,790
|
(2,168,912
|
)
|
||||||||
Net
cash provided by operating activities
|
62,924,266
|
17,093,573
|
15,291,968
|
|||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
Acquisition
of Hongrui
|
(8,584,900
|
)
|
-
|
-
|
||||||||
Proceeds
from sale of investments
|
407,005
|
1,034,028
|
-
|
|||||||||
Proceeds
from sale of restricted investments
|
-
|
155,000
|
-
|
|||||||||
Purchase
of equipment
|
(156,702
|
)
|
(453,718
|
)
|
(183,237
|
)
|
||||||
Purchase
of intangible assets
|
-
|
(8,870,631
|
)
|
-
|
||||||||
Cash
proceeds from sale of equipment
|
15,615
|
-
|
-
|
|||||||||
Cash
proceeds from reverse acquisition
|
-
|
534,950
|
||||||||||
Net
cash used in investing activities
|
(8,318,982
|
)
|
(7,600,371
|
)
|
(183,237
|
)
|
||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
Change
in restricted cash
|
538,815
|
3,292,168
|
435,022
|
|||||||||
Proceeds
from notes payable
|
13,896,990
|
-
|
-
|
|||||||||
Principal
payments on notes payable
|
(12,439,315
|
)
|
(3,292,168
|
)
|
(435,022
|
)
|
||||||
Borrowings
on short term bank loans
|
2,197,500
|
2,616,110
|
4,471,600
|
|||||||||
Principal
payments on short term bank loans
|
(2,783,500
|
)
|
(4,819,150
|
)
|
(5,688,450
|
)
|
||||||
Proceeds
from sale of common stock
|
-
|
337,500
|
-
|
|||||||||
Proceeds
from sale of treasury stock
|
-
|
1,975
|
-
|
|||||||||
Payment
to escrow acount
|
-
|
(1,996,490
|
)
|
-
|
||||||||
Payments
for dividend
|
-
|
(10,608,000
|
)
|
-
|
||||||||
Proceeds
from convertible debt
|
-
|
32,974,500
|
-
|
|||||||||
Payments
for debt issuance cost
|
-
|
(15,408
|
)
|
-
|
||||||||
Net
cash provided by (used in) financing activities
|
1,410,490
|
18,491,037
|
(1,216,850
|
)
|
||||||||
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
154,545
|
2,474,351
|
473,729
|
|||||||||
NET
INCREASE IN CASH
|
56,170,319
|
30,458,590
|
14,365,610
|
|||||||||
CASH,
beginning of the year
|
48,195,798
|
17,737,208
|
3,371,598
|
|||||||||
CASH,
end of the year
|
$
|
104,366,117
|
$
|
48,195,798
|
$
|
17,737,208
|
||||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||||||
Cash
paid for interest
|
$
|
2,255,809
|
$
|
493,781
|
$
|
280,628
|
||||||
Cash
paid for taxes
|
$
|
6,167,810
|
$
|
7,001,264
|
$
|
447,911
|
||||||
Non-cash
investing and financing activities:
|
$
|
$
|
$
|
|||||||||
Capital
contribution made bia contribution of land use rights and
buildings
|
$
|
$
|
$
|
51,280,000
|
||||||||
Common
stock issued to acquire Hongrui
|
$
|
2,597,132
|
$
|
$
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
JIANGBO
PHARMACEUTICALS, INC. AND SUBSIDIARIES
(FORMERLY
KNOWN AS GENESIS PHARMACEUTICALS ENTERPRISES, INC.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009
Note
1 – Organization and business
Jiangbo
Pharmaceuticals, Inc. (the “Company” or “Jiangbo”) was originally incorporated
in the state of Florida on August 15, 2001, under the name Genesis Technology
Group, Inc. with the principal business objective of operating as a business
development and marketing firm that specializes in advising and
providing a turnkey solution for small and mid-sized Chinese
companies entering western markets. On October 12, 2007, after a share exchange
transaction, the Company’s corporate name was changed to Genesis Pharmaceuticals
Enterprises, Inc (“Genesis”).
Pursuant
to a Certificate of Amendment to the Amended and Restated Articles of
Incorporation filed with the State of Florida which took effect as of April 16,
2009, the Company's name was changed from "Genesis Pharmaceuticals Enterprises,
Inc." to "Jiangbo Pharmaceuticals, Inc." (the "Corporate Name Change"). The
Corporate Name Change was approved and authorized by the Board of Directors of
the Company as well as the holders of a majority of the outstanding shares of
the Company’s voting stock by written consent. As a result of the Corporate Name
Change, our stock symbol changed to "JGBO" with the opening of trading on
May 12, 2009 on the OTCBB.
On
October 1, 2007, Genesis executed a Share Acquisition and Exchange Agreement
(“Exchange Agreement”) by and among Genesis, Karmoya International Ltd.
(“Karmoya”), a British Virgin Islands (“BVI”) company, and the shareholders of
100% of Karmoya’s capital stock (the “Karmoya Shareholders”). After the closing
of the share exchange transaction, Karmoya became the Company’s wholly-owned
subsidiary, and the Company’s primary operations now consist of the business and
operations of Karmoya and its subsidiaries.
Contemporaneous
with the share exchange agreement in October 2007, the Company discontinued the
business development and marketing segment of the Company, which had been the
Company’s principal business objective prior to the reverse merger as described
in Note 6. (The business development and marketing segment represented 100% of
the Company’s activities prior to October 1, 2007.) Liabilities of the business
development and marketing segment are reclassified as liabilities assumed from
reorganization in the accompanying consolidated balance sheets. The results of
operations and cash flows of the business development and marketing segment of
the Company have been reflected as loss from discontinued operations in the
consolidated statements of income and consolidated statements of cash flows,
respectively, for the years ended June 30, 2009 and 2008. Except for Jiangbo
Pharmaceuticals, Inc., all other entities that were consolidated into the
Company prior to October 1, 2007, have been administratively
dissolved.
Karmoya
was established on July 18, 2007, under the laws of British Virgin Islands.
Karmoya was established as a “special purpose vehicle” for the foreign capital
raising activities of Laiyang Jiangbo Pharmaceutical Co., Ltd. (“Laiyang
Jiangbo”), a limited liability company formed under the laws of the People’s
Republic of China (the “PRC” or “China”). China’s State Administration of
Foreign Exchange (“SAFE”) requires the shareholders of any Chinese companies to
obtain SAFE’s approval before establishing any offshore holding company
structure for foreign financing as well as subsequent acquisition matters under
an official notice known as “Circular 106” in the PRC. On September 19, 2007,
Karmoya was approved by the local Chinese SAFE as a “special purpose vehicle”
offshore company.
On
September 20, 2007, Karmoya acquired 100% of Union Well International Limited
(“Union Well”), a Cayman Islands corporation established on May 9, 2007. On
September 17, 2007, Union Well established a wholly-owned subsidiary, Genesis
Jiangbo (“Laiyang”) Biotech Technology Co., Ltd. (“GJBT”), in the PRC as a
wholly-owned foreign limited liability company with an original registered
capital of $12 million. GJBT develops, manufactures, and sells health medicines.
The Company increased its registered capital in GJBT to $30,000,000 in June
2008. In August 2008, the PRC government approved for GJBT to increase its
registered capital from $30 million to $58 million. In August 2008, the PRC
government approved for GJBT to increase its registered capital from $30 million
to $58 million. The PRC laws require Union Well, the 100% owner of GJBT to
contribute at least 20% of the registered capital within 30 days of the approval
and the remaining balance was required to be contributed within two years
of the approval date. In August 2008, GJBT received additional registered
capital in the amount of $1,996,001.
See
report of independent registered public accounting firm.
F-6
Laiyang
Jiangbo was formed under laws of the PRC in August 2003, with registered capital
of $1,210,000 (RMB 10,000,000). On December 1, 2006, Laiyang Jiangbo’s
registered capital increased to $6,664,000 (RMB 50,000,000), and on December 22,
2006, the registered capital was funded by the contribution of certain buildings
to the Company. Laiyang Jiangbo produces and sells western pharmaceutical
products in China and focuses on developing innovative medicines to address
various medical needs for patients worldwide. Laiyang Jiangbo operates in 26
provinces in the PRC, and is headquartered in Laiyang City, Shandong province,
China.
On
September 21, 2007, GJBT entered into a series of contractual arrangements
(“Contractual Arrangements”) with Laiyang Jiangbo and its shareholders. Under
the terms of the Contractual Arrangements, GJBT took control over the management
of the business activities of Laiyang Jiangbo and holds a 100% variable interest
in Laiyang Jiangbo. The Contractual Arrangements are comprised of a series of
agreements, including a Consulting Services Agreement and an Operating
Agreement, through which GJBT has the right to advise, consult, manage, and
operate Laiyang Jiangbo, and collect and own all of their respective net
profits. Additionally, Laiyang Jiangbo’s shareholders have granted their voting
rights over Laiyang Jiangbo to GJBT. In order to further reinforce GJBT’s rights
to control and operate Laiyang Jiangbo, Laiyang Jiangbo and its shareholders
have granted GJBT the exclusive right and option to acquire all of their
equity interests in Laiyang Jiangbo or, alternatively, all of the assets of
Laiyang Jiangbo. Further Laiyang Jiangbo’s shareholders have pledged all of
their rights, titles, and interests in Laiyang Jiangbo to GJBT. GJBT is 100%
owned by Union Well International Ltd. (“Union Well”) which is 100% owned
Karmoya. The Company’s CEO and Chairman, Mr. Cao Wubo and his wife, Mrs. Xun
Guihong, jointly owned 74.4 % of Karmoya prior to October 1,
2007. Remaining 25.6% of Karmoya ownership was transferred to Genesis
Technology Group, Inc. (now known as Genesis Pharmaceuticals Enterprises, Inc.)
from various parties on October 1, 2007. As Karmoya, Union Well, and GJBT all
have the same sole executive director, Mr. Cao Wubo, and the voting ownership of
Laiyang Jiangbo and GJBT meet the criteria for common control for accounting
purposes, Laiyang Jiangbo and GJBT have been operated under the common
control.
Karmoya
used the contractual arrangements to gain control of Laiyang Jiangbo, instead of
using a complete acquisition of Laiyang Jiangbo’s assets or equity to make
Laiyang Jiangbo a wholly-owned subsidiary of Karmoya, due to the following: (i)
PRC laws governing share exchanges with foreign entities, which became effective
on September 8, 2006, make the consequences of such acquisitions uncertain and
(ii) other than by share exchange, PRC’s laws would require Karmoya to acquire
Laiyang Jiangbo in cash, and at the time of the acquisition, Karmoya was unable
to raise sufficient funds to pay the full appraised cash fair value for Laiyang
Jiangbo’s assets or shares as required under PRC laws.
In
October 2007, the Company recapitalized the Company to give effect to the
Exchange Agreement. Under generally accepted accounting principles,
the acquisition by the Company of Karmoya is considered to be capital
transactions in substance, rather than a business combination. That is, the
acquisition is equivalent to the acquisition by Karmoya of the Company, then
known as Genesis Technology Group, Inc., with the issuance of stock by Karmoya
for the net monetary assets of the Company. This transaction is
reflected as a recapitalization, and is accounted for as a change in capital
structure. Accordingly, the accounting for the acquisition is
identical to that resulting from a reverse acquisition. Under reverse
acquisition accounting, the comparative historical financial statements of the
Company, as the legal acquirer, are those of the accounting acquirer,
Karmoya. Since Karmoya, Union Well and GJBT did not have any business
activities, the Company’s accompanying financial statements prior to the closing
on the reverse acquisition reflect only the business activities of Laiyang
Jiangbo. The financial statements reflect the recapitalization of the
shareholders’ equity as if the transactions occurred as of the beginning of the
first period presented.
See
report of independent registered public accounting firm.
F-7
Pursuant
to the Exchange Agreement, the shareholders of Karmoya transferred to the
Company all of the outstanding shares of Karmoya in exchange for 597 shares of
the Company’s common stock, and 5,995,780 shares of the Company’s Series B
convertible voting preferred stock and convertible into 299,789,000 common
shares of the Company. The 594 shares of common stock and 5,995,780 shares of
preferred stocks issued to the former Karmoya stockholders are deemed to be
outstanding for all periods reported prior to the date of the reverse
acquisition. Upon the preferred stock conversion, as of the closing date,
the holder of the preferred stock would hold approximately 75% of the
Company’s issued and outstanding common stock. As a result, Karmoya
became the Company’s wholly-owned subsidiary. As a result of the transaction
pursuant to the Exchange Agreement, the Company’s business has become the
business of Laiyang Jiangbo. The sole director and officer of Karmoya is Mr.
Wubo Cao, who, as a result of the exchange, became the Chief Executive Officer,
President and Chairman of the Board of the Company.
Note
2 - Summary of significant accounting policies
Restatement
The
Company previously excluded the dilutive effect of its May 2008 convertible
debentures from the diluted earnings per share calculation for the year ended
June 30, 2008. The Company has revised its accounting to include the dilutive
effect of the May 2008 convertible debentures
in its diluted earnings per share calculation. The interest expense and
amortization expenses on the financing costs and note discounts were added back
and all the unamortized financing costs and debt discounts at beginning of the
period were subtracted from the 2008 diluted earnings per shares
calculation.
