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EX-32.1 - CERTIFICATION - Jpak Group, Inc.jpak_ex321.htm
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EX-32.2 - CERTIFICATION - Jpak Group, Inc.jpak_ex322.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-K

þ ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 2011

o TRANSITION REPORT PURSUANT TO SECTION 13 OF 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _____________TO ____________

COMMISSION FILE NUMBER:
 
JPAK GROUP, INC.
(Exact name of registrant as specified in its charter)
Nevada
 
20-1977020
(State or other jurisdiction of  incorporation)
 
(I.R.S. Employer Identification or Organization No.)

15 Xinghua Road
Qingdao, Shandong Province
Postal Code 266401
People’s Republic of China
(86-532) 84616387
(Address and telephone number of principal executive offices and principal place of business)

Securities registered under Section 12 (b) of the Act:  NONE
 
 Securities registered under Section 12 (g) of the Act: 
 
COMMON STOCK WITH $.001 PAR VALUE
   
(Title of Class)
 
Indicate by check mark if the Registrant is a well known seasoned issuer as defined in Rule 405 of the securities Act.  Yes o   No þ

Indicate by check mark if Registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.  Yes o   No  þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ   No o

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o   No o

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

Large accelerated filer  
o
Accelerated Filer
o
Non-accelerated filer    
o
Smaller reporting company
þ

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of December 31, 2010 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $1,134,000.  

The number of outstanding shares of the Registrant’s Common Stock as of the close of business on September 27, 2011 was 36,368,334, 5,608,564 shares of the Registrant’s Series A Preferred, 5,000,000 shares of Series B Preferred and 12,000,000 shares of Series C Preferred Stock.
 


 
 

 
JPAK GROUP, INC.
FORM 10-K
INDEX
 
 
PART I
   
     
Page
Item 1
Description of Business
 
3
       
Item 2
Description of Property
 
16
       
Item 3
Legal Proceedings
 
17
       
Item 4
(Removed and Reserved)
    17
       
 
PART II
   
       
Item 5
Market for Common Equity and Related Stockholder Matters and Issuer Purchases Of Equity Securities
 
17
       
Item 6
Selected Financial Data
 
20
       
Item 7
Management’s Discussion and Analysis of Financial Conditions and Results of Operations
 
21
       
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
 
29
       
Item 8
Financial Statements and Supplementary Data
 
F-1
       
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
30
       
Item 9A (T)
Controls and Procedures
 
30
       
Item 9B
Other Information
 
32
       
 
PART III
   
       
Item 10
Directors, Executive Officers and Corporate Governance
 
33
       
Item 11
Executive Compensation
 
37
       
Item 12
Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters
 
40
       
Item 13
Certain Relationships and Related Transactions, and Director Independence
 
42
       
Item 14
Principal Accountant Fees and Services
 
45
       
 
PART IV
   
       
Item 15
Exhibits and Financial Statements Schedules
 
46
       
 
Signatures
 
47

 
2

 
 
PART I
 
ITEM 1.   DESCRIPTION OF BUSINESS

GENERAL OVERVIEW

We are engaged primarily in the development, manufacture, and distribution of aseptic liquid food and beverage cartons for milk, fruit juices, soy milk, yogurt drinks, iced tea, coffee, sauces and other liquid foods and beverages in China. Since 2004, we have focused on the research and development, and we believe we are one of the largest and leading domestic suppliers of aseptic liquid food and beverage cartons in China. Our business is primarily in China and we have also exported a small quantity of products.

       Our growth strategy consists of consolidating our market leader position among domestic liquid food and beverage aseptic carton suppliers and pursuing expansion in the China market as well as selective Asian and Middle Eastern markets. We intend to achieve our goal by implementing the following strategies:

Increasing output to further penetrate the China market;

Developing bundled packaging materials and filling machines;

Increasing sales to selective Asian and other markets;

Continuing and increasing the recent orders from Russia and other Eastern Europe markets;

Establishing brand names and brand awareness; and

Enhancing the Company’s competitive advantages through R&D.

Company History
 
RX Staffing, Inc.

Rx Staffing, Inc. was a development stage company incorporated in the State of Nevada on December 6, 2004 (“Rx Staffing”). It was formed as a full-service temporary personnel agency to better meet the supplemental staffing needs of healthcare providers. Its corporate purpose was (i) to provide personnel staffing services to institutions, occupational site healthcare organizations and alternative site healthcare organizations and (ii) to provide health care professionals such as nurses, specialty technicians and physicians with the flexibility to balance their professional and personal schedules.
 
 
3

 

For the period beginning on the date of incorporation through the date of the Share Exchange described below, Rx Staffing generated minimal revenue from the sale of its medical staffing services.
 
On August 9, 2007, Rx Staffing completed a reverse acquisition of Jpak Group Co., Ltd. (“Jpak Ltd.”).  Prior to the acquisition, Rx Staffing was a public shell company, as defined in Rule 12b-2 of the Exchange Act.  To accomplish the share exchange Rx Staffing issued 23,005,000 shares of common stock on a one to one ratio for a 100% equity interest in Jpak Ltd. Pursuant to the share exchange, Jpak Ltd. became our wholly owned subsidiary.  Per the terms of the Share Exchange and Bill of Sale of assets of Rx Staffing and Shaun Jones, Rx Staffing was delivered with zero assets and zero liabilities at time of closing. The transaction was regarded as a reverse merger whereby Jpak Ltd. was considered to be the accounting acquirer as its shareholders retained control of RX Staffing after the exchange.  Although Rx Staffing is the legal parent company, the share exchange was treated as a recapitalization of Jpak Ltd.  Thus, Jpak Ltd. is the continuing entity for financial reporting purposes.  The Financial Statements have been prepared as if Jpak Ltd. had always been the reporting company and then on the date of the share exchange, had changed its name to Jpak Group, Inc. and reorganized its capital stock.  We function as a holding company and, through our subsidiaries, own 100% equity interest in Qingdao Renmin Printing Co, Ltd (“Qingdao Renmin”), our operating subsidiary.
 
Jpak Group, Inc.

Qingdao Renmin is located in Qingdao, Shandong Province of the People’s Republic of China, and commenced operations in China in 1958 as a state-owned, traditional printing and packaging company. In 2004, our management completed the buyout of 88.23% of state-owned equity interest in Qindao Renmin; in the same year, Qingdao Renmin started developing aseptic liquid food and beverage cartons which was launched in the China market in 2005. 

Jpak Ltd. was incorporated in the Cayman Islands on June 22, 2006 under the name Winner Dragon Limited; it changed the name to “Jpak Group Co., Ltd.” on September 18, 2006.  In September 2006, Jpak Ltd. acquired 88.23% equity interest in Qingdao Renmin through Grand International Industrial Limited (“Grand International”), the 100% owned subsidiary of Jpak Ltd. As a result of the acquisition, Qingdao Renmin became the majority owned subsidiary of Grand International and an indirect majority owned subsidiary of Jpak Ltd. The transaction was regarded as a reverse merger whereby Qingdao Renmin was considered to be the accounting acquirer as both Grand International and Jpak Ltd. were holding companies with no significant operations and Qingdao Renmin continues as the primary operating entity even after the exchange, although Jpak Ltd. is the legal parent company.  Thus, Jpak Ltd. is the continuing entity for financial reporting purposes.  The Financial Statements have been prepared as if Jpak Ltd. had always been the reporting company and then on the share exchange date, had changed its name and reorganized its capital stock.   Furthermore, in July 2007, Grand International purchased the remaining 11.77% state-owned equity interest in Qingdao Renmin and now owns 100% equity interest in Qingdao Renmin. Substantially, all of our operations are conducted in China through Qingdao Renmin.
 
 
4

 

The Share Exchange and the Financing in 2007

On August 9, 2007, Rx Stuffing entered into and consummated the transactions contemplated (the “Share Exchange”) under a Securities Exchange Agreement (the “SEA”) by and among Rx Stuffing, Jpak Ltd., and the shareholders of Jpak Ltd.  (namely Joyrich Group Limited, a British Virgin Islands (“BVI”) company, Fabregas Group Limited, a BVI company, Statepro Investments Ltd., a BVI company, Raytech Investments Limited, a BVI company, and Capital American Markets Limited, a BVI company), pursuant to which all the shares of Jpak Ltd. were transferred to Rx Stuffing and Jpak Ltd. became a wholly-owned subsidiary of Rx Stuffing, and at the same time the shareholders of Jpak Ltd. were issued 23,005,000 shares of common stock of Rx Stuffing, which represented 64.4% of all the issued and outstanding shares of Rx Stuffing’s  common stock (assuming conversion of the preferred stock described below) following the Share Exchange and the financing described below. On the same day, Rx Stuffing changed its name to Jpak Group, Inc. The Share Exchange has been accounted for as a reverse acquisition under the purchase method of accounting for business combinations in accordance with generally accepted accounting principles in the United States of America, or “U.S. GAAP.” Reported results of operations of the combined group issued after completion of the transaction was reflected to Jpak’s operations.

