WEIKANG BIO-TECHNOLOGY GROUP CO., INC. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - WEIKANG BIO-TECHNOLOGY GROUP CO., INC.	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC.	v240322_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC.	v240322_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC.	v240322_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC.	v240322_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011

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

For the transition period from _______ to _______

Commission File Number: 333-165684

WEIKANG BIO-TECHNOLOGY GROUP COMPANY, INC.

(Exact name of small business issuer as specified in its charter)

Nevada		22-2816569
(State or other jurisdiction of incorporation or organization)		(IRS Employer identification No.)

No. 365 Chengde Street, Daowai District, Harbin

Heilongjiang Province, People’s Republic of China 150020

(Address of principal executive offices)

(86) 451- 88355530

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 x No ¨

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 ¨	Accelerated filer ¨

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

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 34,391,880 shares of common stock, $.00001 par value, were outstanding as of November 18, 2011.

TABLE OF CONTENTS

		Page
	PART I—FINANCIAL INFORMATION	3
Item 1.	Financial Statements.	3

	Report of Registered Independent Public Accounting Firm	5

	Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010	6-7

	Consolidated Statements of Income and Comprehensive Income for the nine and three months ended September 30, 2011 and 2010	8

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010.	9

	Notes to Consolidated Financial Statements as of September 30, 2011 and December 31, 2010 and for the nine months ended September 30, 2011 and 2010	10-28

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation.	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	37
Item 4.	Controls and Procedures.	37
	PART II—OTHER INFORMATION	37
Item 1.	Legal Proceedings.	37
Item 1A.	Risk Factors.	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	38
Item 3.	Defaults Upon Senior Securities.	38
Item 4.	(Removed and Reserved).	38
Item 5.	Other Information.	38
Item 6.	Exhibits.	38

SIGNATURES		39

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Weikang Bio-Technology Group Co., Inc.

Unaudited Consolidated Financial Statements

September 30, 2011 and December 31, 2010

(Stated in US Dollars)

Weikang Bio-Technology Group Co., Inc.

Table of Contents


Report of Independent Registered Public Accounting Firm	5

Consolidated Balance Sheets	6-7

Consolidated Statements of Income	8

Consolidated Statements of Cash Flows	9

Notes to Consolidated Financial Statements	10-28

REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM

To: The Board of Directors and Stockholders of

Weikang Bio-Technology Group Co., Inc.

We have reviewed the accompanying interim consolidated balance Sheets of Weikang Bio-Technology Group Co., Inc. (“the Company”) as of September 30, 2011 and December 31, 2010, and the related statements of income, stockholders’ equity, and cash flows for the three and nine month periods ended September 30, 2011 and 2010. The consolidated financial statements as of and for the year ended December 31, 2010 was audited by another registered independent public accounting firm whose report dated March 11, 2011 was unqualified. These interim consolidated financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with U.S. generally accepted accounting principles.

San Mateo, California	Samuel H. Wong & Co., LLP
November 1, 2011	Certified Public Accountants

Weikang Bio-Technology Group Co., Inc.

Consolidated Balance Sheets

As of September 30, 2011 and December 31, 2010

(Stated in US Dollars)

	September 30,		December 31,
	2011		2010

ASSETS

CURRENT ASSETS
Cash & equivalents	$	51,477,841	$	50,363,812
Account receivable		6,510,091		652,167
Advances to suppliers and other receivables		5,256,546		241,342
Inventory		311,405		388,535
Deferred compensation		-		902,226

Total current assets		63,555,883		52,548,082

NONCURRENT ASSETS
Deferred compensation-noncurrent		-		16,077
Property and equipment, net		24,423,142		9,606,269
Construction in progress		865,474		683,830
Intangible assets		16,198,492		15,754,666

Total noncurrent assets		41,487,108		26,060,842
TOTAL ASSETS	$	105,042,991	$	78,608,924

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$	14,607	$	14,204
Unearned revenue		-		528,485
Taxes payable		3,234,860		6,269,422
Accrued expenses and other payables		651,613		1,376,154
Due to related party		-		25,669

Total current liabilities		3,901,080		8,213,934

CONTINGENCIES

DEFERRED TAX LIABILITY, NET		3,540,317		3,464,815

See Accompanying Notes to the Consolidated Financial Statements and Accountant’s Report

Weikang Bio-Technology Group Co., Inc.

Consolidated Balance Sheets

As of September 30, 2011 and December 31, 2010

(Stated in US Dollars)

		September 30, 2011		December 31, 2010
STOCKHOLDERS' EQUITY
Common stock, $.00001 par value; authorized shares 100,000,000; issued and outstanding shares 34,391,880 and 29,963,551 at September 30, 2011 and December 31, 2010, respectively		343		300
Additional paid in capital		28,544,708		17,530,601
Statutory reserve		2,431,927		2,431,927
Accumulated other comprehensive income		5,955,344		2,524,566
Retained earnings		60,669,272		44,442,781

Total stockholders' equity		97,601,594		66,930,175

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	105,042,991	$	78,608,924

See Accompanying Notes to the Consolidated Financial Statements and Accountant’s Report

Weikang Bio-Technology Group Co., Inc.