The
restatement had no effect on the Company’s consolidated financial statements as
of and for the year ended June 30, 2009 and the Company’s consolidated balance
sheet, consolidated statement of cash flow, and consolidated statements of
shareholders’ equity as of and for the year ended June 30, 2008. The Company’s
consolidated statement of income and other comprehensive income for the year
ended June 30, 2008 has been restated as follows:
Diluted
earnings (loss) per share
Original
|
Increase
(Decrease)
|
Restated
|
||||||||||
For
the years ended June 30,2008:
|
||||||||||||
Net
income for basic earnings per share
|
$
|
22,451,060
|
$
|
—
|
$
|
22,451,060
|
||||||
Add:
interest expense
|
195,833
|
150,000
|
345,833
|
|||||||||
Add:
financing cost amortization
|
71,708
|
52,255
|
123,963
|
|||||||||
Add: note
discount amortization
|
545,359
|
1,954,684
|
2,500,043
|
|||||||||
Subtract:
unamortized financing cost at beginning of the period
|
(349,000
|
)
|
(1,691,907
|
)
|
(2,040,907
|
)
|
||||||
Subtract:
unamortized debt discount at beginning of the period
|
(5,000,000
|
)
|
(30,000,000
|
)
|
(35,000,000
|
|||||||
Net
income for diluted earnings per share
|
17,914,960
|
(29,534,968
|
)
|
(11,620,008
|
)
|
|||||||
Weighted
average shares used in basic computation
|
9,164,127
|
-
|
9,164,127
|
|||||||||
Diluted
effect of stock options
|
87,910
|
(87,910
|
) |
-
|
||||||||
Diluted
effect of warrants
|
79,973
|
(79,973
|
) |
-
|
||||||||
Diluted
effect of convertible notes
|
405,822
|
330,479
|
736,301
|
|||||||||
Weighted
average shares used in diluted computation
|
9,737,832
|
162,596
|
9,900,428
|
|||||||||
Earnings
(loss) per share:
|
||||||||||||
Basic
|
$
|
2.45
|
$
|
-
|
$
|
2.45
|
||||||
Diluted
|
$
|
1.84
|
$
|
(3.01
|
)
|
$
|
(1.17
|
) |
F-8
Basis of
presentation
The
Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America ("US
GAAP"). All significant inter-company accounts and transactions have been
eliminated in consolidation.
Principles
of consolidation
The
accompanying consolidated financial statements include the accounts of the
following entities, and all significant intercompany transactions and balanced
have been eliminated in consolidation:
Consolidated entity name:
|
Percentage of
ownership
|
|||
Karmoya
International Ltd.
|
100 | % | ||
Union
Well International Limited
|
100 | % | ||
Genesis
Jiangbo Biotech Technology Co., Ltd.
|
100 | % | ||
Laiyang
Jiangbo Pharmaceutical Co., Ltd.
|
Variable
Interest
Entity
|
Financial
Accounting Standards Board (“FASB”) Interpretation Number (“FIN”) 46 (revised
December 2003), “Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51” (“FIN 46R”), addresses whether certain types of entities,
referred to as variable interest entities should be consolidated in a company’s
consolidated financial statements. In accordance with the provisions of FIN 46R,
Laiyang Jiangbo is considered variable interest entities, and the Company is the
primary beneficiary. The Company’s relationships with Laiyang Jiangbo and its
shareholders are governed by a series of contractual arrangements between GJBT,
the Company’s wholly foreign-owned enterprise in the PRC, and Laiyang Jiangbo,
which is the operating company of the Company in the PRC. Under PRC laws, each
of GJBT and Laiyang Jiangbo is an independent legal entity and neither of them
is exposed to liabilities incurred by the other parties. The contractual
arrangements constitute valid and binding obligations of the parties of such
agreements. Each of the contractual arrangements and the rights and obligations
of the parties thereto are enforceable and valid in accordance with the laws of
the PRC.
On
September 21, 2007, the Company entered into the following contractual
arrangements with Laiyang Jiangbo:
Consulting
Services Agreement: Pursuant to the exclusive consulting services agreement
between GJBT and Laiyang Jiangbo, GJBT has the exclusive right to provide to
Laiyang Jiangbo general consulting services related to pharmaceutical business
operations, as well as consulting services related to human resources and
technological research and development of pharmaceutical products and health
supplements (the “Services”). Under this agreement, GJBT owns the intellectual
property rights developed or discovered through research and development while
providing the Services for Laiyang Jiangbo. Laiyang Jiangbo pays a
quarterly consulting service fee in Chinese Renminbi (“ RMB ”) to GJBT that
is equal to all of Laiyang Jiangbo's revenue for such quarter.
See
report of independent registered public accounting firm.
F-9
Operating
Agreement: Pursuant to the operating agreement among GJBT, Laiyang Jiangbo and
the shareholders of Laiyang Jiangbo who collectively hold 100% of the
outstanding shares of Laiyang Jiangbo (collectively, the “ Laiyang Shareholders
”), GJBT provides guidance and instructions on Laiyang Jiangbo's daily
operations, financial management and employment issues. The Laiyang Shareholders
must appoint the candidates recommended by GJBT as members of Laiyang Jiangbo's
board of directors. GJBT has the right to appoint senior executives of Laiyang
Jiangbo. In addition, GJBT agrees to guarantee Laiyang Jiangbo's performance
under any agreements or arrangements relating to Laiyang Jiangbo's business
arrangements with any third party. Laiyang Jiangbo, in return, agreed to pledge
its accounts receivable and all of its assets to GJBT. Moreover, Laiyang
Jiangbo agrees that without the prior consent of GJBT, Laiyang Jiangbo will not
engage in any transactions that could materially affect the assets, liabilities,
rights or operations of Laiyang Jiangbo, including, but not limited to,
incurrence or assumption of any indebtedness, sale or purchase of any assets or
rights, incurrence of any encumbrance on any of its assets or intellectual
property rights in favor of a third party, or transfer of any agreements
relating to its business operation to any third party. The term of this
agreement is ten (10) years from September 21, 2007, unless early termination
occurs in accordance with the provisions of the agreement and may be extended
only upon GJBT's written confirmation prior to the expiration of the this
agreement, with the extended term to be mutually agreed upon by the
parties.
Equity Pledge Agreement: Pursuant to the equity pledge agreement among GJBT,
Laiyang Jiangbo and the Laiyang Shareholders, the Laiyang Shareholders pledged
all of their equity interests in Laiyang Jiangbo to GJBT to guarantee Laiyang
Jiangbo's performance of its obligations under the consulting services
agreement. If either Laiyang Jiangbo or any of the Laiyang Shareholders breaches
its respective contractual obligations, GJBT, as pledgee, will be entitled
to certain rights, including the right to sell the pledged equity interests. The
Laiyang Shareholders also granted GJBT an exclusive, irrevocable power of
attorney to take actions in the place and stead of the Laiyang Shareholders to
carry out the security provisions of the equity pledge agreement and take any
action and execute any instrument that GJBT may deem necessary or advisable to
accomplish the purposes of the equity pledge agreement. The Laiyang Shareholders
agreed, among other things, not to dispose of the pledged equity interests or
take any actions that would prejudice GJBT's interest. The equity pledge
agreement will expire two (2) years after Laiyang Jiangbo obligations under the
exclusive consulting services agreement have been fulfilled.
Option
Agreement: Pursuant to the option agreement among GJBT, Laiyang Jiangbo and the
Laiyang Shareholders, the Laiyang Shareholders irrevocably granted GJBT or its
designated person an exclusive option to purchase, to the extent permitted under
PRC law, all or part of the equity interests in Laiyang Jiangbo for the cost of
the initial contributions to the registered capital or the minimum amount of
consideration permitted by applicable PRC law. GJBT or its designated person has
sole discretion to decide when to exercise the option, whether in part or in
full. The term of this agreement is ten (10) years from September 21, 2007,
unless early termination occurs in accordance with the provisions of the
agreement and may be extended only upon GJBT's written confirmation prior to the
expiration of the this agreement, with the extended term to be mutually agreed
upon by the parties.
Proxy Agreement: Pursuant to the proxy agreement among GJBT and the Laiyang
Shareholders, the Laiyang Shareholders agreed to irrevocably grant and entrust
all the rights to exercise their voting power to the person(s) appointed by
GJBT. GJBT may from time to time establish and amend rules to govern how GJBT
shall exercise the powers granted to it by the Laiyang Shareholders, and GJBT
shall take action only in accordance with such rules. The Laiyang Shareholders
shall not transfer their equity interests in Laiyang Jiangbo to any individual
or company (other than GJBT or the individuals or entities designated by GJBT).
The Laiyang Shareholders acknowledged that they will continue to perform this
agreement even if one or more than one of them no longer hold the equity
interests of Laiyang Jiangbo. This agreement may not be terminated without the
unanimous consent of all of the parties, except that GJBT may terminate this
agreement by giving thirty (30) days prior written notice to the Laiyang
Shareholders.
See
report of independent registered public accounting firm.
F-10
These
contractual arrangements obligate GJBT to absorb a majority of the risk of loss
from Laiyang Jiangbo’s activities and enable GJBT to
receive a majority of its expected residual returns. GJBT also has
the right to appoint senior executives and members of Laiyang
Jiangbo’s board of directors, and Laiyang Jiangbo also agrees that without
the prior consent of GJBT, Laiyang Jiangbo will not engage in any transactions
that could materially affect the assets, liabilities, rights or operations of
Laiyang Jiangbo. Because of the contractual arrangements, the Company has a
pecuniary interest in Laiyang Jiangbo that requires consolidation of the
Company’s and Laiyang Jiangbo’s financial statements.
Reverse
stock split
In July
2008, the Company approved a 40-to-1 reverse stock split, effective on September
4, 2008. The accompanying consolidated financial statements have been
retroactively adjusted to reflect the reverse split. All share representations
are on a post-split basis.
Foreign
currency translation
The
reporting currency of the Company is the U.S. dollar (“USD”). The functional
currency of the Company is the local currency, the Chinese Renminbi (“RMB”). In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52,
“Foreign Currency Translation,” results of operations and cash flows are
translated at average exchange rates during the period, assets and liabilities
are translated at the unified exchange rates as quoted by the People’s Bank of
China at the end of the period, and equity is translated at historical exchange
rates. As a result, amounts related to assets and liabilities reported on the
consolidated statements of cash flows will not necessarily agree with changes in
the corresponding balances on the consolidated balance sheets. Transaction gains
and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.
Asset and
liability accounts at June 30, 2009, were translated at 6.83 RMB to $1.00 USD as
compared to 6.85 RMB to $1.00 USD at June 30, 2008. The average translation
rates applied to income statements for the years ended June 30, 2009, 2008, and
2007 were 6.83 RMB, 7.26 RMB and 7.81 RMB to $1.00 USD,
respectively.
Use of
estimates
The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. The significant estimates made in the
preparation of the Company’s consolidated financial statements relate to the
assessment of the carrying values of accounts receivable and related
allowance for doubtful accounts, allowance for obsolete inventory, sales
returns, fair value of warrants and beneficial conversion features related to
the convertible notes, and fair value of options granted to employees. Actual
results could be materially different from these estimates upon which the
carrying values were based.
Revenue
recognition
Product
sales are generally recognized when title to the product has transferred to
customers in accordance with the terms of the sale. The Company recognizes
revenue in accordance with the Securities and Exchange Commission’s (“SEC”)
Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in
Financial Statements,” as amended by SAB No. 104 (together,
“SAB 104”), and SFAS No. 48 (“SFAS 48”) “Revenue Recognition When
Right of Return Exists.” SAB 104 states that revenue should not be
recognized until it is realized or realizable and earned. In general, the
Company records revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price to
the customer is fixed or determinable, and collectability is reasonably
assured.
See
report of independent registered public accounting firm.
F-11
The
Company is generally not contractually obligated to accept returns. However, on
a case by case negotiated basis, the Company permits customers to return their
products. In accordance with SFAS 48, revenue is recorded net of an allowance
for estimated returns. Such reserves are based upon management's evaluation of
historical experience and estimated costs. The amount of the reserves ultimately
required could differ materially in the near term from amounts included in the
accompanying consolidated statements of income.
Financial
instruments
SFAS 107,
“Disclosures about Fair Value of Financial Instruments,” defines financial
instruments and requires fair value disclosures about those
instruments. SFAS 157, “Fair Value Measurements,” adopted July 1,
2008, defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. Investments, receivables, payables, short term
loans and convertible debt all qualify as financial
instruments. Management concluded the receivables, payables and short
term loans approximate their fair values because of the short period of time
between the origination of such instruments and their expected realization and,
if applicable, their stated rates of interest are equivalent to rates
currently available.
The three
levels of valuation hierarchy are defined as follows:
·
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted)
for identical assets or liabilities in active
markets.
|
·
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
·
|
Level
3 inputs to the valuation methodology are unobservable and
significant to the fair value
measurement.
|
The
Company analyzes all financial instruments with features of both liabilities and
equity under SFAS 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities,” and EITF 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.” Further, as required by SFAS 157, financial
assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement. Depending on
the product and the terms of the transaction, the fair value of notes payable
and derivative liabilities were modeled using a series of techniques, including
closed-form analytic formula, such as the Black-Scholes option-pricing
model.