On August 9, 2007, we became a party to a Note Purchase Agreement by and among the Company, Jpak Ltd, Grand International and the Investors (the “NPA”). The NPA was originally entered into in May 2007 pursuant to which Jpak Ltd. issued Convertible Promissory Notes in the aggregate principal amount of $5.5 million to the Investors. As a result of the Share Exchange, the Notes automatically converted into 5,608,564 shares of Series A Convertible Preferred Stock outstanding. The shares of Series A Convertible Preferred Stock are convertible into an aggregate of 11,217,128 shares of common stock. Under the terms of the Notes, we also issued (i) Series A Warrants to purchase an aggregate of 5,500,000 shares of common stock (subject to adjustment) at an exercise price of $.60 per share until August 2013 (the “Series A Warrants”), (ii) Series B Warrants to purchase an aggregate of 5,500,000 shares of common stock (subject to adjustment) at an exercise price of $.70 per share until August 2013 (the “Series B Warrants”) and (iii) Series J Warrants to purchase (a) an aggregate of 5,000,000 shares of Series B Convertible Preferred Stock, which preferred stock shall contain the same terms as the Series A Convertible Preferred Stock (other than conversion price), which shares will be convertible into 8,333,333 shares of our common stock, (b) Series C Warrants to purchase an aggregate of 4,166,667 shares of common stock (subject to adjustment) at an exercise price of $.72 per share (the “Series C Warrants”) and (c) Series D Warrants to purchase an aggregate of 4,166,667 shares of common stock (subject to adjustment) at an exercise price of $.84 per share (the “Series D Warrants”). The Series J Warrants shall be exercisable at an exercise price of $1.00 per warrant and shall only be exercisable until 90 days following the effective date of the registration statement for which this prospectus forms a part. Finally, we also granted warrants to purchase 990,000 shares of common stock with an exercise price of $.50 per share to the placement agent in the financing transaction. These warrants have the same terms as the Series A and Series B Warrants, except that they contain a “cashless” exercise provision.

On August 9, 2007, we also entered into a Registration Rights Agreement with the Investors (the “Investor RRA”). Under the Investor RRA, we were required to prepare and file a registration statement for the sale of the Common Stock issuable to the Investors under the Series A and Series B Preferred Stock and the Warrants and to use our best efforts to cause, and to maintain, the effectiveness of the registration statement until the earlier of (x) the date when all securities covered by such registration statement have been sold or (y) the date on which such securities may be sold without any restriction pursuant to Rule 144(i) (the "Effectiveness Period"). We filed an initial registration statement on November 9, 2007, to fulfill our obligations under the Investor RRA and it was declared effective on January 7, 2009. Since the registration statement was declared effective by the SEC by March 31, 2008, we were not subject to certain monetary obligations under the Investor RRA. Under the Investor RRA, the shareholders of Jpak were granted piggyback registration rights for 15,805,000 shares of our common stock. 
 
 
5

 

The Investor RRA also made provisions if we cannot register all of the shares underlying all of the Series A and Series B Preferred Stock and Warrants due to the SEC’s application of Rule 415.  Pursuant to those provisions, if the SEC issues us a 415 comment, then we must first try to register the common stock underlying the preferred stock (on a pro rata basis among the holders of the Preferred Stock) and then register all of the common underlying the Warrants (on a pro rata basis among the holders of the Warrants).   The SEC did issue a 415 comment to us on March 27, 2008 and accordingly, we filed an amendment to our Registration Statement to register for resale 687,106 shares of common stock underlying the Series A Preferred Stock, as required by the terms of the Investor RRA.  Subsequent registration statements required to be filed to register the rest of the common stock underlying the preferred stock and warrants issued in the financing will be filed on the later of (i) 60 days following the sale of substantially all of the shares of common stock included in the Registration Statement or any subsequent Registration Statement and (ii) 6 months following the effective date of the Registration Statement or any subsequent Registration Statement, as applicable, or such earlier or later date as permitted or required by the Commission.  Each such subsequent registration statement must be declared effective by the earlier of (A) the 90th day following the filing date of such Registration Statement (or in the event such Registration Statement is reviewed by the Commission, the one hundred twentieth (120th) day following such filing date) or (B) 5 business days after SEC has no more comments. However, we do not have any monetary obligations for any securities that were not permitted to be included in a registration statement because of the SEC’s application of Rule 415 until such time as such securities are required to be filed pursuant to the Investor RRA.  In such case, the liquidated damages shall be calculated to only apply to the percentage of securities which are permitted by the Commission to be included in the Registration Statement. On June 8, 2009, we filed a Registration Statement to register for resale 19,333,334 shares of common stock underlying Series A Warrants, Series B Warrants, Series C Warrants and Series D Warrants.

In addition to the Share Exchange, and the Investor RRA, on August 9, 2007, we also entered into a Securities Escrow Agreement (the “Escrow Agreement”) with the Investors, the principal stockholders named therein (the “Principal Stockholders”) and the escrow agent named therein (the “Escrow Agent”). Under the Escrow Agreement, the Principal Stockholders agreed to place an aggregate of 7,200,000 shares of Common Stock into escrow (the “Escrow Shares”) for the benefit of the Investors in the event the Company fails to achieve net income for the fiscal year ended June 30, 2008 (“Fiscal 2008”) of at least $3.955 million (the “Fiscal 2008 Performance Threshold”). Since we met the Fiscal 2008 Performance Threshold, the Escrow Shares were returned to the Principal Stockholders.

In connection with the Financing, H.C. Wainwright & Co., Inc., a broker-dealer member of FINRA who acted as our exclusive placement agent in the financing, received the following compensation for its services as placement agent: (i) a cash fee of 9% of the gross proceeds, plus expenses (an aggregate of $972,500) and (ii) warrants to purchase 990,000 shares of common stock at an exercise price equal to $0.50 per share, and warrants to purchase 750,000 shares of common stock at an exercise price equal to $0.60 per share, certain of which warrants were issued to officers and employees of the placement agent.
 
 
6

 
  
On December 28, 2007, the holders of our outstanding Series J Warrants exercised in full such warrants for aggregate gross proceeds of $5.0 million to us. Upon exercise of the Series J Warrants and pursuant to their stated terms, we issued to the holders of the Series J Warrants (a) an aggregate of 5,000,000 shares of our Series B Convertible Preferred Stock, which are convertible into an aggregate of 8,333,333 shares of our common stock, (b) Series C Warrants to purchase an aggregate of 4,166,667 shares of our common stock at an exercise price of $0.72 per share and (c) Series D Warrants to purchase an aggregate of 4,166,667 shares of our common stock (subject to adjustment) at an exercise price of $0.84 per share. The Series C Warrants and Series D Warrants have a term of six years from the date of issuance.

In connection with such exercise, the holders of the Series J Warrants agreed not to exercise their demand registration rights with respect to the shares of our common stock underlying the Series B Convertible Preferred Stock, the Series C Warrants and the Series D Warrants during the period beginning on the date of exercise of the Series J Warrants and ending on the ninetieth (90th) day following the effective date of the  prospectus registering resale of the common stock underlying the Series B Convertible Preferred Stock, the Series C Warrants and the Series D Warrants.

In connection with the exercise of the Series J Warrants, we extended the term of our Series A Warrants and Series B Warrants from four years to six years, so that such warrants shall now expire on August 9, 2013, and the deadline for effectiveness of the registration statement was extended to March 31, 2008.
 
2009 Financing

On November 3, 2009, we entered into a Securities Purchase Agreement with one investor. Pursuant to the Purchase Agreement, we issued and sold to the Investor 12,000,000 units of our securities at a price of $0.50 per unit and we received net proceeds of $5,916,500. Each unit consists of (i) one (1) share of our Series C Convertible Preferred Stock, par value $0.0001 per share, convertible into one share of our common stock, and (ii) a one-half Series E Warrant and one-half Series F Warrant.  Each whole Series E Warrant may be exercised to purchase one share of common stock at an exercise price of $0.60 per share and each whole Series F Warrant may be exercised to purchase one share of common stock at an exercise price of $0.70 per share.  The Warrants are exercisable for a period of five years from the date of issuance. In connection with the Offering, we paid $30,000 to Tripoint Global Equities, LLC, who acted as placement agent in the Offering.
 
In connection with the Offering, we also entered into a Registration Rights Agreement with the Investor (the “2009 RRA”). Under the 2009 RRA, we were required to prepare and file a registration statement (the “2009 Registration Statement”) for the resale of the common stock issuable to the Investor upon conversion of the Preferred Shares and upon exercise of the Warrants before December 3, 2009 (and to use our best efforts to have the registration statement declared effective by May 2, 2010 (or June 1, 2010 in the event the Registration Statement received a “full review” by the Commission). The registration statement was declared effective on February 5, 2010.
 
 
7

 

The Warrant Exchange

On December 16, 2009, we entered into an exchange agreement with all of the holders of our currently outstanding investor warrants, pursuant to which such holders agreed to exchange all of the warrants that such holders received pursuant to the 2007 and 2009 Financing, representing warrants to purchase an aggregate of 31,333,334 shares of common stock, for shares of our common stock in an amount determined by the following formula:
 
 
X =
Y -    (A)(Y)
   
             B
     
 Where
X =   
 the number of shares of common stock to be issued to the warrant holder.
 
Y =
 the number of shares of common stock purchasable upon exercise of all of the holders’ Warrants.
 
A =
 the Warrant Price.
 
B =
 $1.00 per share of common stock.

The following table discloses the calculations related to the Warrant Exchange Agreement.
 
 Warrants
 
Number
of Warrants
   
Strike
Price
   
Cashless
Exercise Price
   
New
Common Shares
 
Series A
   
5,500,000
   
$
0.56
   
$
1.00
     
2,420,000
 
Series B
   
5,500,000
   
$
0.63
   
$
1.00
     
2,035,000
 
Series C
   
4,166,667
   
$
0.64
   
$
1.00
     
1,500,000
 
Series D
   
4,166,667
   
$
0.71
   
$
1.00
     
1,208,334
 
Series E
   
6,000,000
   
$
0.60
   
$
1.00
     
2,400,000
 
Series F
   
6,000,000
   
$
0.70
   
$
1.00
     
1,800,000
 
Total
   
31,333,334
                     
11,363,334
 
 
Upon effectiveness of the Warrant Exchange Agreement, the number of shares of common stock outstanding on December 16, 2009 was 36,368,334. There was no cash paid or received in conjunction with this exchange.  Due to the Warrant Exchange, we no longer have to seek effectiveness of the registration statement registering for resale the shares of common stock underlying the warrants issued in the 2007 financing.
 