Consolidated Statements of Income and Comprehensive Income

For the nine and three months ended September 30, 2011 and 2010

(Stated in US Dollars)

	NINE MONTHS ENDED SEPTEMBER 30,						THREE MONTHS ENDED SEPTEMBER 30,
	2011			2010			2011		2010
	(UNAUDITED)						(UNAUDITED)

Net sales	$	64,627,022		$	41,878,410		$	19,404,100	$	17,426,211
Cost of goods sold		25,902,325			16,976,845			8,555,112		6,962,482

Gross profit		38,724,697			24,901,565			10,848,988		10,463,729

Operating expenses
Selling		3,406,809			2,416,638			815,770		622,337
General and administrative		11,140,069			3,373,023			6,572,746		755,640
Research and development		12,639			1,760,631			12,639		957,724

Total operating expenses		14,559,517			7,550,292			7,401,155		2,335,701

Income from operations		24,165,180			17,351,273			3,447,833		8,128,028

Non-operating income (expenses)
Interest income		206,287			53,054			80,087		16,864
Other income		538,669			246,776			3,591		246,582
Other expenses		(1,382	)		(1,947	)		26,625		(40	)

Total non-operating income, net		743,574			297,883			110,303		263,406

Income before income tax		24,908,754			17,649,156			3,558,136		8,391,434
Income tax		8,682,260			5,124,858			2,381,403		2,325,991

Net income		16,226,494			12,524,298			1,176,733		6,065,443

Other comprehensive income
Foreign currency translation gain		3,430,779			868,889			1,682,001		646,247

Comprehensive Income	$	19,657,273		$	13,393,187		$	2,858,734	$	6,711,690

Basic weighted average shares outstanding		32,401,606			27,814,024			34,008,184		28,052,649

Diluted weighted average shares outstanding		32,401,606			27,814,024			34,008,184		28,052,649

Basic earnings per share	$	0.50		$	0.45		$	0.03	$	0.22

Diluted earnings per share	$	0.50		$	0.45		$	0.03	$	0.22

See Accompanying Notes to the Consolidated Financial Statements and Accountant’s Report

Weikang Bio-Technology Group Co., Inc.

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

	NINE MONTHS ENDED SEPTEMBER 30,
	2011			2010
	(UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	16,226,494		$	12,524,298
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		914,421			894,867
Stock compensation		9,256,210			192,400
Deferred compensation		-			2,086,567
Changes in deferred tax		(68,961	)		(150,571	)
(Increase) decrease in current assets:
Accounts receivable		(5,702,481	)		(910,677	)
Advances to suppliers and other receivables		(4,258,134	)		(106,552	)
Inventory		91,451			(72,491	)
Increase (decrease) in current liabilities:
Accounts payable		(191	)		1,112
Unearned revenue		(538,669	)		759,546
Accrued expenses and other payables		(765,182	)		226,886
Taxes payable		(3,226,362	)		882,460

Net cash provided by operating activities		11,928,596			16,327,845

CASH FLOWS FROM INVESTING ACTIVITIES:
Construction in progress		(149,473	)		(468,480	)
Acquisition of property & equipment		(14,794,922	)		(14,351	)

Net cash used in investing activities		(14,944,395	)		(482,831	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from shares issued		2,016,900			2,197,500
Changes in due from shareholder		1,702			-
Changes in due from related party		-			24,975

Net cash provided by financing activities		2,018,602			2,222,475

EFFECT OF EXCHANGE RATE CHANGE ON CASH & EQUIVALENTS		2,111,226			501,993

INCREASE IN CASH & EQUIVALENTS		1,114,029			18,569,482

CASH & EQUIVALENTS, BEGINNING OF PERIOD		50,363,812			11,380,019

CASH & EQUIVALENTS, END OF PERIOD	$	51,477,841		$	29,949,501

Supplemental Cash flow data:
Income tax paid	$	10,942,323		$	5,355,503
Interest paid	$	-		$	-

See Accompanying Notes to the Consolidated Financial Statements and Accountant’s Report

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

1.	Organization and Description of Business

Weikang Bio-Technology Group Co., Inc., a Nevada corporation (“Weikang” or “the Company”) was incorporated on May 12, 2004 in Florida as Expedition Leasing, Inc. (“Expedition”). The Company reincorporated in Nevada and changed to its present name on July 12, 2008, pursuant to an acquisition of Sinary Bio-Technology Holdings Group, Inc. (“Sinary”), a Nevada corporation and Sinary’s wholly owned subsidiary, Heilongjiang Weikang Biotechnology Group Co., Ltd. (“Heilongjiang Weikang”), a limited liability company organized and existing under the laws of the People’s Republic of China (“PRC”). Upon completion of the transaction on December 7, 2007, Sinary and Heilongjiang Weikang became our wholly-owned subsidiaries. The Company develops, manufactures and distributes Traditional Chinese Medicine ("TCM") through Heilongjiang Weikang in the PRC.

On December 7, 2007, the Company (as Expedition) entered into a Share Exchange Agreement (the “Exchange Agreement”) with Sinary Bio-Technology Holdings Group, Inc., a Nevada corporation (“Sinary”) and Weili Wang, its sole shareholder, pursuant to which the Company issued 24,725,200 shares of common stock to Weili Wang for all of the common shares of Sinary. Concurrently, Sinary paid $650,000 to certain former shareholders of the Company, who surrendered 24,725,200 shares of the Company’s common stock held by them to the Company for cancellation. This payment was advanced to Sinary by Yin Wang (the “Advance”). As a result, Weili Wang owned 98% of the Company after the share exchange. On the Closing Date, Sinary became a wholly-owned subsidiary of the Company and Mr. Yin Wang was appointed the Company’s Chief Executive Officer and Chairman of the Board.

Prior to the acquisition of Sinary, the Company was a non-operating public shell corporation. Pursuant to Securities and Exchange Commission (“SEC”) rules, the merger or acquisition of a private operating company into a non-operating public shell corporation with nominal net assets is considered a capital transaction, rather than a business combination. Accordingly, for accounting purposes, the transaction was treated as a reverse acquisition and recapitalization, and pro forma information is not presented. Transaction costs incurred in the reverse acquisition were expensed.

Sinary was incorporated under the laws of the State of Nevada on August 31, 2007. On October 25, 2007, Sinary entered into an Equity Interests Transfer Agreement (the “Transfer Agreement”) with Yin Wang and Wei Wang, the stockholders of Heilongjiang Weikang, a limited liability company in the PRC, (the “Heilongjiang Shareholders”) to acquire 100% of the equity interests of Heilongjiang Weikang for 57 million Renminbi (“RMB”), or approximately $7.6 million (the “Acquisition Price”).

On August 6, 2010, Sinary and Yin Wang and Wei Wang, entered into a Settlement Agreement and Release pursuant to which Yin Wang and Wei Wang waived their rights to payment of both the Acquisition Price of approximately $7.6 million and the Advance of $650,000 and contributed the Acquisition Price and the Advance to the Company's capital.