The
following table sets forth by level within the fair value hierarchy the
financial assets and liabilities that were accounted for at fair value on a
recurring basis.
|
Carrying Value
at June 30, 2009
|
Fair Value Measurements at
June 30, 2009,
Using Fair Value Hierarchy
|
||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Investments
|
$
|
879,228
|
$
|
879,228
|
$
|
-
|
$
|
-
|
||||||||
Investments,
restricted
|
1,033,463
|
1,033,463
|
-
|
-
|
||||||||||||
$5M
Convertible Debt (November 2007)
|
1,362,923
|
-
|
-
|
5,276,423
|
||||||||||||
$29.8M
Convertible Debt (May 2008)
|
4,983,988
|
-
|
-
|
31,251,796
|
||||||||||||
Total
|
$
|
8,259,602
|
$
|
1,912,691
|
$
|
-
|
$
|
36,528,219
|
See
report of independent registered public accounting firm.
F-12
The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented on the consolidated balance sheets at fair value in
accordance with SFAS 157.
SFAS 159,
“The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB Statement No. 115,” became effective for the
Company on July 1, 2008. SFAS 159 provides the Company with the irrevocable
option to elect fair value for the initial and subsequent measurement for
certain financial assets and liabilities on a contract-by-contract basis with
the difference between the carrying value before election of the fair value
option and the fair value recorded upon election as an adjustment to beginning
retained earnings. The Company chose not to elect the fair value
option.
Stock-based
compensation
The
Company records stock-based compensation expense pursuant to SFAS No. 123R
(“SFAS 123R”), “Share Based Payment.” SFAS 123R requires companies to measure
compensation cost for stock-based employee compensation plans at fair value at
the grant date and recognize the expense over the employee's requisite service
period. The Company estimates the fair value of the award using the
Black-Scholes option pricing model. Under SFAS 123R, the Company’s expected
volatility assumption is based on the historical volatility of Company’s stock
or the expected volatility of similar entities. The expected life assumption is
primarily based on historical exercise patterns and employee post-vesting
termination behavior. The risk-free interest rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of
grant.
Stock-based
compensation expense is recognized based on awards expected to vest, and there
were no estimated forfeitures as the Company has a short history of issuing
options. SFAS 123R requires forfeitures to be estimated at the time of grant and
be revised in subsequent periods, if necessary, if actual forfeitures differ
from those estimates.
The
Company uses the Black-Scholes option-pricing model which was developed for use
in estimating the fair value of options. Option-pricing models require the input
of highly complex and subjective variables including the expected life of
options granted and the Company’s expected stock price volatility over a period
equal to or greater than the expected life of the options. Because changes in
the subjective assumptions can materially affect the estimated value of the
Company’s employee stock options, it is management’s opinion that the
Black-Scholes option-pricing model may not provide an accurate measure of the
fair value of the Company’s employee stock options. Although the fair value of
employee stock options is determined in accordance with SFAS 123R using an
option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.
Comprehensive
income
SFAS No.
130 (“SFAS 130”), “Reporting Comprehensive Income,” establishes standards for
reporting and display of comprehensive income and its components in financial
statements. It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The accompanying consolidated financial statements include
the provisions of SFAS 130.
Cash and
cash equivalents
Cash and
cash equivalents include cash on hand and demand deposits in accounts maintained
with state-owned banks within the PRC. The Company considers all highly liquid
instruments with original maturities of three months or less, and money market
accounts to be cash and cash equivalents.
See
report of independent registered public accounting firm.
F-13
The
Company maintains cash deposits in financial institutions that exceed the
amounts insured by the U.S. government. Balances at financial institutions or
state-owned banks within the PRC are not covered by insurance. Non-performance
by these institutions could expose the Company to losses for amounts in excess
of insured balances. At June 30, 2009 and 2008, the Company’s bank balances,
including restricted cash balances, exceeded government-insured limits by
approximately $111,684,000 and $55,576,000, respectively. The Company has not
experienced non-performance by these institutions.
Restricted
cash
Restricted
cash represent amounts set aside by the Company in accordance with the Company’s
debt agreements with certain financial institutions. These cash amounts are
designated for the purpose of paying down the principal amounts owed to the
financial institutions, and these amounts are held at the same financial
institutions with which the Company has debt agreements. Due to the short-term
nature of the Company’s debt obligations to these banks, the corresponding
restricted cash balances have been classified as current in the consolidated
balance sheets.
As of
June 30, 2009 and 2008, the Company had restricted cash of $7,325,000 and
$7,839,785, respectively, of which $7,325,000 and $5,843,295, respectively, were
maintained as security deposits for bank acceptance related to the Company’s
notes payable. At June 30, 2008, $1,996,490 of the restricted cash amounts were
maintained in the Company’s legal counsel’s hold-back escrow account related to
the May 2008 convertible note issuance (Note 14), contingent on the Company’s
satisfaction of certain financing terms. These monies were released to the
Company in full in July 2008.
Investments
and restricted investments
Investments
are comprised primarily of marketable equity securities of publicly traded
companies and are stated at fair value based on the trade price of these
securities. These investments are classified as trading securities based on the
Company’s intent to sell them within the year. Restricted investments are
marketable equity securities of publicly traded companies that were acquired
through the reverse merger and contained U.S. Securities and Exchange Commission
Rule 144 restrictions on the securities. These securities are classified as
available-for-sale and are reflected as restricted and noncurrent investments as
the restrictions are expected to be fully terminated beyond one year period and
the Company intends to hold them beyond one year. Restricted investments are
carried at fair value which is estimated using the most recent contemporaneous
offering price for these restricted securities.
For
trading securities, realized and unrealized gains and losses are included in the
accompanying consolidated statements of income. For available-for-sale
securities, realized gains and losses are included in the consolidated
statements of income. Unrealized gains and losses for these available-for-sale
securities are reported in other comprehensive income, net of tax, in the
consolidated statements of shareholders’ equity. The Company has no
investments that are considered to be held-to-maturity securities.
For the
year ended June 30, 2009, realized loss on trading securities amounted to
$473,303. Unrealized loss on trading securities amounted to $229,425 for the
year ended June 30, 2009. For the year ended June 30, 2008, realized loss on
trading securities amounted to $44,881. Unrealized loss on trading securities
amounted to $651,464 for the year ended June 30, 2008.
For the
year ended June 30, 2009, unrealized loss on available-for-sales securities
amounted to $1,514,230. For the year ended June 30, 2008, unrealized gain on
available-for-sales securities amounted to $1,347,852.
For the
years ended June 30, 2007, there was no realized or unrealized gain or loss on
trading securities or available-for-sale securities.
See
report of independent registered public accounting firm.
F-14
Accounts
receivable
In the
normal course of business, the Company extends credit to its customers without
requiring collateral or other security interests. Management reviews its
accounts receivables at each reporting period to provide for an allowance
against accounts receivable for an amount that could become uncollectible. This
review process may involve the identification of payment problems with specific
customers. The Company estimates this allowance based on the aging of the
accounts receivable, historical collection experience, and other relevant
factors, such as changes in the economy and the imposition of regulatory
requirements that can have an impact on the industry. These factors continuously
change, and can have an impact on collections and the Company’s estimation
process. These impacts may be material.
Certain
accounts receivable amounts are charged off against allowances after designated
period of collection efforts. Subsequent cash recoveries are recognized as
income in the period when they occur.
The
activities in the allowance for doubtful accounts are as follows for the years
ended June 30, 2009 and 2008:
2009
|
2008
|
|||||||
Beginning
allowance for doubtful accounts
|
$
|
155,662
|
$
|
166,696
|
||||
Bad
debt expense (recovery)
|
538,068
|
(27,641
|
)
|
|||||
Foreign
currency translation adjustments
|
640
|
16,607
|
||||||
Ending
allowance for doubtful accounts
|
$
|
694,370
|
$
|
155,662
|
Inventories
Inventories,
consisting of raw materials and finished goods related to the Company’s
products, are stated at the lower of cost or market utilizing the weighted
average method.
The
Company reviews its inventory periodically for possible obsolescence or to
determine if any reserve is necessary. As of June 30, 2009 and 2008, the Company
determined that no inventory reserves were necessary.
Advances
to suppliers
Advances
to suppliers represent partial payments or deposits for future inventory
purchases. These advances to suppliers are non-interest bearing and unsecured.
From time to time, vendors require a certain amount of monies to be deposited
with them as a guarantee that the Company will receive their purchases on a
timely basis. As of June 30, 2009, and 2008, the Company’s advance to suppliers
amounted to approximately $236,000 and $1,719,000, respectively.
Plant and
equipment
Plant and
equipment are stated at cost less accumulated depreciation. Additions and
improvements to plant and equipment accounts are recorded at cost. When assets
are retired or disposed of, the cost and accumulated depreciation are removed
from the accounts, and any resulting gains or losses are included in the results
of operations in the year of disposition. Maintenance, repairs, and minor
renewals are charged directly to expense as incurred. Major additions and
betterments to plant and equipment accounts are capitalized. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets. The estimated useful lives of the assets are as follows:
|
Useful Life
|
Buildings
and building improvements
|
5 –
40 Years
|
Manufacturing
equipment
|
5 –
20 Years
|
Office
equipment and furniture
|
5 –
10 Years
|
Vehicles
|
5
Years
|
See
report of independent registered public accounting firm.
F-15
Intangible
assets
All land
in the PRC is owned by the PRC government and cannot be sold to any individual
or company. The Company has recorded the amounts paid to the PRC government to
acquire long-term interests to utilize land underlying the Company’s facilities
as land use rights. This type of arrangement is common for the use of land in
the PRC. The land use rights are amortized on the straight-line method over the
terms of the land use rights, which range from 20 to 50 years. The Company
acquired land use rights in August 2004 and October 2007 in the amounts of
approximately $879,000 and $8,871,000, respectively, which are included in
intangible assets. (See Note 8)
Intangible
assets also consist of purchased technological know-how (“patents”). This
includes secret formulas, manufacturing processes, technical and procedural
manuals, and the certificate of drugs production, and customer list and customer
relationships and are amortized using the straight-line method over the expected
useful life of 3 to 5 years, which reflects the period over which the patents
are kept secret to the Company as agreed between the Company and the selling
parties. (See Note 8)
The
estimated useful lives of intangible assets are as follows:
|
Useful Life
|
Land
use rights
|
50 Years
|
Patents
|
5
Years
|
Licenses
|
5
Years
|
Customer
list and customer relationships
|
3
Years
|
Trade
secrets - formulas and know how technology
|
5
Years
|
Impairment
of long-lived assets
Long-lived
assets of the Company are reviewed periodically or more often if circumstances
dictate, to determine whether their carrying values have become impaired. The
Company considers assets to be impaired if the carrying values exceed the future
projected cash flows from related operations. The Company also re-evaluates the
periods of depreciation to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of June 30, 2009, the Company
expects these assets to be fully recoverable.
Beneficial
conversion feature of convertible notes
The
Company accounted for the $5,000,000 and $30,000,000 secured convertible notes
issued pursuant to the subscription agreements discussed in Note 13 under
Emerging Issues Task Force (“EITF”) 00-27, ‘‘Application of Issue 98-5 to
Certain Convertible Instruments.” In accordance with EITF 00-27, the Company has
determined that the convertible notes contained beneficial conversion feature
because on November 6, 2007, the effective conversion price of the $5,000,000
convertible note was $5.81 when the market value per share was $16.00, and on
May 30, 2008, the effective conversion price of the $30,000,000 convertible note
was $5.10 when the market value per share was $12.00. Total value of beneficial
conversion feature of $2,904,092 for the November 6, 2007 convertible
note and $19,111,323 for the May 30, 2008 convertible debt was treated as a
discount to the convertible notes. The beneficial conversion feature is
amortized using the effective interest method over the term of the notes. As of
June 30, 2009 and 2008, a total of $17,955,637 and $20,453,441, respectively,
remained unamortized relating to the beneficial conversion
features.
See
report of independent registered public accounting firm.
F-16
Income
taxes
The
Company accounts for income taxes in accordance with SFAS No. 109 (“SFAS 109”),
“Accounting for Income Taxes.” Under the asset and liability method as required
by SFAS 109, deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under SFAS 109, the effect on
deferred income taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is recognized if
it is more likely than not that some portion, or all of, a deferred tax asset
will not be realized. As of June 30, 2009 and 2008, the Company did not have any
net deferred tax assets or liabilities, and as such, no valuation allowances
were recorded at June 30, 2009 and 2008.
The
Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement No. 109,” as of July 1, 2007. FIN 48 clarifies
the accounting and disclosure for uncertain tax positions and prescribes a
recognition threshold and measurement attribute for recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
Under FIN
48, evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met.
The
Company’s operations are subject to income and transaction taxes in the United
States and in the PRC jurisdictions. Significant estimates and judgments are
required in determining the Company’s worldwide provision for income taxes. Some
of these estimates are based on interpretations of existing tax laws or
regulations, and as a result the ultimate amount of tax liability may be
uncertain. However, the Company does not anticipate any events that would lead
to changes to these uncertainties.