Our Industry

We believe that the liquid food and beverage carton market for brick and pillow shapes in China is approximately 30 billion packages annually with sales of $1.7 billion. The rapidly increasing per capita consumptions of milk and non-carbonated beverages in the major coastal cities, as well as the rural regions, seems to be the key factor that is driving and will continue to drive the growth of the liquid food and beverage carton market in China.
 
Our Growth Strategy

We strive to strengthen our market leader position among domestic liquid food and beverage aseptic carton suppliers and plan to pursue expansion in the China market as well as in selective Asian and Middle Eastern markets. We intend to achieve our goal by implementing the following strategies:
 
Increasing output to further penetrate the China market.

We are continuing our efforts to increase our production output as well as to widen the range of aseptic carton products to further increase our presence in the packaged milk and other liquid food and beverage markets in China.
 
 
8

 
 
Developing bundled packaging materials and filling machines.

We are developing aseptic liquid filling machines to augment the sales of our aseptic carton packaging products, enabling us to offer a complete packaging solution as well as increase per customer sales.

Increasing sales to selective Asian and other markets.

We are penetrating Asian and other markets via direct sales and channel partnerships in selective countries.

Continuing and increasing the recent orders from Russia and other Eastern European markets.
 
To expand Russia and other Eastern European markets, we have been attending their local product exhibitions to develop new customers, and paying visits to our current customers in these areas which we believe will help us to develop these markets.
 
Establishing brand names and brand awareness.

We are continuing to establish a strong corporate identity as well as our product brand names and brand awareness to enhance an accelerated adoption of our existing and new products.

Enhancing the Company’s competitive advantages through R&D.

 We have successfully developed packaging materials which can be used in the filling machines created by SIG Combibloc (the “SIG”), one of our primary competitors in China. Currently, we have two SIG production lines and are only able to produce small packages. We continue to improve both quality and stability of these existing production lines and are planning to add up to eight additional SIG packaging lines in the near future.  We believe that these new lines will significantly increase our revenue and also provide relatively higher gross margins in the next several years.

Our Products

We provide a wide variety of aseptic liquid food and beverage carton products to meet the needs of our customers.

Aseptic Packaging Technology

We use aseptic packaging technology in our products. An aseptic liquid food and beverage processing and packaging ensures that the packaged contents and packaging materials are free of harmful bacteria and microorganisms in a closed, sterile production environment under ultra high temperature treatment.

Our cartons are designed and constructed for processing under aseptic conditions, keeping the liquid foods and beverages safe, fresh and flavorful without refrigeration or preservatives during storage, and allowing the liquid food and beverages to retain their nutrition, taste, texture and color.
 
 
9

 

Liquid Food and Beverage Cartons

Our aseptic liquid food and beverage cartons are made of multiple layers of polyethylene, paper board, and aluminum materials which are intended for the packaging of milk, fruit juices, soy milk, yogurt drinks, iced tea, coffee, sauces and others. Aseptic cartons are available in brick or pillow shapes in standard and slim formats, with various filling volume specifications.
  
Aseptic Carton Features and Advantages

Our aseptic liquid food and beverage cartons are produced with several proprietary, core product and process technologies which enable the packaging materials to have many distinctive features and advantages, including:

Aseptic packaging materials keep the liquid foods and beverages safe, fresh, and flavorful.
 
Cartons ensure the packaged contents are free of harmful bacteria and microorganisms.
 
Multi-layered materials are moisture-, air- and light-proof, allowing the packaged contents to retain their original nutrition, taste, texture and color.
 
Aseptic packaged materials allow liquid foods and beverages to be stored for a long period of time without refrigeration and preservatives.
 
Special printing process makes the carton package printing attractive and eye-catching.
 
Durable packaging materials are suitable for long distance shipping and handling.

A variety of shapes, forms and volume specifications to suit the various packaging needs.
 
Packaging materials of used and discarded cartons are renewable and recyclable.

Manufacturing

Our manufacturing and operations facility is 18,000 square meters with a current annual production output of up to 3.5 billion aseptic liquid food and beverage cartons. Our production facility is equipped with both imported and self-developed equipments and machines, including printing production lines, coating/forming processing lines, and other cutting and processing equipments.

We have established a stringent quality assurance system that is in conformance with ISO9001:2000, Aseptic Liquid Food Packaging Standards, and Food Safety and Management Requirements. We have obtained the certificates of ISO9001-2000, HACCP Food Safety and Management System as well as certificates of Advanced Technology and Product Enterprise.
 
 
10

 

We believe that our current production wastage ratio is one of the lowest in the industry. We are striving to minimize the wastage by enhancing online testing procedures, employee training as well as improving equipment and fixture efficiency.
 
Suppliers

Raw materials and supplies including paper materials, polyethylene materials, aluminum materials, and other materials are generally procured from domestic suppliers. We rely on a single or limited number of suppliers for such raw materials, parts, components and other items. Although there are many suppliers for each of these raw materials, parts, components and other items, we are dependent on a limited number of suppliers for many of the primary raw materials and components.  However, we currently do not have any long-term or exclusive purchase commitments with any of our suppliers.

Our suppliers may not be able to supply the necessary materials without interruption. We may not have adequate remedies for their failure to supply us which could result in a shortage of our products. If one of our suppliers fails or refuses to supply us for any reason, it could take time and expense to obtain a new supplier. In addition, our failure to maintain existing relationships with our suppliers or to establish new relationships in the future could negatively affect our ability to obtain the materials used in our products in a timely manner. The search for new suppliers could potentially delay the manufacture of our products, resulting in shortages in the marketplace and may cause us to incur additional expense. Failure to comply with applicable legal requirements subjects our suppliers to possible legal or regulatory action, including shutdown, which may adversely affect their ability to supply us with the materials we need for our products. Any delay in supplying, or failure to supply, materials for our products by any of our suppliers could result in our inability to meet the commercial demand for our products, and could adversely affect our business, financial condition, results of operations and growth prospects.

Sales, Customers and Marketing

We sell and distribute our aseptic liquid food and beverage cartons directly to our customers who are manufacturers and suppliers of packaged milk, fruit juices, soy milk, yogurt drinks, iced tea, coffee, sauces and other liquid foods and beverages throughout China.

We are developing and expanding our customer base via distributors in selective Asian and the Middle Eastern countries to target manufacturers and suppliers of packaged milk, fruit juices, iced tea and other non-carbonated drinks.

We conduct marketing activities to further penetrate the China market and to enter selective Asian and Middle Eastern markets, including: attending industry trade shows, advertising in industry publications, using internet marketing, collaborating with the government and increasing brand name and brand awareness.
 
 
11

 

Competition

China Market

The aseptic liquid food and beverage carton market in China is dominated by Tetra Pak International S.A. (“Tetra Pak”), followed by SIG Combibloc (“SIG”), both multi-national suppliers with a combined 90% of the market share in China. Tetra Pak provides packaging materials, packaging machines and processing solutions for the food and beverage industries. Worldwide, it is the dominant market leader in these industries. SIG is a Swiss public company that provides food and beverage carton and plastic bottle packaging materials and filling machines. In 2009, it had worldwide sales of approximately 1.26 billion Euros. Domestic suppliers in China currently have an estimated 10% of the China aseptic carton market and have been gaining market shares from Tetra Pak and SIG. These gains have been primarily due to domestic suppliers’ lower offering price with comparable products. While domestic suppliers have penetrated the non-carbonated soft drink carton market, the higher growth milk carton market continues to be dominated by Tetra Pak and SIG.
  
Based on our annual production output of 3.5 billion packages, we believe that, aside from SIG and Tetra Pak, we are one of the leaders of domestic liquid food and beverage carton suppliers in China. We plan to expand our production capacity and increase our market penetration with a bundle of sales of aseptic cartons and liquid filling machines to our existing and new customers.
 
Asian and Middle Eastern Markets

Tetra Pak dominates the markets for aseptic carton packaging materials, filling machines and the liquid food and beverage processing in most of the Asian and Middle Eastern countries. Since 2004, SIG has established manufacturing plants in Thailand, Vietnam and Saudi Arabia and has taken market shares from Tetra Pak in these regional markets.

With the exception of China, where alternative domestic suppliers exist, Tetra Pak and SIG do not have other serious competitors in most Asian and Middle Eastern markets. China based suppliers, however, like us, are beginning to enter foreign markets. Collectively, these China based suppliers are expected to capture a larger portion of the market share in other countries in the next few years.

Our Competitive Strengths

Leveraging our competitive strengths, we believe that we have established ourselves as a leader among domestic suppliers in China and are in a strong position to challenge the dominant market positions held by other suppliers. We are penetrating the aseptic carton market and expect to take increasing market shares within the next few years. Our competitive strengths include:

Expedited development and time-to-market capability.

In the past we have successfully developed and brought to market a line of aseptic carton products within an eighteen (18) month time frame. We will continue capitalizing on this capability for our newly developed products.

Substantially lower manufacturing system cost.

We have developed a complete manufacturing system for the production of aseptic cartons at a cost that we believe to be significantly lower than the industry’s average. We believe that this significant cost saving makes our products more price-competitive in the market.
 
 
12

 

Significantly reduced direct cost and lower price.
 
We have developed proprietary product and process technologies that allow for minimal production wastage, giving us a critical competitive edge and thus allowing us to offer attractive prices to customers.

High product quality and proven market acceptance.

Our aseptic carton products are proven to be comparable to those of Tetra Pak and SIG and are well-received by our customers.

Experienced and cohesive management team for rapid growth.
 
Most key executives have been with us and working together for over 20 years. This experienced and cohesive management team is committed and ready to rapidly grow our business.

Intellectual Property

We develop our own proprietary product and process technologies for the aseptic carton packaging materials. We have filed a total of 45 patents on material structure, production equipment fixtures, testing equipment and have been granted 30 patents with another 8 pending. Our 22 issued patents will expire between April 2015 and May 2111. We plan to renew all of the patents before expiration.