Heilongjiang Weikang was incorporated in Heilongjiang Province, PRC, on March 29, 2005, and was formerly known as Heilongjiang Province Weikang Bio-Engineering Co., Ltd. Heilongjiang Weikang develops, manufactures and distributes TCM in the PRC.

On July 22, 2008, Heilongjiang Weikang completed the acquisition of 100% of the issued and outstanding equity interests of Tianfang (Guizhou) Pharmaceutical Co., Ltd. (“Tianfang”), a Chinese LLC, for $15,000,000, pursuant to a stock transfer agreement entered into on June 30, 2008 by and among Heilongjiang Weikang, Tianfang, and Tianfang’s two shareholders: Beijing Shiji Qisheng Trading Co., Ltd., a Chinese LLC (“Shiji Qisheng”) and Tri-H Trade (U.S.A.) Co., Ltd., a California corporation (“Tri-H”, and together with Shiji Qisheng collectively as the “Selling Shareholders”).

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

Tianfang was incorporated in Guizhou Province, PRC, in 1998. Tianfang is engaged in the development, manufacture and distribution of over the counter (“OTC”) pharmaceuticals. The Company has expanded its market share to the southern part of China through the acquisition of Tianfang.

On January 6, 2010, Weili Wang formed Lucky Wheel Limited (“Lucky Wheel”), a British Virgin Islands corporation and issued to herself 10,000 ordinary shares or 100% of the issued and outstanding share capital of Lucky Wheel. In June 2010 Ms. Weili Wang transferred 22,925,200 of her shares of the Company’s common stock (82% of the Company’s issued and outstanding common stock) to Lucky Wheel. On May 5, 2010, Ms. Weili Wang and Ying Wang entered into a Call Option Agreement (the “Option Agreement”), pursuant to which Weili Wang granted Yin Wang an irrevocable and unconditional option to purchase all of her ordinary shares of Lucky Wheel (the “Option Shares”) for U.S. $0.10 per ordinary share for a total of $1,000. Mr. Wang has the right to purchase 34% of the Option Shares on December 31, 2010 and 33% on December 31, 2011 and December 31, 2012, respectively. The Option Agreement expires June 29, 2015. If and when the option is fully exercised, Yin Wang will become the sole shareholder of Lucky Wheel whose sole asset is 22,925,200 shares of the Company’s common stock. Mr. Wang is expected to use his personal funds to pay for the Option Shares.

In connection with the transactions described in the Transfer Agreement, on November 9, 2007, the Heilongjiang Office of the State Administration for Industry and Commerce registered Sinary as the 100% owner of Heilongjiang Weikang’s registered capital and issued a foreign invested enterprise business license (the “FIE Business License”) to Heilongjiang Weikang. The initial FIE Business License was valid until June 30, 2010. On March 12, 2010, the Harbin City of Administration for Industry and Commerce extended the FIE Business License until November 9, 2027.

The unaudited financial statements included herein have been prepared by the Company, pursuant to the rules and regulations of the SEC. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) that are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) were omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and footnotes included in the Company’s 2010 audited financial statements included in the Company’s Annual Report on Form 10-K. The results for the nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.

2.	Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Sinary, and the results of operations of Weikang, Sinary’s wholly-owned subsidiary; and Tianfang. All significant inter-company accounts and transactions were eliminated in consolidation.

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

Use of Estimates

In preparing financial statements in conformity with United States Generally Accepted Accounting Principles (“US GAAP”), management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets, allowance for doubtful accounts, and the reserve for obsolete and slow-moving inventories. Actual results could differ from those estimates.

Cash and Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents.

Accounts Receivable

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Based on management’s analysis noted above, the Company made allowance for bad debts of $342,636 and $0 at September 30, 2011 and December 31, 2011, respectively.

Inventory

Inventories are valued at the lower of cost or market with cost determined on a moving weighted average basis. Costs of work in progress and finished goods are comprised of direct material cost, direct production cost and an allocated portion of production overhead.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are expensed as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for all assets with estimated lives, as follows:

Building	20 years
Vehicle	5 years
Office Equipment	3-7 years
Production Equipment	3-10 years

Land Use Right

Right to use land is stated at cost less accumulated amortization. Amortization is provided using the straight-line method over 50 years.

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

Impairment of Long-Lived Assets

We evaluate the recoverability of long-lived assets with finite lives in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 360-10-35, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which requires recognition of impairment of long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. When events or changes in circumstances indicate the carrying amount of an asset may not be recoverable based on estimated undiscounted cash flows, the impairment loss would be measured as the difference between the carrying amount of the asset and its fair value based on the present value of estimated future cash flows. Fair value is generally determined by the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, the Company believes that, as of September 30, 2011 and December 31, 2010, there were no significant impairments of its long-lived assets.

Income Taxes

The Company uses FASB ASC Topic 740, “Accounting for Income Taxes”, which requires recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are considered as the tax consequences in future years for differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the positions taken or the amount of the positions that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely to be realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interests associated with unrecognized tax benefits are classified as interest expenses and penalties are classified in selling, general and administrative expenses in the statements of income. At September 30, 2011 and December 31, 2010, the Company did not take any uncertain positions that would necessitate recording of tax related liability.

Revenue Recognition

The Company's revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (SAB) 104 (codified in FASB ASC Topic 480). Sales revenue is recognized when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all the relevant criteria for revenue recognition is met are recorded as unearned revenue.

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

Sales revenue consists of the invoiced value of goods, which is net of value-added tax (“VAT”). All of the Company’s products are sold in the PRC and are subject to Chinese VAT of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their end product. The Company recorded VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables.

Sales and purchases are recorded net of VAT collected and paid. VAT taxes are not affected by the income tax holiday.

Sales returns and allowances was $0 for the nine months ended September 30, 2011 and 2010. The Company does not provide unconditional right of return, price protection or any other concessions to its dealers or other customers.