Value
added tax
The
Company is subject to value added tax (“VAT”) for manufacturing products and
business tax for services provided. The applicable VAT rate is 17% for products
sold in the PRC. The amount of VAT liability is determined by applying the
applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT
paid on purchases made with the relevant supporting invoices (input VAT). Under
the commercial practice of the PRC, the Company pays VAT based on tax
invoices issued. The tax invoices may be issued subsequent to the date on which
revenue is recognized, and there may be a considerable delay between the date on
which the revenue is recognized and the date on which the tax invoice is issued.
In the event that the PRC tax authorities dispute the date on which revenue is
recognized for tax purposes, the PRC tax office has the right to assess a
penalty, which can range from zero to five times the amount of the taxes which
are determined to be late or deficient, and will be expensed in the period if
and when a determination is been made by the taxing authorities that a penalty
is due.
VAT on
sales and VAT on purchases amounted to $17,037,463 and $2,918,492, respectively,
for the year ended June 30, 2009. VAT on sales and VAT on purchases amounted to
$16,975,054 and $3,283,855, respectively, for the year ended June 30, 2008. VAT
on sales and VAT on purchases amounted to $5,523,840 and $262,013, respectively,
for the year ended June 30, 2007. Sales and purchases are recorded net of VAT
collected and paid as the Company acts as an agent for the government. VAT taxes
are not impacted by the income tax holiday. The Chinese local government
exempted $1,428,804 and $6,126,464 of the Company’s VAT tax liability at June
30, 2008 and 2007, respectively, and this exemption has been included in the
consolidated statement of income for the year then ended. The Company did not
receive any VAT tax exemption in the year ended June 30, 2009.
See
report of independent registered public accounting firm.
F-17
Shipping
and handling
Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative expenses. Shipping and handling costs amounted to
$575,743, $365,327 and $280,099 for the years ended June 30, 2009, 2008, and
2007, respectively.
Advertising
Expenses
incurred in the advertising of the Company and the Company’s products are
charged to operations currently. Advertising expenses amounted to $2,572,631,
$4,653,121 and $1,280,900 for the years ended June 30, 2009, 2008 and 2007,
respectively.
Research
and development
Research
and development costs are expensed as incurred. These costs primarily consist of
cost of material used and salaries paid for the development of the Company’s
products and fees paid to third parties to assist in such efforts. Research and
development costs for the years ended June 30, 2009, 2008, and 2007 were
approximately $4,395,000, $3,236,000, and $11,144,000,
respectively.
Recent
accounting pronouncements
In June
2008, the FASB issued Emerging Issues Task Force Issue No. 07-5 (“EITF 07-5”),
“Determining whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock.” EITF No. 07-5 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. Early application is not permitted.
Paragraph 11(a) of SFAS 133 “Accounting for Derivatives and Hedging Activities”
specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company’s own stock and
(b) classified in stockholders’ equity in the statement of financial
position would not be considered a derivative financial instrument. EITF 07-5
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer’s own stock and thus
able to qualify for the SFAS 133 paragraph 11(a) scope exception. This standard
triggers liability accounting on all warrants exercisable at strike prices
denominated in any currency other than the functional currency of the
operating entity in the PRC (Renminbi). Management is currently evaluating the
impact of adoption of EITF 07-5 on the accounting for related convertible notes
transactions.
On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 when the market for a financial asset is inactive.
Specifically, FSP 157-3 clarifies how (1) management’s internal assumptions
should be considered in measuring fair value when observable data are not
present, (2) observable market information from an inactive market should be
taken into account, and (3) the use of broker quotes or pricing services should
be considered in assessing the relevance of observable and unobservable data to
measure fair value. The adoption of FSP 157-3 did not have a material impact on
the Company’s consolidated financial statements.
In
November 2008, the FASB issued EITF Issue No. 08-7, “Accounting for
Defensive Intangible Assets.” EITF No. 08-7 discusses that when an entity
acquired in a business combination or an asset acquisition an intangible asset
that it did not intend to actively use, otherwise known as a defensive asset,
the entity historically allocated little or no value to the defensive asset.
However, with the issuance of SFAS 141(R) and SFAS 157 the entity must
recognize a value for the defensive asset that reflects the asset’s highest and
best use based on market assumptions. Upon the effective date of both
SFAS 141(R) and SFAS 157, acquirers will generally assign a greater value
to a defensive asset than would typically have been assigned under
SFAS 141. EITF No. 08-7 will be effective for the first annual
reporting period beginning on or after December 15, 2008. EITF
No. 08-7 will apply prospectively to business combinations for which the
acquisition date is after fiscal years beginning on or after December 15,
2008. The adoption of EITF No. 08-7 is not expected to have a
material impact on the Company’s results of operations or financial
condition.
See
report of independent registered public accounting firm.
F-18
In April
2009, the FASB issued FSP SFAS No. 141 (R), “Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from
Contingencies,” or FSP SFAS No. 141 (R). FSP SFAS No. 141
(R) amends and clarifies SFAS No. 141, “Business Combinations,” in
regards to the initial recognition and measurement, subsequent measurement and
accounting, and disclosures of assets and liabilities arising from
contingencies in a business combination. FSP SFAS No. 141 (R) applies
to all assets acquired and liabilities assumed in a business combination that
arise from contingencies that would be within the scope of SFAS No. 5,
“Accounting for Contingencies”, if not acquired or assumed in a business
combination, except for assets or liabilities arising from contingencies that
are subject to specific guidance in SFAS No. 141 (R). FSP SFAS No. 141
(R) will be effective for the first annual reporting period beginning on or
after December 15, 2008. FSP SFAS No. 141(R) will apply prospectively
to business combinations for which the acquisition date is after fiscal years
beginning on or after December 15, 2008. The adoption of SFAS No. 141
(R) will not have a material impact on the Company’s results of operations
or financial condition.
In April
2009, the FASB issued FSP FAS 157-4, which provides guidance on how to determine
the fair value of assets and liabilities when the volume and level of activity
for the asset or liability has significantly decreased when compared with normal
market activity for the asset or liability as well as guidance on identifying
circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is
effective for interim and annual periods ending after June 15, 2009. The Company
is currently evaluating the financial impact of FSP FAS 157-4, but expects that
the financial impact, if any, will not be material on its consolidated financial
statements.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, which amends the requirements
for the recognition and measurement of other-than-temporary impairments for debt
securities by modifying the current "intent and ability" indicator. Under FSP
FAS 115-2 and FAS 124-2, an other-than-temporary impairment must be recognized
if the Company has the intent to sell the debt security or the Company is more
likely than not will be required to sell the debt security before its
anticipated recovery. In addition, FSP FAS 115-2 and FAS 124-2 requires
impairments related to credit loss, which is the difference between the present
value of the cash flows expected to be collected and the amortized cost basis
for each security, to be recognized in earnings while impairments related to all
other factors to be recognized in other comprehensive income. FSP FAS 115-2 and
FAS 124-2 is effective for interim and annual periods ending after June 15,
2009. The Company is currently evaluating the financial impact of FSP FAS 115-2
and FAS 124-2 , but expects that the financial impact, if any, will not be
material on its consolidated financial statements.
In April
2009, the FASB issued FSP 107-1 and 28-1. This FSP amends SFAS 107, to require
disclosures about fair value of financial instruments not measured on the
balance sheet at fair value in interim financial statements as well as in annual
financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to
disclose the method(s) and significant assumptions used to estimate the fair
value of financial instruments. This FSP is effective for interim periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP 157-4 and 115-2 and 124-2. This FSP does not require
disclosures for earlier periods presented for comparative purposes at initial
adoption. In periods after initial adoption, this FSP requires comparative
disclosures only for periods ending after initial adoption. The Company is
currently evaluating the disclosure requirements of this new FSP.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events
(“SFAS 165”).” SFAS 165 provides guidance on management’s assessment
of subsequent events. The new standard clarifies that management must evaluate,
as of each reporting period, events or transactions that occur after the balance
sheet date through the date that the financial statements are issued or are
available to be issued. Management must perform its assessment for both interim
and annual financial reporting periods. SFAS 165 does not significantly
change the Company’s practice for evaluating such events. SFAS 165 is
effective prospectively for interim and annual periods ending after
June 15, 2009 and requires disclosure of the date subsequent events are
evaluated through.
See
report of independent registered public accounting firm.
F-19
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“FAS 167”), which modifies how a company determines when an entity that
is insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. SFAS 167 clarifies that the determination of
whether a company is required to consolidate an entity is based on, among other
things, an entity’s purpose and design and a company’s ability to direct the
activities of the entity that most significantly impact the entity’s economic
performance. SFAS167 requires an ongoing reassessment of whether a company
is the primary beneficiary of a variable interest entity. SFAS167 also requires
additional disclosures about a company’s involvement in variable interest
entities and any significant changes in risk exposure due to that involvement.
SFAS 167 is effective for fiscal years beginning after November 15, 2009. The
Company is currently assessing the impact of the standard on its consolidated
financial statements.
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
Codification (“Codification”) and the Hierarchy of Generally Accepted Accounting
Principles — a replacement of FASB Statement 162” (“SFAS 168”).
SFAS 168 establishes the Codification as the source of authoritative United
States accounting and reporting standards for all non-governmental entities
(other than guidance issued by the SEC). The Codification is a reorganization of
current GAAP into a topical format that eliminates the current GAAP hierarchy
and establishes two levels of guidance — authoritative and
non-authoritative. According to the FASB, all “non-grandfathered, non-SEC
accounting literature” that is not included in the Codification would be
considered non-authoritative. The FASB has indicated that the Codification
does not change current GAAP. Instead, the changes aim to (1) reduce the
time and effort it takes for users to research accounting questions and
(2) improve the usability of current accounting standards. The Codification
is effective for interim and annual periods ending on or after
September 15, 2009. The Company will apply the Codification to its
disclosures beginning with the first quarter ending September 30, 2009. As
the Codification is not intended to change the existing accounting guidance, its
adoption will not have an impact on the Company’s results of operations or
financial condition.
Company
reporting year end
For
financial statement reporting purposes in the United States of America, the
Company adopted June 30 as its fiscal year end, beginning in 2007.
Reclassifications
Certain
amounts in the prior year’s consolidated financial statements have been
reclassified to conform to the current period presentation with no impact on the
previously reported net income or cash flows.
Note
3 - Acquisition
On
January 23, 2009, Laiyang Jiangbo entered into an asset acquisition agreement
(the “Agreement”) with Shandong Traditional Chinese Medicine College (the
“Medicine College”) and Shandong Hongrui Pharmaceutical Factory (“Shandong
Hongrui” or “Hongrui”), a wholly-owned subsidiary of Medicine
College, pursuant to which Laiyang Jiangbo purchased the
majority of the assets owned by Hongrui, including all tangible assets, all
manufacturing and office buildings, land, equipment and inventories and all
rights to manufacture and distribute Hongrui’s 22 Traditional Chinese Medicines
(“TCMs”), for an original contract purchase price of approximately $12 million
consisting of approximately $9.6 million in cash and 643,651 shares of Jiangbo’s
common stock. The $4.035 fair value of each common share was based on the
weighted average trading price of the common stock of 5 days prior to the
execution of the Agreement and amounted to $2,597,132. On February 10, 2009, the
Agreement was amended to revise the total purchase price to approximately $11.1
million consisting of approximately $8.6 million in cash. The Company is
obligated to issue 643,651 shares of Jiangbo’s stock to Medicine College
within one year of the date of the execution of the Agreement. As of June 30,
2009, Laiyang Jiangbo paid approximately $8.6 million in cash in full. The
643,651 shares of Jiangbo’s common stock issuable to
Medicine College in connection with the acquisition of Hongrui have
been included in the accompanying consolidated balance sheet as outstanding
shares.
See
report of independent registered public accounting firm.
F-20
The
Company accounted for this acquisition using the purchase method of accounting
in accordance with SFAS 141, “Business Combinations.” The purchase price was
determined based on an arm's length negotiation and no finder's fees or
commissions were paid in connection with this acquisition.
The
following represents the allocation of the purchase price to the net assets
acquired based on their respective fair values. The accompanying
consolidated financial statements include the acquisition of Hongrui, effective
February 5, 2009. The following represents the allocation of the purchase
price to the net assets acquired based on their respective fair
values.
Inventory
|
$
|
147,250
|
||
Plant
and equipments
|
3,223,808
|
|||
Intangible
assets
|
7,810,974
|
|||
Total
assets acquired
|
11,182,032
|
|||
Net
assets acquired
|
11,182,032
|
|||
Total
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, 2008
(Restated)
|
||||||
Net
Revenues
|
$
|
124,729,372
|
$
|
115,573,456
|
||||
Income
from Operations
|
50,265,379
|
34,244,471
|
||||||
Net
Income
|
29,234,644
|
23,848,737
|
||||||
Net
Income (loss) Per Shares
|
||||||||
Basic
|
$
|
2.80
|
$
|
2.43
|
||||
Diluted
|
$
|
0.11
|
$
|
(0.97
|
) | |||
Weighted
Average number of shares outstanding
|
||||||||
Basic
|
10,424,592
|
9,807,778
|
||||||
Diluted
|
14,848,096
|
10,544,079
|
Note
4 - Earnings per share
The
Company reports earnings per share in accordance with the provisions of SFAS No.