We have submitted 6 registered trademark applications, four of which has been accepted by the State Administration for Industry and Commerce of China while the other two are still pending.

Government Regulation

The PRC government regulates the printing and packaging industry. This section summarizes the principal PRC regulations relating to our businesses:

We operate our business in China under a legal regime consisting of the State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries and agencies under our authority, including the General Administration of Press and Publication, or GAPP, the State General Administration of the Quality Supervision, Inspection and Quarantine (“AQSIQ”), the State Administration for Industry and Commerce (“SAIC”), and their respective authorized local counterparts.
 
 
13

 
 
Regulations on Printing and Manufacturing of Food and Beverage Packaging Products

The principal regulations governing printing and manufacturing of food and beverage packaging products in China consist of the Regulations on the Administration of Printing Industry, the Interim Rules on Establishment of the Foreign Invested Printing Companies, the General Specification on the Manufacturing License of Food Packaging Products, Vessel, Tools and Other Products. Below is a summary of relevant provisions of these regulations.

Regulations on the Administration of Printing Industry

On August 2, 2001, the State Council enacted the Regulations on the Administration of Printing Industry, or Printing Regulations. Such Printing Regulations set forth detailed requirements on the qualification and operations of the operators of printing industry. Under the Printing Regulations, the operators of printing industry shall obtain the operating license, such as the “License for Printing Operations”. Our subsidiary, Qingdao Renmin, has been granted a License for Printing Operations issued by the Shandong Provincial Bureau of Press and Publication that allows Qingdao Renmin to operate the printing business. Qingdao Renmin has also obtained a License for Special Industry issued by the Qingdao Municipal Bureau of Public Security on August 9, 2001. However, such License for Special Industry has not been required for the printing industry since the promulgation of the Decision of the State Council on the Enactment of Administrative Licensing for the Expressly Reserved Items Subject to Administrative Examination and Approval Rules on June 29, 2004.
   
General Specification on the Manufacturing License of Food Packaging, Vessel, Tools and Other Products

Pursuant to the General Specification on the Manufacturing License of Food Packaging, Vessel, Tools and Other Products, or General Specification, promulgated by AQSIQ on July 18, 2006 and came into enforcement on the same day, the food and beverage packaging products must meet certain quality standards and the operators of the food packaging shall obtain a Manufacturing License from the AQSIQ. Such General Specification sets forth the detailed examination and approval procedures for applying the Manufacturing License, which include five steps to obtain the license: (i) preliminary examination at the local counterpart of AQSIQ, (ii) testing manufacturing, (iii) on-the-spot verification, (iv) examination of sample product, and (v) the final approval and issuance of the license. We have obtained the Manufacturing License issued by AQSIQ in April 2007.

Regulations on Foreign Invested Printing Companies

Foreign invested printing companies are specifically governed by the Interim Rules on Establishment of the Foreign Invested Printing Companies, jointly promulgated by the GAPP and the Ministry of Commerce of China, or MOFCOM, in 2002 in accordance with the Law on Sino-Foreign Equity Joint Venture (2001), the Law on Sino-Foreign Contractual Joint Venture (2000), the Law on Wholly Foreign-Funded Enterprises (2000) and the Regulations on the Administration of Printing Industry.
  
The Interim Rules on Establishment of the Foreign Invested Printing Companies allow and encourage the establishment of the sino-foreign equity joint ventures and wholly foreign-funded enterprises engaged in the printing business of packaging products. Furthermore, such sino-foreign equity joint ventures and wholly foreign-funded enterprises shall also obtain the License for Printing Operations to operating the printing business in China, in accordance with the Regulations on the Administration of Printing Industry and other applicable laws and regulations.

We have applied and updated the License for Printing Operations for Qingdao Renmin since its 88.23% equity interests have been acquired by Grand International and subsequently transformed into the sino-foreign equity joint ventures.
 
 
14

 

Research and Development

Development focus.

Our research and development effort focuses on developing proprietary technology in aseptic packaging materials and liquid filling machines to meet the growing market demand. Our research and development expenditures were approximately $1.4 million and $1.9 million for the fiscal years ended June 30, 2011 and 2010, respectively.
 
Research team.

We have an experienced and multi-disciplined research and development team of engineers and technicians with a proven track record working with aseptic packaging materials and machinery.
 
Laboratory equipment.

Our research and development center has five laboratories and one experimental workshop which is for testing new products, built with state-of-the-art laboratory equipment for experiments on, but not limited to, packaging printing, plastic materials, aluminum materials, compound material strength, microorganism assessments and trial filling processing.

Projects and partnerships.

We currently have 24 research and development projects ongoing, 10 of which are classified as “Focused Innovative Technology Development Projects” by Qingdao City. We have formed numerous strategic research and development partnerships with educational institutions, research institutions, material suppliers, machinery builders and liquid food and beverage manufacturers.
 
Product Pipeline.

We have a continuous pipeline for (i) new products for aseptic liquid food and beverage carton packaging materials, (ii) current product extension and (iii) new product.  In our efforts to develop our own line of liquid food and beverage filling machines, our first filling machine can run at approximately 12,000 packages output per hour and has been tested by one of our customers. Our second packaging line was installed and has begun production  and expect to put it into the experimental stage by March 2012.   

In addition, we successfully developed packaging materials which can be used in the filling machines created by SIG. We have achieved technology breakthroughs with our first two SIG packaging lines, which can produce packages for small customers.  Despite this initial success, there is still significant room for improvement in terms of both quality and stability.  We have invested approximately $300,000 of additional funds to continue the development and improvement of our new SIG packaging lines.  We plan to add up to eight additional lines in the near future. Management believes that these new SIG packaging lines will significantly increase our revenue and also provide relatively higher gross margins in the next several years.
 
 
15

 

Employees
 
As of June 30, 2011, we had 417 employees, consisting of 284 in manufacturing and operation, 39 in research and development, 30 in sales and marketing and 64 in general and administrative. All of our employees are full-time employees.

None of our personnel are represented under collective bargaining agreements. All of the employees have signed labor contracts with the Company and have received monthly salaries as well as other social benefits including pension insurance, jobless insurance, accidental insurance, medical insurance and housing funds, etc. We do not have any other employees in addition to our full-time employees.

We are compliant with local prevailing wage, contractor licensing and insurance regulations, and we consider our relations with our employees to be good.
 
HOW YOU CAN FIND ADDITIONAL INFORMATION

We are a reporting company and file annual, quarterly and current reports, proxy statements and other information with the SEC.  For further information with respect to the Company, you may read and copy its reports, proxy statements and other information, at the SEC public reference rooms at 100 F.  Street, N.E., Washington, D.C. 20549.  You can request copies of these documents by writing to the SEC and paying a fee for the copying cost.  Please call the SEC at 1-800-SEC-0330 for more information about the operation of the public reference rooms.  The Company’s SEC filings are also available at the SEC’s web site at http://www.sec.gov.

You may also send a request for a paper copy to our outside securities counsel: Hunter Taubman Weiss LLP, c/o Jpak Group, Inc. 17 State Street, Suite 2000, New York, NY 10004.
 
ITEM 2.  DESCRIPTION OF PROPERTY

Our corporate executive offices are located at 15 Xinghua Road, Qingdao, Shandong Province, 266401, People’s Republic of China.

All land in China is owned by the State. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes. In the case of land used for industrial purposes, the land use rights are granted for a period of 50 years. This period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations. Qingdao Renmin currently owns land use rights to approximately 27,748.3 square meters of land consisting of manufacturing facilities, employee quarters and office buildings in Qingdao, China. Qingdao Renmin holds four State-owned Land Use Rights and the Building Ownership Certificates for the land use rights and buildings owned by it. On the State-owned Land Use Rights and the Building Ownership Certificate (No.: Qing Fang Di Quan 3738), State-owned Land Use Rights and Building Ownership Certificate (No.: Qing Fang Di Quan 399421) and State-owned Land Use Rights and Building Ownership Certificate (No.: Qing Fang Di Quan 45171), there is a note stating that because the information of the land is incomplete, the land use right registration is pending. On the State-owned Land Use Rights and Building Ownership Certificate (No.: Qing Fang Di Quan 19508), the type of the land use right is shown as allocated, meaning that no consideration needed to be paid for the land use right.
 
 
16

 
 
On August 12, 2010, Qingdao Likang entered into a land use right transfer agreement with Qingdao Territories and House Administration Bureau, pursuant to which, Qingdao Likang was granted a 50-year use rights for a parcel of land with an area of approximately 65,064 square meters in Qingdao for a new plant construction. The planned new plant is expected to increase the annual total production capacity of Qingdao Renmin and Qingdao Likang to 8 billion packs. Qingdao Likang is expected to commence its operations by 2012 spring.

We intend to further expand our manufacturing facility over the next few years. We believe that we currently have enough land to satisfy such expansion.
 
ITEM 3.  LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not aware of any pending or threatened legal proceeding that, if determined in a manner adverse to us, could have a material adverse effect on our business and operations.
 
ITEM 4.  (REMOVED AND RESERVED)
 
PART II
 
ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock commenced trading on the Over-The-Counter Bulletin Board on August 15, 2007 and trades under the symbol “JPAK”

The OTC Bulletin Board is an unorganized, inter-dealer, over-the-counter market that provides significantly less liquidity than NASDAQ, and quotes for stocks included on the OTC Bulletin Board are not listed in the financial sections of newspapers, as are those for the NASDAQ Stock Market.
  
Transactions in our common stock have been sporadic and do not constitute an active market. Prior to the Share Exchange our shares of common stock did not trade publicly.
 
The following table sets forth the quarterly high and low bid prices for the common stock since the quarter ended September 30, 2009, the first quarter during which our common stock was listed on an exchange.  The prices set forth below represent inter-dealer quotations, without retail markup, markdown or commission and may not be reflective of actual transactions.