Cost of Goods Sold

Cost of goods sold consists primarily of material costs, employee compensation, depreciation and related expenses, which are directly attributable to the production of products. Write-down of inventory to the lower of cost or market is also recorded in cost of goods sold.

Concentration of Credit Risk

Cash includes cash on hand and demand deposits in accounts maintained within the PRC and the US. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits for the banks located in the US. Balances at financial institutions within the PRC are not covered by insurance. As of September 30, 2011 and December 31, 2010, the Company had approximately $0 and $144,000 deposits in the bank located in US which was in excess of federally insured limits; the Company had $51,324,055 and $49,969,700 deposits in the banks in China, respectively. The Company’s financial institutions in China are reputable banks and majority owned by the Chinese government. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

Financial instruments that potentially subject the Company to credit risk consist primarily of cash, accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of its clients' financial condition and customer payment practices to minimize collecting risk on accounts receivable.

The operations of the Company are located in the PRC. Accordingly, the Company's business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, as well as by the overall performance of the PRC’s economy.

Statement of Cash Flows

In accordance with FASB ASC Topic 230, “Statement of Cash Flows”, cash flows from the Company's operations are calculated based upon local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

Fair Value of Financial Instruments

For certain of the Company’s financial instruments, including cash and equivalents, accounts and other receivables, accounts and other payables, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities. ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

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

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

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

The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815.

As of September 30, 2011 and December 31, 2010, the Company did not identify any assets and liabilities that were required to be presented on the balance sheet at fair value.

Foreign Currency Translation and Comprehensive Income (Loss)

The Company’s functional currency is the Renminbi (“RMB”). For financial reporting purposes, RMB were translated into United States Dollars ("USD" or “$”) as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated other comprehensive income".

Gains and losses resulting from foreign currency transactions are included in income. There has been no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.

The Company uses FASB ASC Topic 220, “Reporting Comprehensive Income”. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except the changes in paid-in capital and distributions to stockholders due to investments by stockholders. Comprehensive income for the nine months ended September 30, 2011 and 2010 included net income and foreign currency translation adjustments.

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

Stock-Based Compensation

The Company accounts for its stock-based compensation in accordance with FASB ASC Topic 718 and 505, “Share Based Payment”. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.

Basic and Diluted Earnings per Share (EPS)

Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similarly to basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted net earnings per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. For the nine months ended September 30, 2011, there were no dilutive shares outstanding due to anti-dilutive feature. The following table presents a reconciliation of basic and diluted earnings per share for the nine and three months ended September 30, 2011 and 2010:

	Nine Months Ended September 30,
	2011		2010
Net income	$	16,226,494	$	12,524,298

Weighted average shares outstanding – basic		32,401,606		27,814,024
Effect of dilutive securities:		-		-
Weighted average shares outstanding – diluted		32,401,606		27,814,024

Earnings per share – basic	$	0.50	$	0.45
Earnings per share - diluted	$	0.50	$	0.45

	Three Months Ended September 30,
	2011		2010
Net income	$	1,176,733	$	6,065,443

Weighted average shares outstanding – basic		34,008,184		28,052,649
Effect of dilutive securities:		-		-
Weighted average shares outstanding – diluted		34,008,184		28,052,649

Earnings per share – basic	$	0.03	$	0.22
Earnings per share - diluted	$	0.03	$	0.22

Segment Reporting

FASB ASC Topic 280, "Disclosures about Segments of an Enterprise and Related Information" requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manners in which management disaggregates a company.

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

FASB ASC Topic 280 has no effect on the Company's financial statements as substantially all of the Company's operations are conducted in one industry segment.

Research and Development

Research and development costs are primarily for the development of new drugs, nutritional and health supplement products. Research and development costs are expensed as incurred.

On January 20, 2009, the Company entered an agreement with Botany Medicine Research Center of Northeast Forestry University (“the University”) to develop certain new medicine and health supplemental products. The Company is responsible for funding the research and development (“R&D”) expense and project examination and registration fee of RMB 15,000,000 (or $2,195,000). According to the contract, upon successful completion of the research work by the University, the Company is required to pay 85% of the total expense to the University and will own the rights to the research findings. The Company is required to pay the remaining 15% upon successful registration and approval of the research findings from the State Food and Drug Administration and Department of Public Health of Heilongjiang Province. The Company is responsible for registration of the research findings and getting approval from related authorities. In case the registration application is not approved by the authorities, the Company will not be entitled to any refund of the amount it already paid and will not be required to pay the remaining 15% of RMB 2,300,000 (or $336,000). On June 30, 2009, the R&D of the new medicine and health supplemental products was completed successfully. During the term of the contract, the Company paid RMB 12,700,000 (or $1,859,000) to the University and obtained the ownership rights of the research findings. The Company is in the process of registering the research findings with the related authorities. The Company recorded the payment for the R&D project as R&D expense.

On March 20, 2010, the Company entered into a one-year contract with a professional R&D team to research and develop licorice flavonoids extraction technology for industrialization of use in therapeutics. The Company is responsible for all the research and development expense with the total payment expected to be approximately $2.95 million. As of December 31, 2010, the Company paid research and development expenses of approximately $2.54 million under this agreement and is committed to pay the remaining $0.41 million upon the successful development of the technology. The Company will own the research and development results and related intellectual property..

New Accounting Pronouncements

In June 2011, FASB issued ASU 2011-05, Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income. Under the amendments in this update, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. In addition, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this update should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently assessing the effect that the adoption of this pronouncement will have on its financial statements.

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

3.	Accounts Receivable

	9/30/2011			12/31/2010
Accounts receivable	$	6,852,727		$	652,167
Less: Allowance for doubtful accounts		(342,636	)		-
	$	6,510,091		$	652,167

Allowance for bad debt:	9/30/2011			12/31/2010
Beginning balance	$	-		$	-
Additions to allowance		(342,636	)		-
Ending balance	$	(342,636	)	$	-

The Company offers credit terms of between 30 to 60 days to most of their customers.