128 (“SFAS 128”), “Earnings Per Share.” SFAS 128 requires presentation of basic
and diluted earnings per share in conjunction with the disclosure of the
methodology used in computing such earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock.
All share
and per share amounts used in the Company’s financial statements and notes
thereto have been retroactively restated to reflect the 40-to-1 reverse stock
split, which occurred on September 4, 2008.
The
following is a reconciliation of the basic and diluted earnings per share
computations for the years ended June 30, 2009, 2008, and 2007:
See
report of independent registered public accounting firm.
F-21
Note
4 – Earnings (loss) per share
Basic
earning per share
2009
|
2008
|
2007
|
||||||||||
For
the years ended June 30, 2009, 2008 and 2007
|
||||||||||||
Net
income for basic earnings per share
|
$
|
28,880,264
|
$
|
22,451,060
|
$
|
22,053,056
|
||||||
Weighted
average shares used in basic computation
|
10,061,326
|
9,164,127
|
7,494,740
|
|||||||||
Earnings
per share – Basic
|
$
|
2.87
|
$
|
2.45
|
$
|
2.94
|
Diluted
earnings (loss) per share
2009
|
2008
|
2007
|
||||||||||
Restated
|
||||||||||||
For
the years ended June 30, 2009, 2008 and 2007
|
||||||||||||
Net
income for basic earnings per share
|
$
|
28,880,264
|
$
|
22,451,060
|
$
|
22,053,056
|
||||||
Add:
interest expense
|
2,124,340
|
345,833
|
-
|
|||||||||
Add:
financing cost amortization
|
680,276
|
123,963
|
||||||||||
Add: note
discount amortization
|
4,004,868
|
2,500,043
|
||||||||||
Subtract:
unamortized financing cost at beginning of the period
|
(1,916,944
|
)
|
(2,040,907
|
)
|
-
|
|||||||
Subtract:
unamortized debt discount at beginning of the period
|
(32,499,957
|
)
|
(35,000,000
|
)
|
-
|
|||||||
Net
income for diluted earnings per share
|
1,274,847
|
(11,620,008
|
) |
22,053,056
|
||||||||
Weighted
average shares used in basic computation
|
10,061,326
|
9,164,127
|
7,494,740
|
|||||||||
Diluted
effect of stock options
|
48,504
|
-
|
-
|
|||||||||
Diluted
effect of warrants
|
-
|
-
|
-
|
|||||||||
Diluted
effect of convertible notes
|
4,375,000
|
736,301
|
-
|
|||||||||
Weighted
average shares used in diluted computation
|
14,484,830
|
9,900,428
|
7,494,740
|
|||||||||
Earnings
(loss) per share:
|
||||||||||||
Basic
|
$
|
2.87
|
$
|
2.45
|
$
|
2.94
|
||||||
Diluted
|
$
|
0.09
|
$
|
(1.17
|
) |
$
|
2.94
|
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.
For the
year ended June 30, 2007, all options and warrants were excluded in the diluted
earnings per share calculation due to the anti-dilutive effect.
See
report of independent registered public accounting firm.
F-22
Note
5 - Discontinued operations
In
connection with the reverse merger with Karmoya on October 1, 2007, the Company
determined to discontinue its operations of business development and marketing,
as it no longer supported its core business strategy. The discontinuance of
these operations did not involve any sale of assets of assumption of liabilities
by another party. In conjunction with the discontinuance of operations, the
Company determined that the assets related to the Company’s business
development and marketing operations were subject to the recognition of
impairment. However, since the related assets are continuing to be used by the
Company’s Karmoya and subsidiaries, the Company determined that there had been
no impairment. The remaining liabilities of the discontinued operations are
reflected in the consolidated balance sheets under the caption "liabilities
assumed from reorganization" which amounted to approximately $1,565,000 and
$1,084,000 as of June 30, 2009 and 2008, respectively.
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the results of operations of a component of entity that has
been disposed of or is classified as held for sale shall be reported in
discontinued operations. Accordingly, the results of operations of the business
development and marketing operation segment are reported as discontinued
operations in the accompanying consolidated statements of income for the years
ended June 30, 2009 and 2008. As the accompanying consolidated statements of
income for the year ended June 30, 2007 reflect the results of operations for
Karmoya and its subsidiaries, the discontinued operations of Genesis did not
have any impact on the consolidated statements of income for those periods
presented.
The
following is a summary of the components of the loss from discontinued
operations for the years ended June 30, 2009 and 2008:
2009
|
2008
|
|||||||
Revenues
|
$
|
-
|
||||||
Cost
of sales
|
-
|
|||||||
Gross
profit
|
-
|
|||||||
Operating
and other non-operating expenses
|
1,781,946
|
380,027
|
||||||
Loss
from discontinued operations before other expenses and income
taxes
|
1,781,946
|
380,027
|
||||||
Income
tax benefit
|
-
|
-
|
||||||
Loss
from discontinued operations
|
$
|
1,781,946
|
$
|
380,027
|
Note
6 - Inventories
Inventories
consisted of the following:
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
||
Raw
materials
|
$
|
1,539,612
|
$
|
2,164,138
|
||||
Work-in-process
|
55,992
|
531,076
|
||||||
Packing
materials
|
483,297
|
204,763
|
||||||
Finished
goods
|
1,198,303
|
1,006,197
|
||||||
Total
|
$
|
3,277,194
|
$
|
3,906,174
|
See
report of independent registered public accounting firm.
F-23
Note
7 - Plant and equipment
Plant and
equipment consist of the following at June 30, 2009 and 2008:
2009
|
2008
|
|||||||
Buildings
and building improvements
|
$
|
12,798,375
|
$
|
10,926,369
|
||||
Manufacturing
equipment
|
2,603,114
|
1,188,643
|
||||||
Office
equipment and furniture
|
291,061
|
298,137
|
||||||
Vehicle
|
477,396
|
380,485
|
||||||
Total
|
16,169,946
|
12,793,634
|
||||||
Less:
accumulated depreciation
|
(2,212,549
|
)
|
(1,567,790
|
)
|
||||
Total
|
$
|
13,957,397
|
$
|
11,225,844
|
See
report of independent registered public accounting firm.
For the years ended June
30, 2009, 2008, and 2007, depreciation expense amounted to $679,507, $517,863,
and $364,417, respectively.
Note
8 - Intangible assets
At June
30, 2009 and 2008, intangible assets consist of the following:
2009
|
2008
|
|||||||
Land
use rights
|
$
|
11,245,939
|
$
|
9,930,157
|
||||
Patents
|
4,937,050
|
539,830
|
||||||
Customer
lists and customer relationships
|
1,123,580
|
|||||||
Trade
secrets- formulas and manufacture process know-how
|
1,025,500
|
|||||||
Licenses
|
23,368
|
23,271
|
||||||
Total
|
18,355,436
|
10,493,258
|
||||||
Less:
accumulated amortization
|
(1,314,255
|
)
|
(576,457
|
)
|
||||
Total
|
$
|
17,041,181
|
$
|
9,916,801
|
The
estimated amortization expense for the next five years and thereafter
are
Years ending June 30:
|
||||
2010
|
$
|
1,743,299
|
||
2011
|
1,682,606
|
|||
2012
|
1,518,984
|
|||
2013
|
1,300,754
|
|||
2014
and thereafter
|
10,795,537
|
|||
Total
|
$
|
17,041,181
|
For the
years ended June 30, 2009, 2008, and 2007, amortization expense relating to the
above intangible assets amounted to $735,427, $184,465, and $122,126,
respectively.
See
report of independent registered public accounting firm.
F-24
Note
9 - Debt
Short
term bank loans
Short
term bank loan represents an amount due to a bank that is due within one year.
This loan can be renewed with the bank upon maturity. The Company’s short term
bank loan consisted of the following:
|
|
June 30, 2009
|
|
|
June 30,2008
|
|
||
Loan
from Bank of Communication; due December 2009 and September 2008; interest
rates of 6.37% and 8.64% per annum; monthly interest payment; guaranteed
by related party, Jiangbo Chinese-Western
Pharmacy.
|
$
|
2,197,500
|
$
|
2,772,100
|
||||
Total
|
$
|
2,197,500
|
$
|
2,772,100
|
Interest
expense related to the bank loans amounted to $116,649, $436,818, and $280,628
for the years ended June 30, 2009, 2008, and 2007, respectively.
See
report of independent registered public accounting firm.
Notes Payable
Notes
payable represent amounts due to a bank which are normally secured and are
typically renewed. All notes payable are secured by the Company’s restricted
cash. The Company’s notes payables consist of the following:
June 30, 2009
|
June 30, 2008
|
|||||||
Commercial
Bank, various amounts, due from April 2009 to September 2009; 100% of
restricted cash deposited.
|
$
|
7,325,000
|
$
|
5,843,295
|
||||
Total
|
$
|
7,325,000
|
$
|
5,843,295
|
Note
10 - Related party transactions
Accounts
receivable - related parties
The
Company had engaged in business activities with three related parties, Jiangbo
Chinese-Western Pharmacy, Laiyang Jiangbo Medicals, Co., Ltd, and Yantai Jiangbo
Pharmaceuticals Co., Ltd. The Company’s Chief Executive Officer and other
related parties have majority ownership of these entities. At June 30, 2009 and
2008, accounts receivable from the Company’s product sales to these related
entities were $0 and $673,808, respectively. Accounts receivable due from
related parties are receivable in cash and due within three to six months. For
the years ended June 30, 2009, 2008, and 2007, the Company recorded sales
to related parties as follows:
See
report of independent registered public accounting firm.
F-25
Name of Related Party
|
Relationship
|
Net Sales
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||||
Jiangbo
Chinese-Western Pharmacy
|
90%
owned by Chief Executive Officer
|
$
|
108,176
|
$
|
1,622,935
|
$
|
3,018,502
|
|||||||
Laiyang
Jiangbo Medicals, Co. Ltd
|
100%
owned by Chief Executive Officer and his spouse
|
-
|
1,185,183
|
436,909
|
||||||||||
Yantai
Jiangbo Pharmaceuticals Co., Ltd.
|
Owned
by Other Related Party
|
135,850
|
2,755,980
|
478,470
|
||||||||||
Total
|
$
|
244,026
|
$
|
5,564,098
|
$
|
3,933,881
|
Other
income from related parties
The
Company leases two of its buildings to Jiangbo Chinese-Western Pharmacy. For the
years ended June 30, 2009, 2008, and 2007, the Company recorded other income of
$382,970, $110,152, and $102,472 from leasing the two aforementioned
buildings.
Other
payables - related parties
Other
payables-related parties primarily consist of accrued salary payable to the
Company’s officers and directors, and advances from the Company’s Chief
Executive Officer. These advances are short-term in nature and bear no interest.
The amounts are expected to be repaid in the form of cash. Other
payables - related parties consisted of the following:
June 30,
2009
|
June 30,
2008
|
|||||||
Payable
to Wubo Cao, Chief Executive Officer and Chairman of the
Board
|
$
|
184,435
|
$
|
281,137
|
||||
Payable
to Haibo Xu, Chief Operating Officer and Director
|
33,688
|
43,839
|
||||||
Payable
to Elsa Sung, Chief Financial Officer
|
18,333
|
-
|
||||||
Payable
to John Wang, Director
|
2,500
|
-
|
||||||
Total
other payable - related parties
|
$
|
238,956
|
$
|
324,976
|
See
report of independent registered public accounting firm.
F-26
Note
11 - Concentration of major customers, suppliers, and products
For the
years ended June 30, 2009, 2008 and 2007, three products accounted for 88%, 95%
and 95%, respectively, of the Company’s total sales.
For the
years ended June 30, 2009, 2008, and 2007, five customers accounted for
approximately 25.6%, 18.1%, and 33.3%, respectively, of the Company's sales.
These five customers represented 31.4% and 11.8% of the Company’s total accounts
receivable as of June 30, 2009 and 2008, respectively.
For the
years ended June 30, 2009, 2008 and 2007, five suppliers accounted for
approximately 63.3%, 67.7% and 87.2%, respectively, of the Company’s purchases.
These five suppliers represented 82.4% and 63.8% of the Company’s total accounts
payable as of June 30, 2009 and 2008, respectively.
Note
12 - Taxes
Income
taxes
The
Company is subject to the United States federal income tax at a tax rate of 34%.
No provision for income taxes in the U.S. has been made as the company had no
U.S. taxable income during the years ended June 30, 2009, 2008, and
2007.
The
Company’s wholly-owned subsidiaries, Karmoya and Union Well were incorporated in
the British Virgin Islands and Cayman Islands, respectively. Under the current
laws of the BVI and Cayman Islands, the two entities are not subject to income
taxes.