   
High
   
Low
 
Quarter ended September 30, 2009
 
 0.94
   
 0.08
 
Quarter ended December 31, 2009
 
 0.95
   
 0.06
 
Quarter ended March 31, 2010
 
 0.80
   
 0.08
 
Quarter ended June 30, 2010
 
 0.80
   
 0.45
 
Quarter ended September 30, 2010
 
$
0.50
   
$
0.16
 
Quarter ended December 31, 2010
 
$
0.40
   
$
0.20
 
Quarter ended March 31, 2011
 
$
0.20
   
$
0.06
 
Quarter ended June 30, 2011
 
$
0.18
   
$
0.18
 
 
 
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On September 27, 2011, the last price of the common stock was $0.05 and we had approximately 63 record holders of our stock. This number excludes any estimate by us of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed.

There are warrants to purchase 990,000 shares of common stock at $0.50 per share, which were issued to the placement agent in the Financing. The placement agent warrants will expire in 2013.
 
There are also warrants to purchase 750,000 shares of common stock at $0.60 per share, which were issued to the placement agent in the exercise of the Series J Warrants. These placement agent warrants will also expire in 2013.
 
Effective August 11, 1993, the SEC adopted Rule 15g-9, which established the definition of a "penny stock," for purposes relevant to the Company, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (i) that a broker or dealer approve a person's account for transactions in penny stocks; and (ii) that the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must (i) obtain financial information and investment experience and objectives of the person; and (ii) make a reasonable determination that the transactions in penny stocks are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the Commission relating to the penny stock market, which, in highlight form, (i) sets forth the basis on which the broker or dealer made the suitability determination; and (ii) states that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Disclosure also has to be made about the risks of investing in penny stock in both public offerings and in secondary trading, and about commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
 
Dividend Policy

We have never declared or paid dividends on our common stock. We intend to retain earnings, if any, to support the development of our business and therefore do not anticipate paying cash dividends for the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.
 
 
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Description of Equity Compensation Plans

On December 15, 2010, the Board of Directors approved the Company’s 2010 Equity Incentive Plan (the “Plan”) to authorize 4,000,000 shares for issuance under equity incentive awards, effective December 15, 2010. On December 15, 2010, the Company granted five years options to purchase up to 3,600,000 shares of the common stock of the Company at the exercise price of 0.20 per share to 4 of its key employees under the Plan as follows:
 
Yijun Wang  1,800,000 Share options
Qingjun Yang   900,000 Share options
Ming Qi   600,000 Share options
Huatian Sha   300,000 Share options
 
Recent Sales of Unregistered Securities
 
During the past three years, we effected the following transactions in reliance upon exemptions from registration under the Securities Act as amended. Unless stated otherwise; (i) that each of the persons who received these unregistered securities had knowledge and experience in financial and business matters which allowed them to evaluate the merits and risk of the receipt of these securities, and that they were knowledgeable about our operations and financial condition; (ii) no underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with the transactions; (iii) the transactions did not involve a public offerings; and (iv) each certificate issued for these unregistered securities contained a legend stating that the securities have not been registered under the Act and setting forth the restrictions on the transferability and the sale of the securities.

On August 9, 2007, we issued 23,005,000 shares of common stock in exchange for all of the issued and outstanding shares of Jpak Group Co., Ltd, (“Jpak”).

On August 9, 2007, we became a party to that certain Note Purchase Agreement (the “NPA”) by and among Jpak, Grand International and the investors named therein (collectively, the “Investors”). The NPA was originally entered into in May 2007 pursuant to which Jpak issued Convertible Promissory Notes (the “Financing”) in the aggregate principal amount of $5.5 million to the Investors (the “Notes”). As a result of the Share Exchange, under the terms of the NPA and the Notes, the Notes automatically converted into (i) 5,608,564 shares of our Series A Convertible Preferred Stock, par value $.001 per share (the “Preferred Stock”), which shares are convertible into an aggregate of 11,217,128 shares of common stock, (ii) Series A Warrants to purchase an aggregate of 5,500,000 shares of common stock (subject to adjustment) at an exercise price of $.60 per share until August 2011 which were amended on December 28, 2007 to extend the term to August 2013 (the “Series A Warrants”), (iii) Series B Warrants to purchase an aggregate of 5,500,000 shares of common stock (subject to adjustment) at an exercise price of $.70 per share until August 2011 which were amended on December 28, 2007 to extend the term to August 2013 (the “Series B Warrants”) and (iv) Series J Warrants to purchase (a) an aggregate of 5,000,000 shares of Series B Preferred Stock, which preferred stock shall contain the same terms as the Series A Preferred Stock (other than conversion price), which shares will be convertible into 8,333,333 shares of our common stock, (b) Series C Warrants to purchase an aggregate of 4,166,667 shares of common stock (subject to adjustment) at an exercise price of $.72 per share (the “Series C Warrants”) and (c) Series D Warrants to purchase an aggregate of 4,166,667 shares of common stock (subject to adjustment) at an exercise price of $.84 per share (the “Series D Warrants”. The Series J Warrants shall be exercisable at an exercise price of $1.00 per warrant and shall only be exercisable until 90 days following the effective date of the registration statement. 
 
 
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On December 28, 2007, the holders of the Company's outstanding Series J Warrants exercised in full such warrants for aggregate gross proceeds of $5.0 million to the Company. Pursuant to the terms of the Series J Warrants, the Company issued to the holders of the Series J Warrants (a) an aggregate of 5,000,000 shares of the Company's Series B Convertible Preferred Stock, which will be convertible into an aggregate of 8,333,333 shares of the Company's Common Stock, (b) Series C Warrants to purchase an aggregate of 4,166,667 shares of the Company's Common Stock at an exercise price of $0.72 per share and (c) Series D Warrants to purchase an aggregate of 4,166,667 shares of the Company's Common Stock (subject to adjustment) at an exercise price of $0.84 per share. The Series C Warrants and Series D Warrants have a term of six years from the date of issuance.

In connection with the Financing, we also granted warrants to purchase 990,000 shares of common stock with an exercise price of $.50 per share to the placement agent in the Financing. These warrants have the same terms as the Series A and Series B Warrants, except that they contain a “cashless” exercise provision.

None of the above transactions involved a public offering, and we believe that each transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) of the Securities Act and Rule 506 of Regulation D as promulgated by the SEC.

In April 2008, we engaged TriPoint Capital Advisors, LLC to provide us with business development and U.S. corporate compliance services. The initial term of the agreement is one year.  Pursuant to the agreement, TriPoint shall receive 300,000 shares of our restricted common stock – all of which was issued on July 14, 2008, with 175,000 vesting immediately and the remainder to vest in equal installments of 75,000 every 90 days thereafter - in consideration for their services. The shares were valued at $0.30 per share, the closing bid price for shares of our common stock on the date of issuance. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering.

On April 1, 2009, we issued 200,000 restricted shares to Dongliang (Frank) Su for the Acting CFO duties he would provide to us from April 1, 2009 through March 31, 2010. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering.

On November 3, 2009, we issued 12,000,000 units of our securities at a price of $0.50 per unit; each unit consists of (i) 1 share of our Series C Convertible Preferred Stock, par value $0.0001 per share, convertible into one share of our common stock, par value $0.001 per share, and (ii) a one-half Series E Warrant and one-half Series F Warrant pursuant to a Securities Purchase Agreement.  (The warrants have now been exchanged for shares of common stock pursuant to the Warrant Exchange Agreement.)  The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering.  

On December 16, 2009, we issued aggregately 11,363,334 shares of common stock in exchange of outstanding investor warrants issued pursuant to the 2007 and 2009 Financing including 5,500,000 Series A Warrants, 5,500,000 Series B Warrants, 4,166,667 Series C Warrants, 4,166,667 Series D Warrants, 6,000,000 Series E Warrants and 6,000,000 Series F warrants.
 
ITEM 6.  SELECTED FINANCIAL DATA

Not applicable.

 
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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and result of operations contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of the other reports we file with the Securities and Exchange Commission. Actual results may differ materially from those contained in any forward-looking statements.
 
The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of Jpak for the years ended June 30, 2011 and 2010 and should be read in conjunction with such financial statements and related notes included in this report.
 
Overview
 
We are engaged primarily in the development, manufacture and distribution of aseptic liquid food and beverage cartons for milk, fruit juices, soy milk, yogurt drinks, iced tea, wine, sauces and other liquid foods and beverages in China. Since 2004, we have focused on research and development and we believe we are one of the largest and leading domestic suppliers of aseptic liquid food and beverage cartons in China. Our business is primarily focused in China, but we have begun exporting our manufacturing products to several foreign countries.

Company History

Our operations are conducted in China through Qingdao Renmin. Qingdao Renmin commenced operations in China in 1958 as a state-owned, traditional printing and packaging company. Management completed the buyout of 88.23% of the state-owned equity interest in 2004, and in the same year started the development of aseptic liquid food and beverage cartons which was launched in the China market in 2005.

On June 22, 2006, Jpak Group Co., Ltd (“Jpak Ltd.”) was incorporated in the Cayman Islands In September 2006, Jpak Ltd. completed the acquisition of 88.23% of the equity interest in Qingdao Renmin through Grand International, the 100% owned subsidiary of JpakLtd.. In July 2007, Grand International completed the acquisition of the remaining 11.77% of the state-owned equity interest and now owns 100% of the equity interest of Qingdao Renmin.

On August 9, 2007, Rx Staffing completed a reverse acquisition of Jpak Ltd. and issued 23,005,000 shares of common stock on a one to one ratio for a 100% equity interest in Jpak Ltd., whereby Jpak Ltd. becomes a subsidiary of Rx Staffing. On the same day, Rx Staffing changed its corporate name to Jpak Group, Inc. (“Jpak”).
 