4.	Advances to Suppliers and Other Receivables

Advances to suppliers and other receivables at September 30, 2011 and December 31, 2010 were as follows:

	2011		2010
Prepaid IR expense	$	400,577	$	228,904
Advance to suppliers		4,518,257		9,401
Other		1,449		3,037
Total	$	4,920,283	$	241,342

Inventory

Inventory at September 30, 2011 and December 31, 2010 was as follows:

	2011		2010
Raw materials	$	108,823	$	138,897
Packing materials		108,576		34,925
Finished goods		94,006		214,713
Total	$	311,405	$	388,535

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

6.	Property and Equipment, net

Property and equipment consisted of the following at September 30, 2011 and December 31, 2010:

	2011			2010
Building	$	23,973,472		$	8,508,466
Building improvements		980,263			940,625
Production equipment		2,567,384			2,444,801
Office furniture and equipment		230,084			219,916
Vehicles		132,424			127,070
		27,883,627			12,240,878
Less: Accumulated depreciation		(3,460,485	)		(2,634,609	)
	$	24,423,142		$	9,606,269

During the period ended September 30, 2011, the Company purchased an office building for RMB 96,000,000 for sales and operations purposes.

Depreciation for the nine months ended September 30, 2011 and 2010 was $847,978 and $683,465, respectively. Depreciation for the three months ended September 30, 2011 and 2010 was $380,504 and $225,657, respectively.

7.	Construction in Progress

At September 30, 2011, construction in progress consisted of the payment for constructing a manufacturing line for producing licorice flavonoids. The construction was completed at the end of September 30, 2011. However, the manufacturing line is in the process of final inspection before put in use.

8.	Intangible Assets

Intangible assets consisted of the following at September 30, 2011 and December 31, 2010:

	2011			2010
Land use right	$	13,180,476		$	12,647,501
Goodwill arising from acquisition of Tianfang (Note 18)		3,842,233			3,692,853
Software and internet domain		8,634			8,285
		17,031,343			16,348,639
Less: Accumulated amortization		(832,851	)		(593,973	)
	$	16,198,492		$	15,754,666

All land in the PRC is government owned and cannot be sold to any individual or company. However, the government grants users a “land use right” to use the land. The Company has the right to use the land for 50 years and amortizes the right on a straight-line basis over 50 years.

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

Amortization for the nine months ended September 30, 2011 and 2010 was $215,256 and $211,400, respectively. Amortization for the three months ended September 30, 2011 and 2010 was $72,666 and $68,500, respectively. Amortization for the next five years from September 30, 2011 is expected to be $288,000, $288,000, $287,000, $287,000 and $287,000, respectively.

9.	Related Party Transactions

Dues to Related Party

At September 30, 2011 and December 31, 2010, due to related party represented Company’s expenses of $0 and $25,669 paid by a related party company owned by one of the Company’s officers. This advance bears no interest and is payable upon demand.

10.	Major Customers and Vendors

There were no customers who accounted for over 10% of the Company’s total sales for the nine and three months ended September 30, 2011 and 2010.

One vendor provided 24% of the Company’s purchases of raw materials for the nine months ended September 30, 2011. At September 30, 2011, the total payable balance due to this vendor was $0.

One vendor provided 26% of the Company’s purchases of raw materials for the three months ended September 30, 2011. The Company did not have accounts payable to these vendors at September 30, 2011.

Three vendors collectively provided 63% and 62% of the Company’s purchases of raw materials for the nine and three months ended September 30, 2010, respectively. Each vendor accounted for 38%, 15% and 10% of the purchases for the nine months ended September 30, 2010, and 34%, 18% and 10% for the three months ended September 30, 2010, respectively. The Company did not have any outstanding accounts payable to these vendors at September 30, 2010.

11.	Unearned Revenue

On June 30, 2010, the Company entered into an agreement with a medicine manufacturing company for leasing them the use right of a product manufacturing technology and related workshop for a period of one year. The total lease payment was RMB 7 million ($1.06 million), RMB 4 million ($606,000) was for the technology use right and RMB 3 million ($454,000) was for the workshop rental. For 2010, RMB 3.5 million ($0.53 million) was recognized as other income, and RMB 3.5 million ($0.53 million) was recognized as unearned revenue as of December 31, 2010. During the nine months ended September 30, 2011, the unearned revenue of RMB 3.5 million ($0.54 million) was recognized as other income.

12.	Taxes Payable

Taxes payable consisted of the following at September 30, 2011 and December 31, 2010:

	2011		2010
Income taxes	$	2,501,820	$	4,610,332
Value added taxes		627,733		1,477,018
Sales tax payable		55,076		26,424
Other		50,231		155,648
	$	3,234,860	$	6,269,422

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

13.	Other Payables and Accrued Expenses

Accrued expenses consisted of the following at September 30, 2011 and December 31, 2010:

	2011		2010
Sales commission	$	6,039	$	1,212,515
Promotion		617,099
Payroll and welfare		9,205		18,563
Accrued expenses		13,549		145,076
Other payables		5,721		-
	$	651,613	$	1,376,154

14.	Deferred Tax Asset (Liability)

Deferred tax represented differences between the tax basis and book basis of property, equipment and land use right.

At September 30, 2011 and December 31, 2010, deferred tax asset (liability) consisted of the following:

	2011			2010
Deferred tax asset (net) on property and equipment for basis differences since acquisition of Heilongjiang Weikang and Tianfang – noncurrent	$	319,365		$	238,794
Deferred tax asset arising from the acquisition of Heilongjiang Weikang - noncurrent		31,825			30,539
Deferred tax liability arising from the acquisition of Tianfang - noncurrent		(3,891,507	)		(3,734,148	)
Deferred tax liability, net - noncurrent	$	(3,540,317	)	$	(3,464,815	)

15.	Income Taxes

Weikang and Sinary were incorporated in the US and have net operating losses (NOL) for income tax purposes. Weikang and Sinary had NOL carry forwards for income taxes $13,480,000 and $1,084,000 at September 30, 2011, respectively, which may be available to reduce future years’ taxable income as NOL; NOLs can be carried forward up to 20 years from the year the loss is incurred. Management believes the realization of benefits from these losses is uncertain due to Weikang and Sinary’s limited operating history and continuing losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.