Prior to
January 1, 2008, companies established in the PRC were generally subject to an
enterprise income tax ("EIT") rate of 33.0%, which included a 30.0% state income
tax and a 3.0% local income tax. The PRC local government has provided various
incentives to companies in order to encourage economic development. Such
incentives include reduced tax rates and other measures. On March 16, 2007, the
National People's Congress of China passed the new Enterprise Income Tax Law
("EIT Law"), and on November 28, 2007, the State Council of China passed the
Implementing Rules for the EIT Law ("Implementing Rules") which took effect on
January 1, 2008. The EIT Law and Implementing Rules impose a unified EIT of
25.0% on all domestic-invested enterprises and Foreign Investment Enterprises
(“FIEs”), unless they qualify under certain limited exceptions. Therefore,
nearly all FIEs are subject to the new tax rate alongside other domestic
businesses rather than benefiting from the foreign enterprise income tax, and
its associated preferential tax treatments, beginning January 1,
2008.
In
addition to the changes to the current tax structure, under the EIT Law, an
enterprise established outside of China with "de facto management bodies" within
China is considered a resident enterprise and will normally be subject to an EIT
of 25.0% on its global income. The Implementing Rules define the term "de facto
management bodies" as "an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise." If the PRC tax authorities subsequently
determine that the Company should be classified as a resident enterprise, then
the organization’s global income will be subject to PRC income tax of rate
25.0%. Laiyang Jiangbo and GJBT were subject to 25% income tax rate since
January 1, 2008, and 33% income tax rate prior to January 1, 2008.
See
report of independent registered public accounting firm.
F-27
Liangyang
Jiangbo was subject to 33% income tax rate from January 1, 2007, to December 31,
2007, and 25% from January 1, 2008, to June 30, 2009. In 2007 and 2008, the
Chinese local government granted Laiyang Jiangbo special tax waivers to exempt
and release certain corporate income tax, value added tax, and other
miscellaneous tax liabilities; the PRC local government has provided various
incentives to local companies in order to encourage economic development. Such
incentives include reduced tax rates and other measures. The tax waivers were
provided on a non-recurring basis. For the year ended June 30, 2009,
the Company did not receive any tax exemptions. For the year ended
June 30, 2008, the Company received $5,256,634 in tax exemption. Of that amount,
$2,114,983 was reflected as reduction of the provision for income taxes;
$1,695,671 was reflected as reduction of sales tax and miscellaneous fees; and
$1,445,980 was recorded as non-operating income. The Chinese local government
exempted all of the Company's taxes due for the period from January 1, 2007
to June 30, 2007. For that period, the Company received $9,931,919
tax exemption as of June 30, 2007, of which $3,338,774 was reflected as
reduction of the provision for income taxes, and $6,593,145 was recorded as
non-operating income.
Total tax
exemptions for the years ended June 30, 2008 and 2007 is summarized as
follows:
June 30, 2008
|
June 30, 2007
|
|||||||
VAT
tax exemption
|
$
|
1,428,804
|
$
|
6,126,464
|
||||
Income
tax exemption
|
2,114,983
|
2,986,806
|
||||||
City
construction tax exemption
|
1,079,063
|
510,362
|
||||||
Others
|
633,784
|
308,287
|
||||||
Total
|
$
|
5,256,634
|
$
|
9,931,919
|
The table
below summarizes the differences between the U.S. statutory federal rate and the
Company’s effective tax rate and are as follows for the fiscal years ended June
30, 2009, 2008 and 2007:
2009
|
2008
|
2007
|
||||||||||
U.S.
statutory rates
|
34.0 | % | 34.0 | % | 34.0 | % | ||||||
Foreign
income not recognized in the U.S.
|
(34.0 | ) % | (34.0 | ) % | (34.0 | ) % | ||||||
China
income taxes
|
25.0 | % | 25.0 | % | 33.0 | % | ||||||
China
income tax exemptions
|
- | (5.6 | ) % | (18.6 | ) % | |||||||
Other
Items(a)
|
5.7 | % | 4.3 | % | (3.7 | ) % | ||||||
Total
provision for income taxes
|
30.7 | % | 23.7 | % | 10.7 | % |
(a) The
5.7% and 4.3% represent the expenses incurred by the Company that are not
deductible for PRC income tax purpose for the years ended June 30, 2009 and 2008
respectively. The 3.7% represents the non-operating income generated by the
Company that is not taxable for the year ended June 30, 2007.
Taxes
Payable
Taxes
payable as of June 30, 2009 and 2008 are as follows:
2009
|
2008
|
|||||||
Value
added tax
|
$
|
4,090,492
|
$
|
83,775
|
||||
Income
taxes
|
6,689,199
|
62,733
|
||||||
Other
taxes
|
468,535
|
19,925
|
||||||
Total
|
$
|
11,248,226
|
$
|
166,433
|
See
report of independent registered public accounting firm.
F-28
Jiangbo
incurred net operating losses of $9,327,288 for income tax purposes for the year
ended June 30, 2009. The estimated net operating loss carry forwards
for US income taxes amounted to $1,177,231 which may be available to reduce
future years’ taxable income. These carry forwards will expire, if not utilized,
from 2026 through 2029. Management believes that the realization of
the benefits from these losses appears uncertain due to the Company’s limited
operating history and continuing losses for US income tax
purposes. Accordingly, the Company has provided a 100% valuation
allowance on the deferred tax asset benefit to reduce the asset to
zero. The net change in the valuation allowance for the
period ended June 30, 2009 was $400,259 and the accumulated valuation
allowance as of June 30, 2009 amounted to $761,368. Management reviews this
valuation allowance periodically and makes adjustments as
necessary.
The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $81,041,000 as of June 30, 2009, and is included in consolidated
retained earnings and will continue to be indefinitely reinvested in
international operations. Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if the Company concluded that such earnings will be remitted in the
future.
Note
13 - Convertible Debt
November
2007 Convertible Debentures
On
November 7, 2007, the Company entered into a Securities Purchase Agreement (the
“November 2007 Purchase Agreement”) with Pope Investments, LLC (the “November
2007 Investor”). Pursuant to the November 2007 Purchase Agreement, the Company
issued and sold to the November 2007 Investor, $5,000,000 consisting of: (a) 6%
convertible subordinated debentures due November 30, 2010 (the “November 2007
Debenture”) and (b) a three-year warrant to purchase 250,000 shares of the
Company’s common stock, par value $0.001 per share, at an exercise price of
$12.8 per share, subject to adjustment as provided therein. The November 2007
Debenture bears interest at the rate of 6% per annum and the initial conversion
price of the debentures is $10 per share. In connection with the offering, the
Company placed in escrow 500,000 shares of its common stock. In connection with
the May 2008 financing, the November 2007 Debenture conversion price was
subsequently adjusted to $8 per share (Post 40-to-1 reverse split).
The
Company evaluated the application of EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,” and EITF 00-27, “Application of Issue No. 98-5 to Certain
Convertible Instruments,” and concluded that the convertible debenture has a
beneficial conversion feature. The Company estimated the fair value
of the beneficial conversion feature of the November 2007 Debenture at
$2,904,093 as a discount to par value. The fair value of the warrants was
estimated at $2,095,907. The two amounts are recorded together as debt discount
and amortized using the effective interest method over the three-year term of
the debenture.
The fair
value of the warrants granted with this private placement was computed using the
Black-Scholes option-pricing model. Variables used in the option-pricing model
include (1) risk-free interest rate at the date of grant (4.5%),
(2) expected warrant life of 3 years, (3) expected volatility of
197%, and (4) zero expected dividends. The total estimated fair value of
the warrants granted and beneficial conversion feature of the November 2007
Debenture should not exceed the $5,000,000 Debenture, and the calculated warrant
value was used to determine the allocation between the fair value of the
beneficial conversion feature of the November 2007 Debenture and the fair value
of the warrants.
See
report of independent registered public accounting firm.
F-29
In
connection with the private placement, the Company paid the placement agents a
fee of $250,000 and incurred other expenses of $104,408, which were capitalized
as deferred debt issuance costs and is being amortized to interest expense over
the life of the debenture. During the years ended June 30, 2009 and 2008,
amortization of debt issuance costs related to the November 2007 Purchase
Agreement was $118,136 and $77,116, respectively. The remaining balance of debt
issuance costs of the November 2007 Purchase Agreement at June 30, 2009 and 2008
was $159,155 and $277,291, respectively. The amortization of debt discounts was
$817,564 and $545,359 for the years ended June 30, 2009 and 2008, respectively,
which has been included in interest expense on the accompanying consolidated
statements of income. The balance of the debt discount was $3,637,077 and
$4,454,641 at June 30, 2009 and 2008, respectively.
The
November 2007 Debenture bears interest at the rate of 6% per annum, payable in
semi-annual installments on May 31 and November 30 of each year, with the first
interest payment due on May 31, 2008. The initial conversion price (“November
2007 Conversion Price”) of the November 2007 Debentures is $10 per share. If the
Company issues common stock at a price that is less than the effective November
2007 Conversion Price, or common stock equivalents with an exercise or
conversion price less than the then effective November 2007 Conversion Price,
the November 2007 Conversion Price of the November 2007 Debenture and the
exercise price of the warrants will be reduced to such price. The November 2007
Debenture may not be prepaid without the prior written consent of the Holder, as
defined. In connection with the Offering, the Company placed in escrow 500,000
shares of common stock issued by the Company in the name of the escrow
agent. In the event the Company’s consolidated Net Income Per Share (as defined
in the Purchase Agreement), for the year ended June 30, 2008, is less than
$1.52, the escrow agent shall deliver the 500,000 shares to the November 2007
Investor. The Company has concluded its fiscal 2008 Net Income Per Share has met
the required amount and no shares were delivered to the November 2007
Investor.
Pursuant
to the November 2007 Purchase Agreement, the Company entered into a Registration
Rights Agreement. In accordance with the Registration Rights Agreement, the
Company must file on each Filing Date (as defined in the Registration Rights
Agreement) a registration statement to register the portion of the Registrable
Securities (as defined therein) as permitted by the SEC’s guidance. The initial
registration statement must be filed within 90 days of the Closing Date and
declared effective within 180 days following the Closing Date. Any subsequent
registration statements that are required to be filed on the earliest practical
date on which the Company is permitted by the SEC’s guidance to file such
additional registration statement, these statements must be effective 90 days
following the date on which it is required to be filed. In the event that the
registration statement is not timely filed or declared effective, the Company
will be required to pay liquidated damages. Such liquidated damages shall be, at
the investor’s option, either $1,643.83 or 164 shares of common stock per day
that the registration statement is not timely filed or declared effective as
required pursuant to the Registration Rights Agreement, subject to an amount of
liquidated damages not exceeding either $600,000, and 60,000 shares of common
stock, or a combination thereof based upon 12% liquidated damages in the
aggregate. In December 2006, the FASB issued FSP EITF 00-19-2, "Accounting for
Registration Payments," which was effective immediately. This FSP amended EITF
00-19 to require potential registration payment arrangements be treated as a
contingency pursuant to SFAS No. 5, “Accounting for Contingencies,” rather than
at fair value. The November 2007 Investor has subsequently agreed to allow the
Company to file the November 2007 registration statement in conjunction with the
Company’s financing in May 2008 and, as such, no liquidated damages were
incurred for the year ended June 30, 2008.
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").
See
report of independent registered public accounting firm.
F-30
May 2008
Convertible Debentures
On May
30, 2008, the “Company entered into a Securities Purchase Agreement (the “May
2008 Securities Purchase Agreement”) with certain investors (the “May 2008
Investors”), pursuant to which, on May 30, 2008, the Company sold to the May
2008 Investors 6% convertible debentures (the “May 2008 Notes”) and warrants to
purchase 1,875,000 shares of the Company’s common stock (“May 2008 Warrants”),
for an aggregate amount of $30,000,000 (the “May 2008 Purchase Price”), in
transactions exempt from registration under the Securities Act of 1933, as
amended (the “May 2008 Financing”). Pursuant to the terms of the May 2008
Securities Purchase Agreement, the Company will use the net proceeds from the
Financing for working capital purposes. Also pursuant to the terms of the May
2008 Securities Purchase Agreement, the Company must, among other things,
increase the number of its authorized shares of common stock to 22,500,000 by
August 31, 2008, and is prohibited from issuing any “Future Priced Securities”
as such term is described by NASD IM-4350-1 for one year following the closing
of the Financing. The Company has satisfied the increase in the number of its
authorized shares of common stock in August 2008 (post 40-to-1 reverse
split).