On January 11, 2010, Qingdao Likang Packaging Co. Ltd (“Qingdao Likang”), a wholly-owned subsidiary of Grand International, was registered in Qingdao with a capital commitment of $13.5 million. As of December 31, 2010, approximately $7.1 million or 52.6% of total registered capital has been invested and the rest will be invested within two years since the registration. Grand International is allowed to use the capital raised or the profit generated by Qingdao Renmin for this capital injection.
 
 
21

 

Competitive environment

The market for packaging products is competitive. Our operations may be affected by technological advances of competitors, industry consolidation, competitive combination products and new information of marketed products or post-marketing surveillance.

Due to China’s new anti-monopoly laws, some of our larger competitors decreased the amounts of bundled products they offer, which may cause them to lower their prices. Recently we have seen more and more competition from the new entry of local suppliers as they are attracted by the relatively higher margin of this sector.  As a result of intensifying competition, our sales price and gross margin have been affected.

Strategy

Our growth strategy consists of consolidating our market leader position among domestic liquid food and beverage aseptic carton suppliers and pursuing expansion in the China market as well as selective Asian and Middle Eastern markets. We intend to achieve our goal by implementing the following strategies:

Increasing output to further penetrate the China market;  
Developing bundled packaging materials and liquid filling machines;  
Increasing sales to selective Asian and other markets;
Partnering with top milk producers;
Establishing brand names and brand awareness; and
Enhancing the Company’s competitive advantages through R&D.

Research and Development

To maintain and expand our market share, our top priority is to achieve technology breakthroughs on SIG packages and self-developed filling equipment.

In October 2006, Qingdao Renmin invested in Qingdao Delikang Packing Machinery Co., Ltd., (“Qingdao Delikang”), a joint venture with Xi’an Heiniu Machinery, Co. Qingdao Renmin is the 51% owner of Qingdao Delikang. The main business of this joint venture is to research and develop filling machines. Our first filling machine can run at approximately 12,000 packages output per hour and has finished tests by one of our customers. The second one has been installed and began production and expect to put it into the experimental stage by March 2012.

In addition, we are dedicated to developing packaging materials that can be used in the filling machines created by SIG. We have achieved technology breakthroughs with our first and second SIG packaging line, which can produce packages for small customers.  We continue to improve both quality and stability of these two new lines. We plan to add up to eight additional lines in the near future. Management believes that these new SIG packaging lines will significantly increase our revenue and also provide relatively higher gross margins in the next several years.
 
 
22

 

Manufacturing, Sales and Marketing

We support commercialized products with manufacturing, sales and marketing efforts. We are also moving forward with additional investments to enhance our infrastructure and business, including capital expenditures for the new production machinery. Our current annual capacity is approximately 4.5 billion packs for normal packaging. Once SIG packaging passes tests proving its ability to produce packages in large batches, assuming funding is available, management plans to introduce up to eight more production lines with anticipated annual capacity of 80 million packs per line.

Management continually reviews the business, including manufacturing operations, to identify actions that will enhance long-term competitiveness. By continuously streamlining the management of the production processes and improving production efficiency, we decreased the scrap percentage and lowered our costs. However, because of rising raw material prices, we were unable to lower our prices further, which may have resulted in a slower pace of growth than we might have experienced had we lowered our prices.

With the planning and construction of our new plant of Qingdao Likang, we anticipate that a new line for normal packs and four new lines for SIG packs will be put into production in the beginning of 2012. As our finances permit, further expansion will be continued in the following two or three years which may increase our annual capacity to 8.0 billion packs per annum in total.

Results of Operations

The following table shows the results of operations of our business.
 
Comparison of the years ended June 30, 2011 and 2010

Year Ended June 30
 
2011
   
2010
 
Sales
  $ 69,538,699     $ 56,141,659  
Cost of sales
  $ 58,176,381     $ 42,948,118  
Gross profit
  $ 11,362,318     $ 13,193,541  
Selling, general and administrative expenses
  $ 9,470,698     $ 8,785,252  
Other income (expense)
  $ (649,968 )   $ (147,890 )
Income taxes
  $ 491,054     $ 837,281  
Noncontrolling interest
  $ (840 )   $ (451 )
Net income (loss)
  $ 751,438     $ 3,423,569  
Foreign currency translation adjustment
  $ 1,643,276     $ 165,767  
Comprehensive income (loss)
  $ 2,394,714     $ 3,589,336  

Sales. Total sales were approximately $69.5 million for the fiscal year ended June 30, 2011 as compared with approximately $56.1 million for the fiscal year ended June 30, 2010, an increase of approximately $13.4 million, or 23.9%. The increase was mainly due to our continued sales and marketing efforts to locate and the new customers also contributed to the sales growth.  With our competitive pricing advantage, we have added 10 new domestic customers in this fiscal year which accounted for 0.46% of total revenue.
 
 
23

 

Cost of Sales. Cost of sales for the fiscal year ended June 30, 2011 was approximately $ 58.2 million, or 83.7% of sales, as compared with $42.9 million, or 76.5% of sales, for the fiscal year ended June 30, 2011. Our cost of sales is primarily composed of the costs of direct raw materials (mainly paper materials, polyethylene materials, aluminum materials, printing materials), labor, depreciation and amortization of manufacturing equipment and facilities, and other overhead. The increase of cost of sales as a percentage of sales by 7.2% was due to the purchase price escalation of major raw materials such as paper and plastic particles, which led to a narrower profit margin during this period. Our cost of sales may continue to rise as the global commodity prices move higher. We have no control over the cost of our major raw materials such as paper and plastic particles. Although we try to use material savings techniques to reduce the portion of cost of sales due to raw material costs, our efforts may be insignificant compared with the price increase of certain raw material.

Gross profit. As a result of increase in the percentage of cost of sales, gross profit margin for the fiscal year ended June 30, 2011 was approximately 16.3% as compared with 23.5% for the fiscal year ended June 30, 2010, a decrease of 7.2%.

Selling, general and administrative expenses. Selling, general and administrative expenses were approximately $9.5 million for the fiscal year ended June 30, 2011 as compared with approximately $8.8 million for the fiscal year ended June 30, 2010, an increase of approximately $0.7 million, or 8%. The increase was mainly due to the growing wages, social security and the welfare expenses by approximately $0.37 million and the additional expenses occurring to Likang amounted to approximately $0.33 million.

Income tax.  Income tax was approximately $0.5 million for the fiscal year ended June 30, 2011 as compared with approximately $0.8 million for the fiscal year of 2010, a decrease of approximately $0.3 million or 37.5% in accordance with the change of profit before tax.
 
Net income.  Net income was $0.8 million for the fiscal year ended June 30, 2011 as compared with net income of $3.4 million for the year ended June 30, 2010, a decrease of approximately $2.6 million, or 76.5%. The decrease in net income was primarily due to the increase of cost of sold and the slight rise of selling, general and administrative expenses this year. .
 
Foreign currency translation adjustment.  Our reporting currency is the US dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. 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.
 
Currency translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of shareholders' equity and was a gain of $1,643,276 for the fiscal year ended June 30, 2011 compared with a gain of $165,767 for the year ended June 30, 2010. The balance sheet amounts with the exception of equity at June 30, 2011 were translated at RMB 6.4641 to US$1.00 as compared with RMB6.7889 to US$1.00 at June 30, 2010. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the fiscal year ended June 30, 2011 and 2010 were RMB 6.6173 and RMB6.8180 to US$1.00.

Comprehensive income. The comprehensive income, which adds the currency adjustment to net income, was approximately $2.4 million for the fiscal year ended June 30, 2011 as compared with $3.6 million for the fiscal year ended June 30, 2010, a decrease of approximately $1.2 million. The decrease of comprehensive income was mainly due to the decrease of our net income.

 
24

 
 
Liquidity and Capital Resources

   
For the year ended June 30,
 
   
2011
   
2010
 
Cash flow from operating activities
  $ 1,404,402     $ (2,544,328 )
Cash flow from investing activities
    (9,658,340 )     (3,415,551 )
Cash flow from financing activities
    7,384,577       9,161,798  

As of June 30, 2011 we had working capital totaling approximately $14 million, including cash and cash equivalents of $5.6 million.

Net cash generated in operating activities was approximately $1.4 million for the fiscal year ended June 30, 2011. This net cash provided was primarily due to the increase of accounts payable by approximately $2.8 million as a result of the increase in the growing raw material prices. Net cash used in operating activities was $2.5 million for the fiscal year ended June 30, 2010.

Net cash used in investing activities for the fiscal year ended June 30, 2011 totaled ($9.7) million and related primarily to the purchase and advanced payments for property and equipment for Qingdao Likang. Net cash used in investing activities for the fiscal year ended June 30, 2010 totaled ($3.4) million and also related primarily to the purchase of property and equipment.
 
Net cash generated in financing activities for the fiscal year ended June 30, 2011 was $7.4 million and related primarily to: 1) Insurance of trade notes payable amounted to $7.4 million; 2) a contracted sale-lease back financing amounted to $0.8 million; and 3) proceeds from additional borrowings from employees amounted to $6.8 million. Net cash used in financing activities for the fiscal year ended June 30, 2010 was $9.2 million and was related primarily to the increase of proceeds from bank loan, sale-lease back financing and employees, reduction of trade notes payable and repayment of borrowings from employees during the year.
 
 Borrowings and Credit Facilities

We have entered into several loan agreements with our primary lenders, Qingdao City Commercial Bank, with which we have term loans. The short-term bank borrowings outstanding as of June 30, 2011 and 2010 were approximately $3.1 million and $2.9 million, each loan born an average interest rate of 6.1005% per annum. Secured by properties and equipment of Qindao Renmin, the loan agreements have one-year terms, contain customary affirmative and negative covenants and will expire in January 2012. As of June 30, 2011, we were in material compliance with the terms of our loan agreements. The current borrowings will probably extend after expiration in consideration of the capital demand from our company.
 