Heilongjiang Weikang and Tianfang are governed by the Income Tax Law of the PRC concerning the private enterprises that are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the nine months ended September 30, 2011 and 2010:

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

	2011			2010
US statutory rates		34.0	%		34.0	%
Tax rate difference		(12.5	)%		(10.3	)%

Valuation allowance for US NOL		13.3	%		4.7	%

Non-tax deductible expenses		-	%		0.6	%
Other		0.1	%		-	%
Tax per financial statements		34.9	%		29.0	%

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended September 30, 2011 and 2010:

	2011			2010
US statutory rates		34.0	%		34.0	%
Tax rate difference		(24.1	)%		(9.6	)%
Valuation allowance for US NOL		57.0	%		2.1	%
Non-tax deductible expenses		-	%		1.2%	%

Tax per financial statements		66.9	%		27.7	%

The provisions for income taxes for the nine months ended September 2011 and 2010 consisted of the following:

	2011			2010
Income tax expense - current	$	8,751,221		$	5,192,188
Income tax benefit - deferred		(68,961	)		(67,330	)
Total income tax expenses	$	8,682,260		$	5,124,858

The provisions for income taxes for the three months ended September 2011 and 2010 consisted of the following:

	2011			2010
Income tax expense – current	$	2,405,840		$	2,346,556
Income tax benefit - deferred		(24,437	)		(20,565	)
Total income tax expenses	$	2,381,403		$	2,325,991

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

16.	Stockholders’ Equity

Common Stock with Warrants Issued for Cash

Private Placement in January 2010

On January 20, 2010, the Company entered into Subscription Agreements with "accredited" investors (or “the Investors”). Pursuant to the Subscription Agreements, the Investors purchased 1,470,588 shares of Company common stock at $1.70 per share. The Company raised $2,500,000 in gross proceeds and received net proceeds of $2,047,500. In connection with the Financing the Company paid the following: (i) $150,000 to an Investment Relations escrow account, (ii) $250,000 in placement agent fees, and (iii) $52,500 in offering expenses, including legal fees.

The Investors received one Series A Warrant and one Series B Warrant for every $8.00 invested in the Company under the Purchase Agreement. Series A Warrants grant the holder the right to purchase shares of Common Stock at $3.00 per share. Series B Warrants grant the holder the right to purchase shares of Common Stock at $5.00 per share. At the closing the Investors received Series A Warrants to purchase 312,500 shares of Common Stock and Series B Warrants to purchase 312,500 shares of Common Stock.

The Series A and Series B Warrants expire January 20, 2013. The Warrants provide for antidilution adjustments to the exercise price for certain convertible securities issued with conversion prices lower than the Warrants' exercise price. The warrants are exercisable into a fixed number of shares. Accordingly, the warrants are classified as equity instruments. The Company accounted for the warrants issued to the investors and placement agents based on the fair value method under ASC Topic 505.The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions: discount rate – 2.76%; dividend yield – 0%; expected volatility – 100% and term of 3 years. The value of the Warrants was $1,212,000.

In connection with the Financing, the Company entered into an Investor Relations Escrow Agreement, pursuant to which the Company established an escrow account of $150,000 which may be allocated and released to investor relations firms for marketing purposes at the sole discretion of a representative of the Investors. The Company paid $150,000 to an IR firm for it to provide IR services over two years. For 2010, the Company recorded $71,096 as an IR expense. During the six months ended June 30, 2011, the Company recorded the remaining portion of $78,904 as an IR expense.

In addition the Company issued the following securities: (i) Series A Warrants to purchase 73,528 shares of Common Stock to placement agents, (ii) Series B Warrants to purchase 73,528 shares of Common Stock to placement agents, (iii) 180,000 shares of Common Stock to an investor relations firm, (iv) 600,000 shares of Common Stock to a consultant for business development and capital markets advice, and (v) 7,000 shares of Common Stock for legal services. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions: discount rate – 2.76%; dividend yield – 0%; expected volatility – 100% and term of 3 years. The value of the Warrants was $285,000.

In connection with the financing, the Company also issued 27,000 shares to several legal counsels and 200,000 shares to a consultant, First Trust China Ltd. The fair value of the shares based on the market price at the date of the financing of $397,000, was recorded as financing expense of the issuance of equity as a charge to additional paid in capital.

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

Private Placement in December 2010

In December, 2010, the Company sold in a series of private placement a total of 286,249 Units, each unit comprised (i) four shares of common stock, (ii) a three-year warrant to purchase one share of common stock at an exercise price of $3.60 per share (the “Series C Warrant”), and (iii) a three-year warrant to purchase one share of common stock at an exercise price of $4.80 per share (The “Series D Warrant”), for $2,747,973. The Company received net proceeds of $1,976,413. In connection with the Financing the Company paid the following: (i) $299,777 in placement agents’ fees, (ii) $150,000 to an Investment Relations escrow account, and (iii) $321,783 offering expenses, including legal fees, financing consultant fees and bank account management fees.

The Company recorded $72,500 and $0 as IR expense during the nine and three months ended September 30, 2011, respectively.

The Series C and Series D Warrants described above which expire at December 2013 issued to the investors are immediately exercisable and have a term of three years. Such warrants may be exercised cashless in the event that there is no effective registration statement providing for the resale of the common stock. The exercise prices of the Warrants are subject to customary adjustments provisions for stock splits, stock dividends, recapitalizations and the like. Additionally, for a period of three years following the final closing of the private placement, anti-dilution protection shall be afforded the investors, The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions: discount rate – 2.76%; dividend yield – 0%; expected volatility – 100% and term of 3 years. The fair value of the Warrants was $974,322.

In connection with the private placement transactions, the Company issued placement agents three-year warrants to purchase an aggregate of 93,232 shares of common stock at $2.40 per share, immediately exercisable, as consideration of services. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions: discount rate – 2.76%; dividend yield – 0%; expected volatility – 100% and term of 3 years. The fair value of the Warrants was $187,979.