The May
2008 Notes are due May 30, 2011, and are convertible into shares of the
Company’s common stock at a conversion price equal to $8, subject to adjustment
pursuant to customary anti-dilution provisions and automatic downward
adjustments in the event of certain sales or issuances by the Company of common
stock at a price per share less than $8. Interest on the outstanding principal
balance of the May 2008 Notes is payable at a rate of 6% per annum, in
semi-annual installments payable on November 30 and May 30 of each year, with
the first interest payment due on November 30, 2008. At any time after the
issuance of the May 2008 Note, any May 2008 Investor may convert its May 2008
Note, in whole or in part, into shares of the Company’s common stock, provided
that such May 2008 Investor shall not effect any conversion if immediately after
such conversion, such May 2008 Investor and its affiliates would, in the
aggregate, beneficially own more than 9.99% of the Company’s outstanding common
stock. The May 2008 Notes are convertible at the option of the Company if the
following four conditions are met: (i) effectiveness of a registration statement
with respect to the shares of the Company’s common stock underlying the Notes
and the Warrants; (ii) the Volume Weighted Average Price (“VWAP” of the common
stock has been equal to or greater than 250% of the conversion price, as
adjusted, for 20 consecutive trading days on its principal trading market; (iii)
the average dollar trading volume of the common stock exceeds $500,000 on its
principal trading market for the same 20 days; and (iv) the Company achieves
2008 Guaranteed EBT (as hereinafter defined) and 2009 Guaranteed EBT (as
hereinafter defined). A holder of a May 2008 Note may require the Company to
redeem all or a portion of such May 2008 Note for cash at a redemption price as
set forth in the May 2008 Notes, in the event of a change in control of the
Company, an event of default or if any governmental agency in the PRC challenges
or takes action that would adversely affect the transactions contemplated by the
Securities Purchase Agreement. The May 2008 warrants are exercisable for a
five-year period that is beginning on May 30, 2008 at an initial exercise
price of $10 per share.
The
Company evaluated the application of EITF 98-5 and EITF 00-27, and concluded
that the convertible debenture has a beneficial conversion
feature. The Company estimated the fair value of the beneficial
conversion feature of the May 2008 Note at $19,111,323 as a discount to par
value. The fair value of the warrants was estimated at $10,888,677. The two
amounts are recorded together as debt discount and amortized using the effective
interest method over the three-year term of the debenture.
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.
See
report of independent registered public accounting firm.
F-31
In
connection with the private placement, the Company paid the placement agents a
fee of $1,500,000 and incurred other expenses of $186,500, which were
capitalized as deferred debt issuance costs and is being amortized to interest
expense over the life of the debenture. During the years ended June 30, 2009 and
2008, amortization of debt issuance costs related to the May 2008 Purchase
Agreement was $562,140 and $46,848, respectively. The remaining balance of
debt issuance costs of the May 2008 Purchase Agreement at June 30, 2009 and
2008 was $1,077,513 and $1,639,653, respectively. The amortization of debt
discounts was $3,189,304 and $1,954,684 for the years ended June 30, 2009 and
2008, respectively, which has been included in interest expense on the
accompanying consolidated statements of income. The balance of the unamortized
debt discount was $24,856,012 and $28,045,316 at June 30, 2009 and 2008,
respectively.
In
connection with the May 2008 Financing, the Company entered into a holdback
escrow agreement (the “Holdback Escrow Agreement”) dated May 30, 2008, with the
May 2008 Investors and Loeb & Loeb LLP, as Escrow Agent, pursuant to which
$4,000,000 of the May 2008 Purchase Price was deposited into an escrow account
with the Escrow Agent at the closing of the Financing. Pursuant to the terms of
the Holdback Escrow Agreement, (i) $2,000,000 of the escrowed funds will be
released to the Company upon the Company’s satisfaction no later than 120 days
following the closing of the Financing of an obligation that the board of
directors be comprised of at least five members (at least two of whom are to be
fluent English speakers who possess necessary experience to serve as a director
of a public company), a majority of whom will be independent directors
acceptable to Pope Investments LLC (“Pope”) and (ii) $2,000,000 of the escrowed
funds will be released to the Company upon the Company’s satisfaction no later
than six months following the closing of the Financing of an obligation to hire
a qualified full-time chief financial officer (as defined in the May 2008
Securities Purchase Agreement). In the event that either or both of these
obligations is not so satisfied, the applicable portion of the escrowed funds
will be released pro rata to the Investors. The Company has satisfied both
requirements and the holdback money was fully released to the Company in July
2008.
In
connection with the May 2008 Financing, Mr. Cao, the Company’s Chief Executive
Officer and Chairman of the Board, placed 3,750,000 shares of common stock of
the Company owned by him into an escrow account pursuant to a make good escrow
agreement, dated May 30, 2008 (the “Make Good Escrow Agreement”). In the event
that either (i) the Company’s adjusted 2008 earnings before taxes is less than
$26,700,000 USD (“2008 Guaranteed EBT”) or (ii) the Company’s 2008 adjusted
fully diluted earnings before taxes per share is less than $1.6 USD (“2008
Guaranteed Diluted EBT”), 1,500,000 of such shares (the “2008 Make Good Shares”)
are to be released pro rata to the May 2008 Investors. In the event that either
(i) the Company’s adjusted 2009 earnings before taxes is less than $38,400,000
USD (“2009 Guaranteed EBT”) or (ii) the Company’s adjusted fully diluted
earnings before taxes per share is less than $2.32 USD (or $2.24 USD if the
500,000 shares of common stock held in escrow in connection with the November
2007 private placement have been released from escrow) (“2009 Guaranteed Diluted
EBT”), 2,250,000 of such shares (the “2009 Make Good Shares”) are to be released
pro rata to the May 2008 Investors. Should the Company successfully satisfy
these respective financial milestones, the 2008 Make Good Shares and 2009 Make
Good Shares will be returned to Mr. Cao. In addition, Mr. Cao is required to
deliver shares of common stock owned by him to the Investors on a pro rata basis
equal to the number of shares (the “Settlement Shares”) required to satisfy all
costs and expenses associated with the settlement of all legal and
other matters pertaining to the Company prior to or in connection with the
completion of the Company’s October 2007 share exchange in accordance with
formulas set forth in the May 2008 Securities Purchase Agreement (post 40-to-1
reverse split). The Company has determined that both thresholds for the periods
ended June 30, 2008 and June 30, 2009 have been met. The make good shares have
yet to be returned to Mr. Cao.
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.
See
report of independent registered public accounting firm.
F-32
Pursuant
to a Registration Rights Agreement, the Company agreed to file a registration
statement covering the resale of the shares of common stock underlying the May
2008 Notes and Warrants, (ii) the 2008 Make Good Shares, (iii) the 2009 Make
Good Shares, and (iv) the Settlement Shares. The Company must file an initial
registration statement covering the shares of common stock underlying the Notes
and Warrants no later than 45 days from the closing of the Financing and to have
such registration statement declared effective no later than 180 days from the
closing of the Financing. If the Company does not timely file such registration
statement or cause it to be declared effective by the required dates, then the
Company will be required to pay liquidated damages to the Investors equal to
1.0% of the aggregate Purchase Price paid by such Investors for each month that
the Company does not file the registration statement or cause it to be declared
effective. Notwithstanding the foregoing, in no event shall liquidated damages
exceed 10% of the aggregate amount of the May 2008 Purchase Price. The Company
satisfied its obligations under the Registration Rights Agreement by filing the
required registration statement and causing it to be declared effective within
the time periods set forth in the Registration Rights Agreement.
During
the year ended June 30, 2009, the Company issued 20,000 shares of its common
stock upon conversion of $160,000 convertible debt.
The above
two convertible debenture liabilities are as follows:
|
June 30, 2009
|
June 30, 2008
|
||||||
November
2007 convertible debenture note payable
|
$
|
5,000,000
|
$
|
5,000,000
|
||||
May
2008 convertible debenture note payable
|
29,840,000
|
30,000,000
|
||||||
Total
convertible debenture note payable
|
34,840,000
|
35,000,000
|
||||||
Less:
Unamortized discount on November 2007 convertible debenture note
payable
|
(3,637,077
|
)
|
(4,454,641
|
)
|
||||
Less:
Unamortized discount on May 2008 convertible debenture note
payable
|
(24,856,012
|
)
|
(28,045,316
|
)
|
||||
Convertible
debentures, net
|
$
|
6,346,911
|
$
|
2,500,043
|
Note
14 - Shareholders’ equity
Common
Stock
In July
2008, the Board of Directors approved a 40-to-1 reverse stock split that became
effective on September 4, 2008. Those holding fractional shares were rounded up
the next whole share. Subsequent to the stock split, the Company had
approximately 9,768,000 shares issued and outstanding. The total number of
authorized shares became 22,500,000. These consolidated financial statements
have been retroactively adjusted to reflect the reverse split. Additionally, all
share representations are on a post-split basis.
In July
2008, in connection with the settlement (see Note 20) with Mr. Fernando Praca
(Fernando Praca, Plaintiff vs. EXTREMA, LLC and Genesis Pharmaceuticals
Enterprises, Inc.- Case No. 50 2005 CA 005317, Circuit Court of the 15th
Judicial Circuit in and for Palm Beach County, Florida), the Company cancelled
2,500 shares of its common stock (post 40-to-1 reverse split) and the cancelled
shares were valued at fair market value on the date of cancellation at $8 per
share or $20,000 in total, based on the trading price of the common stock. For
the year ended June 30, 2009, the Company recorded settlement income of $20,000
related to this settlement.
In July
2008, the Company issued 2,500 shares of common stock to two of the Company’s
current and former directors as part of their compensation for services. The
Company valued these shares at the fair market value on the date of grant of $8
per share, or $20,000 in total, based on the trading price of common stock (post
40-to-1 reverse split). In September 2008, the Company issued 2,500 shares of
common stock to two of the Company’s current and ex-directors as part of
compensation for services. The Company valued these shares at the fair market
value on the date of grant of $9 per share, or $22,500 in total, based on the
trading price of common stock (post 40-to-1 reverse split).
See
report of independent registered public accounting firm.
F-33
In
November 2008, the Board of the Directors of the Company authorized a share
buyback program to purchase the Company’s common stock in the open market with a
$2,000,000 limitation. As of the date of these consolidated financial
statements, no shares were purchased in the open market.
In
December 2008, the Company issued 20,000 shares of its common stock in
connection with the conversion of $160,000 of convertible debt. In connection
with the conversion, the Company recorded $145,524 interest expense to fully
amortize the unamortized discount related to the converted
dentures.
In
January 2009, in connection with the Hongrui acquisition, the Company recorded
643,651 shares of Jiangbo’s common stock issuable to Shandong Traditional
Chinese Medicine College as part of the consideration for
acquisition. The fair value of the common stock of $4.035 per share
was based on the weighted average trading price of 5 days prior to the date of
the acquisition, and amounted to $2,597,132.
In May
2009, in connection with the Company’s name change to Jiangbo Pharmaceuticals,
Inc., the Company changed the trading symbol for its common stock to
“JGBO.” This change in trading symbol became effective on May 12,
2009.
Registered
capital contribution receivable
At
inception, Karmoya issued 1,000 shares of common stock to its founder. The
shares were valued at par value. On September 20, 2007, the Company issued 9,000
shares of common stock to nine individuals at par value. The balance of $10,000
is shown in capital contribution receivable on the accompanying consolidated
financial statements. As part of its agreements with the shareholders, the
Company was to receive the entire $10,000 in October 2007. As of June 30, 2009,
the Company has not received the $10,000.
Union
Well was established with a registered capital of $1,000. In connection with
Karmoya’s acquisition of Union Well, the registered capital of $1,000 is
reflected as capital contribution receivable on the accompanying consolidated
financial statements. The $1,000 was due in October 2007; however, as of June
30, 2009, the Company has not received the $1,000.
PRC laws
require the owner of a WOFE to contribute at least 15% of the registered capital
within 90 days of its business license issuance date and the remaining balance
is required to be contributed within two years of the business license issuance
date. In June 2008, the PRC government approved GJBT to increase its registered
capital from $12,000,000 to $30,000,000. By June 30, 2008, the Company had
funded GJBT the entire registered capital required in accordance with PRC laws.
In August 2008, the PRC government approved GJBT to increase its registered
capital from $30,000,000 to $59,800,000. The PRC laws require Union Well, the
100% owner of GJBT to contribute at least 20% of the registered capital within
30 days of the approval, and the remaining balance is required to be contributed
within two years of the approval date. In August 2008, GJBT received additional
registered capital in the amount of approximately $1,966,000. As of June 30,
2009, the Company has not received the remaining contribution receivable in the
amount of $27,845,000. If the remaining contribution receivable cannot be
received by August 2010, the Company may be required to reduce its registered
capital or apply to extend the registered capital due date with the
government.
Note 15 -
Warrants
In
connection with the May 2008 financing, the exercise price of outstanding
warrants issued in 2004 to purchase 74,085 shares of common stock was reduced to
$8 per share. The 2004 warrants contain full ratchet anti-dilution provisions to
the exercise price, which due to the Company’s May 2008 financing, resulted in
the 2004 warrants to be exercisable at $8 per share. The provisions of the 2004
Warrants which result in the reduction of the exercise price remain in place.
The 74,085 shares of warrants were fully expired as of June 30,
2009.
See
report of independent registered public accounting firm.
F-34
In
connection with the $5,000,000 November 2007 Convertible Debenture, 6%
convertible subordinated debenture note, the Company issued a three-year warrant
to purchase 250,000 shares of common stock, at an exercise price of $12.80 per
share. The calculated fair value of the warrants granted with this private
placement was computed using the Black-Scholes option-pricing model. Variables
used in the option-pricing model include (1) risk-free interest
rate at the date of grant (4.5%), (2) expected warrant life of
3 years, (3) expected volatility of 197%, and (4) zero expected
dividends. In connection with the May 2008 financing, the exercise price of
outstanding warrants issued in November 2007 was reduced to $8 per share and the
total number of warrants to purchase common stock was increased to
400,000.