On April 28, 2011, the subsidiary of the company, Likang entered into three long-term loan agreements with Qingdao City Commercial Bank. The long-term loan borrowing outstanding from Qingdao City Commercial Bank were approximately $6.2 million and born a fixed interest rate 7.6475% in the first year. The loan agreements have 5-year terms, contain customary affirmative and negative covenants and will expire in December 31, 2016.
 
 
25

 

Capital Commitment
 
On August 12, 2010, Qingdao Likang, our indirectly owned subsidiary, entered into a land use right transfer agreement with Qingdao Territories and House Administration Bureau, pursuant to which, Qingdao Likang was granted a 50 years use rights for a parcel of land with an area of approximately 65,064 square meters in Qingdao for a consideration of RMB19,909,553 (US$2,928,700). Qingdao Likang has started building a new plant on the land and the construction is estimated to be completed by June, 2011.
 
The agreement also included provisions that require total investment for the project no less than RMB242.1 million (US$35.66 million) before August 12, 2013 with a conditional one-year extension. The amount of total investment refers to the amount of capital that will be spent in the construction and operations of the plant. It includes not only the registered capital, but also future borrowings such as bank loans.

Critical Accounting Policies and Estimates
 
Our consolidated financial information has been prepared in accordance with generally accepted accounting principles in the United States, which requires us to make judgments, estimates and assumptions that affect (1) the reported amounts of our assets and liabilities, (2) the disclosure of our contingent assets and liabilities at the end of each fiscal period and (3) the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.

When reviewing our financial statements, you should consider (1) our selection of critical accounting policies, (2) the judgment and other uncertainties affecting the application of those policies, and (3) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgment and estimates used in the preparation of our financial statements.

Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles Generally Accepted in the Unites States of America (GAAP).

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.
 
 
26

 

Cash and Cash Equivalents

In accordance with Statement of ASC Topic 230, “Statement of Cash Flows,” we consider all highly liquid instruments with original maturities of three months or less to be cash and cash equivalents.

Accounts Receivable and Allowance for Doubtful Accounts.

Trade accounts receivable are stated at the amount management expects to collect from balances outstanding at the end of the year. An allowance is estimated based upon (i) management’s assessment of the credit history with customers having outstanding balances and (ii) the current status of the relationship with the customer. It is possible the allowance for doubtful accounts could materially differ than management’s estimate.

Inventory

Inventory is stated at the lower of weighted average cost or market, which takes into account historical prices on a continuing basis. Our provision for inventory write-downs is based on our best estimates of (i) product sale prices, (ii) customer demand patterns, and (iii) our plan to transition products. However, since we operate in a highly competitive industry that is characterized by aggressive pricing practices, downward pressures on gross margins, and rapid technological advances it is foreseeable that the estimates used by us to determine its provisions for inventory write-downs will be materially different from the actual amounts or results. Such differences could result in higher than expected inventory provisions and related costs, which could have a materially adverse effect on our results of operations and financial condition in the near term.
 
Property and Equipment
 
Property and equipment are stated at cost and depreciated using the straight-line method, over 5 and 40 years. The carrying value of long lived assets is evaluated whenever changes in circumstances indicate the carrying amount of such assets may not be recoverable. If necessary, we recognize an impairment loss for the difference between the carrying amount of the assets and their estimated fair value. Fair value is based upon current and anticipated future discounted cash flows. Expenditures for maintenance and repairs are charged to operations as incurred; additions, renewals and betterments are capitalized. Based upon our most recent analysis, we believe that no impairment of property and equipment existed for the fiscal year ended June 30, 2011.

Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” codified in ASC Topic 360-10-35, the Company reviews the recoverability of its long-lived assets on a periodic basis in order to identify business conditions, which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future discounted cash flows. If the total of the expected future discounted cash flows is less than the total carrying value of the assets, a loss is recognized for the difference between the fair value (computed based upon the expected future discounted cash flows) and the carrying value of the assets.
 
 
27

 

Sale-leaseback transaction

Sale-leaseback transactions is presented and disclosed in accordance with ASC Topic 840-40 “Sale-Leaseback transactions”. The transaction has been accounted for as a financing arrangement, wherein the equipment remains on the Company’s books and will continue to be depreciated. The loss on the sale of the equipment was deferred and amortized over the remaining useful life of the leased assets as an increase of depreciation expense.  A financing obligation representing the proceeds has been recorded under long-term debt in the Company’s Balance Sheet, and is being reduced based on payments under the lease.

Revenue recognition
 
We derive our revenues primarily from sales of printing packaging products. We generally recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and the collectibility is probable. In instances where final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met. We are generally not contractually obligated to accept returns.

Income Taxes

We are not subject to any income taxes in the United States or the Cayman Islands. Under the Interim Regulations of the People's Republic of China on Enterprises Income Tax effective from January 1, 1994 to December 31, 2007 and the Income Tax Law of the People's Republic of China for Foreign Investment Enterprises and Foreign Enterprises effective from July 1, 1991 to December 31, 2007, a company is generally subject to an income tax at an effective rate of 33% (30% state income taxes plus 3% local income taxes) on income reported in the statutory financial statements after appropriate tax adjustments with the following “tax holidays”: If the enterprise is a manufacturing related joint venture with a foreign enterprise or a wholly owned subsidiary of a foreign enterprise, with an operation of 10 years or more, it enjoys a two-year income tax exemption from the year that it is profitable and a 50% income tax reduction for the following three years ( the “2-3 tax holiday”).
 
Our subsidiary, Qingdao Renmin has been a domestic limited liability company since May 24, 2001 and has been subject to an income tax at an effective rate of 33%. However, since September 7, 2006, as a result of our acquisition, Qingdao Renmin is now a foreign investment enterprise and started to enjoy the 2-3 tax holidays.
 
On March 16, 2007, the PRC promulgated a new income tax law for enterprises that became effective on January 1, 2008. Under the new income tax law, a company incorporated in the PRC will be generally subject to an income tax at an effective rate of 25%. In accordance with the new tax law, Qingdao Renmin may continue to enjoy the 2-3 tax holidays that it currently enjoys as a foreign investment enterprise subject to the regulations to be promulgated by the State Council of the PRC. Since January 1, 2009, Qingdao Renmin has entered to the three-year period of tax holiday by a 50% reduction of income tax with effective rate of 12.5%.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, investment securities, accounts receivable, accounts payable, accrued expenses and other obligations, approximate their fair value due to the short-term maturities of the related instruments.
 
 
28

 

Foreign Currency Translation and Transactions

The financial position and results of operations of the Company is determined using local currency (Chinese Yuan) as the functional currency. In accordance with SFAS No. 52, “Foreign Currency Translation”, codified in ASC Topic 830-10, assets and liabilities are translated at the prevailing exchange rate in effect at each year end. Contributed capital accounts are translated using the historical rate of exchange when capital is contributed. Income statement accounts are translated at the average rate of exchange during the year. Currency translation adjustments arising from the use of different exchange rates are included in accumulated other comprehensive income (loss) in shareholders' equity. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations.

Off-Balance Sheet Arrangements
 
On July 20, 2011, Qingdao Renmin and Qingdao Jiexin Recycling Resources Technological Development Co. Ltd (“Qingdao Jiexin”), a PRC company, entered into a Merger Agreement, pursuant to which Qingdao Renmin is acquired 100% of Qingdao Jiexin’s shares for the consideration of RMB 5,000,000 (approximately USD $773,500) by Qingdao Renmin.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable

 
29

 
 
ITEM 8.   FINANCIAL STATEMENTS

JPAK GROUP, INC.

CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2010







 
F-1

 

Table of Contents
 
Consolidated Financial Statements      
       
Report of Independent Registered Public Accounting Firm     F-3  
         
Consolidated Balance Sheets     F-4  
         
Consolidated Statements of Operations     F-5  
         
Consolidated Statements of Comprehensive Income     F-6  
         
Consolidated Statements of Changes in Equity     F-7  
         
Consolidated Statements of Cash Flows     F-8  
         
Notes to Consolidated Financial Statements     F-9  
 
 
F-2

 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
JPAK Group, Inc.


We have audited the accompanying consolidated balance sheets of JPAK Group, Inc. (the “Company”) as of June 30, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 includes 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 consolidated 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of JPAK Group, Inc. as of June 30, 2011 and 2010, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 
/s/ Patrizio & Zhao
Patrizio & Zhao, LLC
Parsippany, New Jersey
September 27, 2011
 
 
F-3

 

JPAK GROUP, INC.