Private Placement in January 2011

On January 28, 2011, the Company sold in a private placement 234,582 Units, each unit comprised of (i) four shares of common stock, (ii) a three-year warrant to purchase one share of common stock at $3.60 per share (the “Series C Warrant”), and (iii) a three-year warrant to purchase one share of common stock at $4.80 per share (The “Series D Warrant”), for $2,252,000. The Company received net proceeds of $2,016,900. In connection with the financing, the Company paid $225,000 in placement agents’ fees.

The Series C and Series D Warrants issued to the investors and the placement agents are immediately exercisable and have a term of three years. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions: discount rate – 2.76%; dividend yield – 0%; expected volatility – 100% and term of 3 years. The fair value of the Warrants was $889,764.

In connection with the private placement transaction, the Company issued placement agents three-year warrants to purchase an aggregate of 75,000 shares of common stock at an exercise price of $2.40 per share, immediately exercisable, as consideration of services. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions: discount rate – 2.76%; dividend yield – 0%; expected volatility – 100% and term of 3 years. The fair value of the Warrants was $167,619.

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

Following is a summary of the warrant activity:

	Number of Shares		Average Exercise Price per Share		Weighed Average Remaining Contractual Term in Years
Granted – series A warrants		386,028		3.00		3.00
Granted – series B warrants		386,028		5.00		3.00

Exercised
Forfeited
Outstanding at March 31, 2010		772,056		4.00		2.81
Exercisable at March 31, 2010		772,056		4.00		2.81

Exercised		-
Forfeited		-
Outstanding at June 30, 2010		772,056		4.00		2.56
Exercisable at June 30, 2010

Exercised		-
Forfeited		-
Outstanding at September 30, 2010		772,056		4.00		2.31
Exercisable at September 30, 2010		772,056		4.00		2.31

Granted – warrants to placement agents		93,232		2.40		3.00
Granted – series C warrants		286,249		3.60		3.00
Granted – series D warrants		286,249		4.80		3.00

Exercised		-
Forfeited		-
Outstanding at December 31, 2010		1,437,786		3.98		2.46
Exercisable at December 31, 2010		1,437,786		3.98		2.46

Granted – warrants to placement agents		75,000		2.40		3.00
Granted – series C warrants		234,582		3.60		3.00
Granted – series D warrants		234,582		4.80		3.00

Exercised		-
Forfeited		-
Outstanding at September 30, 2011		1,981,950		3.97		1.88
Exercisable at September 30, 2011		1,981,950		3.97		1.88

Stock-Based Compensation and Deferred Compensation

On January 20, 2010, the Company issued 600,000 shares of Common Stock valued at $3.26 per share (stock price at grant date) to several consultants for providing consulting services to the Company. In the first quarter of 2010, the Company recorded $1,793,000 as deferred compensation, which was amortized over periods ranging from two to six months. During the year ended December 31, 2010, the Company amortized $1,793,000 as stock-based compensation expense.

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

On January 20, 2010, the Company issued 180,000 shares to an IR firm for providing IR services for a period of two years; the stock was valued at $3.26 per share (stock price at grant date). In the first quarter of 2010, the Company recorded $586,800 as deferred compensation. During the nine and three months ended September 30, 2011, the Company amortized $309,476 and $163,982 as stock-based compensation expense. The deferred compensation was fully expenses in the third quarter of 2011 as a result of termination of the IR service. During the nine and three months ended September 30, 2010, $203,371 and 73,953 was recorded as stock-based compensation expense, respectively.

During the first quarter of 2010, the Company issued 20,000 shares to one employee with stock valued at $3.26 per share (stock price at grant date). The Company recorded $65,200 stock-based compensation expense for the shares issued to this employee.

On April 7, 2010, the Company issued 40,000 shares common stock as annual compensation to four independent directors of the Company with stock valued at $4.65 per share (stock price at grant date). The Company recorded $186,000 as deferred compensation and fully expensed during the six months ended June 30, 2011.

On July 28, 2010, the Company issued 40,000 shares common stock as compensation to a consulting company for a one-month business consulting service with stock valued at $3.18 per share (stock price at grant date). The Company recorded $127,200 as stock-based compensation during 2010.

On October 3, 2010, the Company issued 500,000 shares common stock as compensation to a consulting company for a one-month business consulting service with stock valued at $2.70 per share (stock price at grant date). The Company recorded $1,350,000 as stock-based compensation during 2010.

On November 18, 2010, the Company issued 29,167 shares common stock as compensation to a prior VP of the Company with stock valued at $3.20 per share (stock price at grant date). The Company recorded $93,334 as stock-based compensation during 2010.

On December 29, 2010, the Company issued 25,000 shares common stock as compensation to an IR company for a one-year investor relation service with stock valued at $2.90 per share (stock price at grant date). In the fourth quarter of 2010, the Company recorded $72,500 as deferred compensation, which was amortized over 12 months. The Company fully expensed during the quarter ended September 30, 2011 as a result of termination of the service.

In connection with the December 2010 financing, the Company also issued 200,000 shares to a consulting company for a 3-months business consulting services agreement with Far East Strategies, LLC. The stock was valued at $2.44 per share (stock price at grant date). In the fourth quarter of 2010, the Company recorded $488,000 as deferred compensation, which was amortized over 3 months. The amortization expense for this consulting expense $488,000 was fully expensed during the nine months ended September 30, 2011.

On November 11, 2010, the Company issued 80,000 shares to a consultant as a one month consulting service. The stock was valued at $3.20 per share (stock price at grant date). During the nine months ended September 30, 2011, the Company fully expensed $256,000 as stock-based compensation.

According to an IR agreement, the Company issued 5,000 shares to an IR firm on January 20, 2011 and January 24, 2011, respectively. The stock was valued at $3.35 and $3.90 per share (stock price at grant date). During the nine months ended September 30, 2011, the Company fully expensed $36,250 as stock-based compensation.