In
connection with the $30,000,000 May 2008 Convertible Debentures, the Company
issued a five-year warrant to purchase 1,875,000 shares of common stock, at an
exercise price of $10 per share. The calculated fair value of the warrants
granted with this private placement was computed using the Black-Scholes
option-pricing model. Variables used in the option-pricing model include
(1) risk-free interest rate at the date of grant (4.5%), (2) expected
warrant life of 5 years, (3) expected volatility of 95%, and
(4) zero expected dividends.
On
February 15, 2009, the Company granted 40,000 stock warrants to a consultant at
an exercise price of $6.00 per share exercisable for a period of three years.
The warrants fully vest on July 15, 2009. The fair value of this
warrant grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (1) risk-free interest rate
at the date of grant (1.83%), (2) expected warrant life of three years, (3)
expected volatility of 106%, and (4) zero expected dividends. In connection with
these warrants, the Company recorded stock-based compensation expense
of $46,508 and stock based deferred compensation of $77,400 for the year ended
June 30, 2009.
A summary
of the warrants as of June 30, 2009, and changes during the years ended June 30,
2009 and 2008, respectively, is presented below:
|
|
Number of warrants
|
||
Outstanding
as of June 30, 2007
|
74,085
|
|||
Granted
|
2,275,000
|
|||
Forfeited
|
-
|
|||
Exercised
|
-
|
|||
Outstanding
as of June 30, 2008
|
2,349,085
|
|||
Granted
|
40,000
|
|||
Forfeited
|
(74,085)
|
|||
Exercised
|
-
|
|||
Outstanding
as of June 30, 2009
|
2,315,000
|
The
following is a summary of the status of warrants outstanding at June 30,
2009:
Outstanding Warrants
|
Exercisable Warrants
|
||||||||||||||||||||
Average
Exercise Price
|
Number
|
Average
Remaining
Contractual Life
|
Average
Exercise Price
|
Number
|
Average
Remaining
Contractual Life
|
||||||||||||||||
$
|
6.00
|
40,000
|
2.63
|
$
|
6.00
|
-
|
-
|
||||||||||||||
$
|
8.00
|
400,000
|
3.36
|
$
|
8.00
|
400,000
|
3.36
|
||||||||||||||
$
|
10.00
|
1,875,000
|
3.92
|
$
|
10.00
|
1,875,000
|
3.92
|
||||||||||||||
Total
|
2,315,000
|
2,275,000
|
See
report of independent registered public accounting firm.
F-35
The
Company has 2,275,000 warrants outstanding and exercisable at an average
exercise price of $9.65 per share as of June 30, 2009.
Note 16
- Stock options
On July
1, 2007, 133,400 options were granted and the fair value of this option grant
was estimated on the date of the grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
Expected
|
Expected
|
Dividend
|
Risk Free
|
Grant Date
|
|||||||||||||
Life
|
Volatility
|
Yield
|
Interest Rate
|
Fair Value
|
|||||||||||||
Former
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 Fair
|
|||||||||||||
Life
|
Volatility
|
Yield
|
Interest Rate
|
Value
|
|||||||||||||
Current
officer
|
5
years
|
95
|
%
|
0
|
%
|
2.51
|
%
|
$
|
8.00
|
As of
June 30, 2009, of the 7,500 options held by the Company’s executives, directors,
and employees, 5,625 were vested.
The
following is a summary of the option activity during the years ended June 30,
2009 and 2008, respectively:
Number of options
|
||||
Outstanding
as of June 30, 2007
|
194,436
|
|||
Granted
|
7,500
|
|||
Forfeited
|
(23,536
|
)
|
||
Exercised
|
(37,500
|
)
|
||
Outstanding
as of June 30, 2008
|
140,900
|
|||
Granted
|
-
|
|||
Forfeited
|
-
|
|||
Exercised
|
-
|
|||
Outstanding
as of June 30, 2009
|
140,900
|
The
following is a summary of the status of options outstanding at June 30,
2009:
F-36
Outstanding options
|
Exercisable options
|
||||||||||||||||
Average
Exercise price
|
Number
|
Average
remaining
contractual life
(years)
|
Average
exercise price
|
Number
|
|||||||||||||
$
|
4.20
|
133,400
|
1.50
|
$
|
4.20
|
133,400
|
|||||||||||
12.00
|
2,000
|
4.00
|
12.00
|
2,000
|
|||||||||||||
16.00
|
1,750
|
4.00
|
16.00
|
1,750
|
|||||||||||||
20.00
|
1,875
|
4.00
|
20.00
|
1,875
|
|||||||||||||
24.00
|
1,875
|
4.00
|
-
|
-
|
|||||||||||||
$
|
4.93
|
140,900
|
$
|
4.40
|
139,025
|
For the
years ended June 30, 2009 and 2008, the Company recorded total stock-based
compensation expense of $104,107 and $57,847, respectively. As of
June 30, 2009 and 2008, there was approximately $89,000 and $26,000,
respectively, of total unrecognized compensation expense related
to unvested share-based compensation arrangements granted. That cost
is expected to be recognized over a weight average period of six
months.
Note
17 - Statutory reserves
The
Company is required to make appropriations to reserve funds, comprising the
statutory surplus reserve and discretionary surplus reserve, based on after-tax
net income determined in accordance with generally accepted accounting
principles of the PRC ("PRC GAAP"). Appropriation to the statutory surplus
reserve is required to be at least 10% of the after tax net income
determined in accordance with PRC GAAP until the reserve is equal to 50% of the
entities' registered capital. Appropriations to the discretionary surplus
reserve are made at the discretion of the Board of Directors.
The
statutory surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years' losses, if any, and may be
utilized for business expansion or converted into share capital by issuing new
shares to existing shareholders in proportion to their shareholding or by
increasing the par value of the shares currently held by them, provided that the
remaining reserve balance after such issue is not less than 25% of the
registered capital.
The
discretionary surplus fund may be used to acquire fixed assets or to increase
the working capital to expend on production and operations of the business. The
Company’s Board of Directors decided not to make an appropriation to this
reserve for 2009, 2008, and 2007.
Pursuant
to the Company's articles of incorporation, the Company should appropriate 10%
of the net profit as statutory surplus reserve up to 50% of the Company’s
registered capital. For the year ended June 30, 2008, the Company appropriated
to the statutory surplus reserve in the amount of $1,096,241. The Company’s
statutory surplus reserve has reached 50% of its registered capital as of June
30, 2008, as such; no additional reserve was recorded during the year ended June
30, 2009.
Note
18 - Employee pension
Employee
pension in the Company generally includes two parts: the first part to be paid
by the Company is 30.6% of $128 for each qualified employee each month. The
other part, paid by the employees, is 11% of $128 each month. For the years
ended June 30, 2009, 2008, and 2007, the Company made pension contributions in
the amount of approximately $146,000, $35,000, and $32,000,
respectively.
Note
19 - Accumulated other comprehensive income
The
components of accumulated other comprehensive income for the years ended June
30, 2009 and 2008 are as follows:
See
report of independent registered public accounting firm.
F-37
June 30,
|
June 30,
|
|||||||
2009
|
2008
|
|||||||
Beginning
Balance
|
$
|
7,700,905
|
$
|
1,146,441
|
||||
Foreign
currency translation gain
|
336,926
|
5,206,612
|
||||||
Unrealized
gain (loss) on restricted marketable securities
|
(1,514,230
|
)
|
1,347,852
|
|||||
Ending
Balance
|
$
|
6,523,601
|
$
|
7,700,905
|
Note
20 - Commitments and contingencies
Operations
based in the PRC
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, and by the general
state of the PRC's economy.
The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic, and legal environments, and foreign currency exchange. The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among
others.
R&D
Agreement
In
September 2007, the Company entered into a three year Cooperative Research and
Development Agreement (“CRADA”) with Pharmaceutical Institute of Shandong
University (the “University”). Pursuant to the CRADA, the University is
responsible for designing, researching and developing designated pharmaceutical
projects for the Company. Additionally, the University will also provide
technical services and training to the Company. As part of the CRADA, the
Company will pay approximately $3,500,000 (RMB 24,000,000) plus out-of-pocket
expenses to the University annually, and provide internship opportunities for
students of the University. The Company will have the primary ownership of
the designated research and development project results.
In
November 2007, the Company entered into a five year CRADA with Institute of
Microbiology (Chinese Academy of Sciences) (the “Institute”). Under the CRADA,
the Institute is responsible for designing, researching and developing
designated pharmaceutical projects for the Company. Additionally, the Institute
will also provide technical services and trainings to the Company. As part
of the CRADA, the Company will pay approximately $880,000 (RMB 6,000,000) to the
Institute annually. The Company will have the primary ownership of the
designated research and development project results.
For the
years ended June 30, 2009 and 2008, approximately $4,395,000 and $3,236,000
related to the two CRADAs, respectively, was incurred as research and
development expenses. As of June 30, 2009, the Company’s future estimated
payments to those CRADAs amounted to approximately $4,100,000.
Legal
proceedings
The
Company is involved in various legal matters arising in the ordinary course of
business. The following summarizes the Company’s pending and settled legal
proceedings as of June 30, 2009:
Fernando
Praca, Plaintiff vs. EXTREMA, LLC and Genesis Pharmaceuticals Enterprises, Inc.-
Case No. 50 2005 CA 005317, Circuit Court of the 15 th Judicial
Circuit in and for Palm Beach County, Florida
Fernando
Praca, former Director and former President of the Company’s discontinued
subsidiary, Extrema LLC, filed an action in Dade County, Florida against
Extrema, LLC and the Company in June 2005 relating to damages arising from the
sale of Extrema LLC to Genesis Technology Group, Inc. Fernando Praca had filed a
Motion of Temporary Injunction but had not proceeded to move this case forward.
The plaintiff has decided to reinitiate the legal action in March 2008. In July
2008, the Company and Fernando Praca entered into a Settlement Agreement whereby
Fernando Praca agreed to dismiss this action against the Company and to
surrender to the Company for cancellation, 100,000 shares of common stock in the
Company held by him. The Company agreed to provide Fernando Praca with a legal
opinion of its counsel removing the restrictive legend on the 1,269,607 shares
of common stock held by Fernando Praca. This matter was settled in
July 2008. (See Note 14)
See
report of independent registered public accounting firm.
F-38
CRG
Partners, Inc. and Capital Research Group, Inc. and Genesis Technology Group,
Inc., n/k/a Genesis Pharmaceuticals Enterprises, Inc. (Arbitration) - Case No.
32 145 Y 00976 07, American Arbitration Association, Southeast Case Management
Center
On
December 4, 2007, CRG Partners, Inc. (“CRGP”), a former consultant of the
Company, filed a demand for arbitration against the Company alleging breach of
contract and seeking damages of approximately $10 million as compensation for
consulting services rendered to the Company. The amount of damages sought by the
claimant was equal to the dollar value of 29,978,900 shares of the Company’s
common stock (Pre 40-to-1 reverse split) in November 2007, in which the claimant
alleged were due and owing to CRGP. On December 5, 2007, the Company gave
notice of termination of the relationship with CRG under the consulting
agreement. CRGP subsequently filed an amendment to the demand for arbitration to
include Capital Research Group, Inc. (“CRG”) as an added claimant and increased
the damage amount sought under this matter to approximately $13.8 million. The
Company subsequently filed counter claims in reference to the aforementioned
allegations of breach of contract.
In
February 2009, the Company was notified by the arbitration panel of American
Arbitration Association (the “Panel”) that the Panel awarded CRG and CRGP
jointly, a net total of $980,070 (the “Award”) to be paid by the Company on or
before February 27, 2009. Once the Award is satisfied, CRG and CRGP would have
no further claims against the Company’s common stock or other property that were
the subject of the arbitration. The amount has been charged to operations for
year ended June 30, 2009, and is included in liabilities assumed from
reorganization as of June 30, 2009.
On March
6, 2009, CRG Partners, Inc. (“CRGP”) and Capital Research Group, Inc. (“CRG”),
former consultants of the Company, filed a motion to confirm the arbitration
award conferred by a panel of arbitrators of the American Arbitration
Association on February 2, 2009. On July 15, 2009, the Circuit Court of the 11th
Judicial Circuit in and for Miami-Dade County confirmed the arbitration award
and entered judgment against Genesis Technology Group, Inc. At June 30, 2009,
the award has not been paid and the Company is in the process of appealing the
case.
China
West II, LLC and Genesis Technology Group, Inc., n/k/a Genesis Pharmaceuticals
Enterprises, Inc. (Arbitration)
In June
2008, China West II, LLC (“CW II”) filed a Demand For Arbitration with the
American Arbitration Association (“AAA”) the case of CW II and Genesis
Technology Group, Inc. n/k/a Genesis Pharmaceuticals Enterprises, Inc. and
Joshua Tan. In that matter, CW II sought breach of contract
damages in connection with the Company’s October 2007 reverse merger from the
Company and Joshua Tan, former director of the Company, jointly and severally
for approximately $6,700,000 estimated by CW II.
In
January 2009, the Company received a written notice from the
Panel that CW II had withdrawn the Demand for Arbitration without
prejudice.
See
report of independent registered public accounting firm.
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