Consolidated Balance Sheets
 
   
June 30, 2011
   
June 30, 2010
 
Assets
 
Current assets:
           
Cash and cash equivalents
  $ 5,574,130     $ 6,221,273  
Restricted cash
    12,904,460       4,744,084  
Accounts receivable, net of allowance for doubtful accounts of $1,339,485
    14,369,228       10,915,611  
  and $1,284,360 at June 30, 2011 and 2010, respectively
               
Inventory
    10,655,991       8,298,177  
Trade notes receivable
    30,940       515,150  
Other receivables
    627,444       484,003  
Advance payments
    773,833       1,287,924  
Prepaid expenses and other current assets
    515,229       299,713  
Total current assets
    45,451,255       32,765,935  
                 
Property and equipment, net
    18,706,975       11,201,241  
                 
Other noncurrent assets:
               
Advance payments – non current
    592,489       2,382,545  
Intangible assets, net
    3,134,678       -  
Deferred loss on sales of assets
    2,302,922       1,899,277  
Prepaid expenses
    1,111,259       952,676  
                 
Total assets
  $ 71,299,578     $ 49,201,674  
                 
Liabilities
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 5,402,866     $ 2,401,560  
Trade notes payable
    12,513,972       4,659,370  
Short-term bank loans
    3,094,000       2,946,000  
Current portion of long-term debt
    3,899,818       2,589,409  
Income tax payable
    9,986       127,169  
Other current liabilities
    116,110       167,728  
Total current liabilities
    25,036,752       12,891,236  
Long-term debt
    9,883,005       3,049,115  
Total liabilities
    34,919,757       15,940,351  
                 
Equity
               
Stockholders’ equity:
               
Series A convertible preferred stock, $0.0001 par value, 5,608,564
               
  shares authorized, issued and outstanding
    561       561  
Series B convertible preferred stock, $0.0001 par value, 5,000,000
               
  shares authorized, issued and outstanding
    500       500  
Series C convertible preferred stock, $0.0001 par value, 12,000,000
               
  shares authorized, issued and outstanding
    1,200       1,200  
Common stock, $0.001 par value, 300,000,000 shares authorized,
               
  36,368,334 shares issued and outstanding at June 30, 2011
               
  and 2010, respectively
    36,368       36,368  
Series A preferred stock
    2,484,226       2,484,226  
Series B preferred stock
    1,390,853       1,390,853  
Additional paid-in capital
    23,903,645       23,184,206  
Retained earnings
    2,252,319       1,776,028  
Statutory reserves
    1,826,236       1,551,089  
Accumulated other comprehensive income
    4,374,319       2,731,043  
Total stockholders’ equity
    36,270,227       33,156,074  
Noncontrolling interest
    109,594       105,249  
Total equity
    36,379,821       33,261,323  
                 
Total liabilities and equity
  $ 71,299,578     $ 49,201,674  
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-4

 
 
JPAK GROUP, INC.

Consolidated Statements of Operations

   
For the Years Ended June 30,
 
   
2011
   
2010
 
             
Sales
  $ 69,538,699     $ 56,141,659  
                 
Cost of sales
    58,176,381       42,948,118  
                 
Gross profit
    11,362,318       13,193,541  
                 
Operating expenses
               
Selling, general and administrative
    9,470,698       8,785,252  
                 
Income from operations
    1,891,620       4,408,289  
                 
Other income (expenses):
               
Interest Income
    151,653       152,844  
Interest expense
    (817,100 )     (610,461 )
Non-operating income, net
    15,479       309,727  
                 
Total other expenses
    (649,968 )     (147,890 )
                 
Income before provision for income taxes
    1,241,652       4,260,399  
                 
Provision for income taxes
    491,054       837,281  
                 
Net income
    750,598       3,423,118  
                 
Less: net loss attributable to noncontrolling interest
    (840 )     (451 )
                 
Net income attributable to Jpak Group, Inc.
    751,438       3,423,569  
                 
Undistributed income attributable to preferred stockholders
    349,067       1,603,576  
                 
Net income attributable to common stockholders
  $ 402,371     $ 1,819,993  
                 
Basic earnings per common share
  $ 0.01     $ 0.06  
Diluted earnings per common share
  $ 0.01     $ 0.06  
                 
Weighted average number of common shares outstanding
               
     Basic
    36,368,334       31,329,384  
     Diluted
    67,918,795       58,737,379  
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-5

 

JPAK GROUP, INC.
 
Consolidated Statements of Comprehensive Income

   
For the Years Ended June 30,
 
   
2011
   
2010
 
             
Net income
  $ 750,598     $ 3,423,118  
                 
Other comprehensive income
               
Foreign currency translation adjustment
    1,648,461       166,339  
                 
Total other comprehensive income
    1,648,461       166,339  
                 
Comprehensive income
    2,399,059       3,589,457  
                 
Less: comprehensive income attributable to the
               
  noncontrolling interest
    4,345       121  
                 
Comprehensive income attributable to Jpak Group, Inc.
  $ 2,394,714     $ 3,589,336  
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-6

 

JPAK GROUP, INC.

Consolidated Statements of Changes in Equity
 
   
Common Stock
   
Series A
Convertible
preferred Stock
   
Series B
Convertible preferred
Stock
   
Series C
Convertible preferred
Stock
   
Allocation
of
Series A
   
Allocation
of
Series B
         
Placement
   
Commission
Series Aof
   
Commission
Series B
of
   
Additional
   
Retained
         
Accumulated
Other Compre-
   
Total
Stock-
   
Noncon-
       
         
Par
         
Par
         
Par
         
Par
   
Preferred
   
Preferred
         
Agent
   
Preferred
   
Preferred
   
Paid-in
   
Earnings
   
Statutory
   
hensive
   
holder’s
   
trolling
   
Total
 
   
Shares
   
Value
   
Shares
   
Value
   
Shares
   
Value
   
Shares
   
Value
   
Shares
   
Shares
   
Warrants
   
Warrants
   
Shares
   
Shares
   
Capital
   
(Deficit)
   
Reserves
   
Income
   
Equity
   
Interest
   
Equity
 
                                                                                                                               
Balance June 30, 2009
    25,005,000     $ 25,005       5,608,564     $ 561       5,000,000     $ 500       -     $ -     $ 2,484,226     $ 1,390,853     $ 4,634,678     $ 1,172,487     $ 355,237     $ 462,519     $ 10,655,348     $ (1,106,478 )   $ 1,010,026     $ 2,565,276     $ 23,650,238     $ 105,128     $ 23,755,366  
                                                                                                                                                                         
Net income
    -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       3,423,569       -       -       3,423,569       (451 )     3,423,118  
                                                                                                                                                                         
Other comprehensive income
                                                                                                                                                                       
Foreign currency translation
    -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       165,767       165,767       572       166,339  
Adjustment
                                                                                                                                                                       
Comprehensive income
    -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       3,589,336       121       3,589,457  
                                                                                                                                                                         
Statutory reserves
    -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       (541,063 )     541,063       -       -       -       -  
                                                                                                                                                                         
Issuance of  common shares
    11,363,334       11,363       -       -       -       -       12,000,000       1,200       -       -       (4,634,678 )     -       -       -       10,538,615       -       -       -       5,916,500       -       5,916,500  
                                                                                                                                                                         
Balance June 30, 2010
    36,368,334     $ 36,368       5,608,564     $ 561       5,000,000     $ 500       12,000,000     $ 1,200     $ 2,484,226     $ 1,390,853     $ -     $ 1,172,487     $ 355,237     $ 462,519     $ 21,193,963     $ 1,776,028     $ 1,551,089     $ 2,731,043     $ 33,156,074     $ 105,249     $ 33,261,323  
Net income
    -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       751,438       -       -       751,438       (840 )     750,598  
                                                                                                                                                                         
Other comprehensive income
                                                                                                                                                                       
Foreign currency translation
    -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       1,643,276       1,643,276       5,185       1,648,461  
Adjustment
                                                                                                                                                                       
Comprehensive income
    -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       2,394,714       4,345       2,399,059  
                                                                                                                                                                         
Statutory reserves
    -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       (275,147 )     275,147       -       -       -       -  
                                                                                                                                                                         
Management incentive option   as compensation
    -       -       -       -       -       -       -       -       -       -       -       -       -       -       719,439       -       -       -       719,439       -       719,439  
                                                                                                                                                                         
Balance June 30, 2011
    36,368,334     $ 36,368       5,608,564     $ 561       5,000,000     $ 500       12,000,000     $ 1,200     $ 2,484,226     $ 1,390,853     $ -     $ 1,172,487     $ 355,237     $ 462,519     $ 21,913,402     $ 2,252,319     $ 1,826,236     $ 4,374,319     $ 36,270,227     $ 109,594     $ 36,379,821  
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-7

 
 
JPAK GROUP, INC.

Consolidated Statements of Cash Flows

   
For the Years Ended June 30,
 
   
2011
   
2010
 
             
Cash flows from operating activities:
           
Net income
  $ 750,598     $ 3,423,118  
Adjustments to reconcile net income to net cash
               
  provided by (used in) operating activities:
               
Depreciation and amortization
    1,370,651       1,569,887  
Share-based payment
    719,439       -  
Loss on disposal of fixed assets
    22,292       5,684  
Changes in assets and liabilities:
               
Accounts receivable
    (2,838,010 )     (1,794,434 )
Inventory
    (1,896,018 )     (2,903,280 )
Trade notes receivable
    498,286       (512,947 )
Other receivables
    (143,574 )     (282,437 )
Advance payments
    565,399       (1,071,722 )
Prepaid expenses and other current assets
    (319,025 )     211,344  
Accounts payable and accrued expenses
    2,826,529       (889,335 )
Income tax payable
    (120,712 )     (40,998 )
Other current liabilities
    (31,453 )     (259,208 )
Total adjustments
    653,804       (5,967,446 )
                 
Net cash provided by (used in) operating activities
    1,404,402       (2,544,328 )
                 
Cash flows from investing activities:
               
Advance payments for fixed assets
    1,865,555       (1,492,641 )
Additions to property and equipment
    (8,431,400 )     (1,497,633 )
Proceeds from disposal of fixed assets
    6,498       -  
Acquisition of intangible assets – land use rights
    (3,098,993 )     (601,281 )
Loan receivable
    -       176,004  
                 
Net cash used in investing activities
    (9,658,340 )     (3,415,551 )
                 
Cash flows from financing activities:
               
Restricted cash
    (7,738,715 )     (1,340,216 )
Issuance of trade notes payable
    7,444,176       1,423,010  
Proceeds from short-term bank loans
    -       586,680  
Proceeds from long-term debt
    7,679,116       2,575,824  
Additional paid-in capital
    -       5,916,500  
                 
Net cash provided by financing activities
    7,384,577       9,161,798  
                 
Effect of foreign currency translation on cash
    222,218       49,655  
                 
Net increase (decrease) in cash and cash equivalents
    (647,143 )     3,251,574  
                 
                 
Cash and cash equivalents at beginning of year
    6,221,273       2,969,699  
                 
Cash and cash equivalents at end of year
  $ 5,574,130     $ 6,221,273  
                 
Supplemental schedule of non cash activities
               
Deferred loss - sale leaseback
  $ 484,123     $ 2,009,578  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-8