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

On April 2, 2011, the Company issued 1,500,000 shares to a consultant for three months consulting service. The stock was valued at $2.95 per share (one year average stock price prior to the grant date). During the nine months ended September 30, 2011, the Company recorded $4,425,000 as stock-based compensation.

On July 3, 2011, the Company issued 1,500,000 shares to a consultant for two months consulting service. The stock was valued at $2.32 per share (one year average stock price prior to the grant date). During the three months ended September 30, 2011, the Company fully expensed $3,480,000 as stock-based compensation.

On September 14, 2011, the Company issued 400,000 shares to a consulting firm for three months consulting service. The stock was valued at $2.00 per share (one year average stock price prior to the grant date). During the three months ended September 30, 2011, the Company recorded $140,659 as stock-based compensation.

Option to legal counsel

On October 4, 2010, the Company granted stock options to its legal counsel to acquire 20,000 shares of the Company’s common stock, at $2.70 per share, vested immediately with a life of 3 years. The options were vested in the grant date. The fair value of the options was calculated using the following assumptions: estimated life of three years, volatility of 100%, risk free interest rate of 2.76%, and dividend yield of 0%. The grant date fair value of options was $35,132. The Company recorded $35,132 as stock-based compensation during 2010. The weighted remaining contractual term for the option was 2.01 years at September 30, 2011.

17.	Statutory Reserves

Pursuant to the corporate law of the PRC effective on January 1, 2006, the Company is now only required to maintain one statutory reserve by appropriating from its after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings.

Surplus Reserve Fund

The Company’s Chinese subsidiaries are now only required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital. The Company’s Chinese subsidiaries are not required to make appropriation to other reserve funds and do not have any intentions to make appropriations to any other reserve funds. There are no legal requirements in the PRC to fund these reserves by transfer of cash to restricted accounts, and the Company’s Chinese subsidiaries do not do so.

The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

Common Welfare Fund

Common welfare fund is a voluntary fund that the Company can elect to transfer 5% to 10% of its net income to this fund. This fund can only be utilized on capital items for the collective benefit of the Company’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation. The Company did not contribute to this fund.

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010

And for the nine months ended September 30, 2011 and 2010

(Stated in US Dollars)

18.	Contingencies

The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s operations may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

The Company’s sales, purchases and expense transactions are denominated in RMB and all of the Company’s assets and liabilities are also denominated in RMB. RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be conducted only by authorized financial institutions. Remittances in currencies other than RMB may require certain supporting documentation in order to affect the remittance.

19.

Goodwill

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with FASB ASC Topic 350, goodwill is not amortized but is tested for impairment annually, or when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds the fair value of the reporting unit, with the fair value of the reporting unit determined using a discounted cash flow (DCF) analysis. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and projections of realizations and costs to produce. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.

On July 22, 2008, Heilongjiang Weikang completed the acquisition of 100% of the issued and outstanding equity interests of Tianfang for $15,000,000 (RMB 102,886,500). The total consideration for acquisition exceeded fair value of the net assets acquired by approximately $3,566,000. The excess was recorded as goodwill. Goodwill was recorded as intangible assets. As of September 30, 2011, the Company concluded there was no impairment of goodwill.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This section and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Form 10-K”), which are incorporated herein by reference. The following discussion should be read in conjunction with the 2010 Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) and the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Overview

Weikang Bio-Technology Group Company, Inc. (“we”, “us”, the “Company”) was incorporated in Florida on May 12, 2004 as Expedition Leasing, Inc. On December 7, 2007, we acquired Sinary Bio-Technology Holdings Group, Inc. (“Sinary”), a Nevada corporation and, as a result, Sinary’s wholly-owned subsidiary Heilongjiang Weikang Bio-Technology Group Co., Ltd. (“Heilongjiang Weikang”), a limited liability company (“LLC”) in the People’s Republic of China (“PRC”), by exchanging 24,725,200 shares of our Common Stock for 100% of the issued and outstanding common stock of Sinary.

Having no substantive operation of its own, Sinary, through Heilongjiang Weikang, engages in the research, development, manufacturing, marketing, and sales of Traditional Chinese Medicine (“TCM”) in the PRC. Heilongjiang Weikang is located in Heilongjiang Province in Northeastern PRC, with its principal office and manufacturing facility located in the Economic and Technology Development Zone in the city of Shuangcheng, 42 kilometers south of the provincial capital Harbin. Heilongjiang Weikang’s products are primarily Chinese herbal-based health and nutritional supplements. Heilongjiang Weikang seeks to maintain and improve the quality of its products, and as of April 2006, implemented the “GB/T19001-2000 idt ISO9001:2000” quality assurance management system to all of its manufacturing processes. Heilongjiang Weikang was issued a Certificate of Good Manufacturing Practices for Health Food by the Health Department of Heilongjiang Province on November 24, 2008.

On July 22, 2008, Heilongjiang Weikang acquired 100% of the equity interest of Tianfang (Guizhou) Pharmaceutical Co., Ltd. (“Tianfang”), a PRC LLC, for $15,000,000, pursuant to a Stock Transfer Agreement dated and entered into on June 30, 2008 by and among Heilongjiang Weikang, Tianfang, and Tianfang’s two shareholders, Beijing Shiji Qisheng Trading Co., Ltd. and Tri-H Trade (U.S.A.) Co., Ltd.

Tianfang was incorporated in Guizhou Province, PRC in 1998. Tianfang is engaged in the development, manufacture and distribution of over-the-counter (“OTC”) pharmaceuticals. Tianfang was issued a Certificate of Good Manufacturing Practices for Pharmaceutical Products by Food and Drug Administration of Guizhou Province on August 20, 2010.

On January 20, 2010, the Company entered into Subscription Agreements to sell to accredited investors an aggregate of 1,470,588 shares of its common stock at $1.70 per share. The Company raised $2,500,000 in gross proceeds and received net proceeds of $2,047,500. The investors received one Series A Warrant and one Series B Warrant for every $8.00 invested in the Company under the Subscription Agreement. In connection with the private placement, the Company filed a registration statement on Form S-1, as amended, covering 2,095,588 shares of common stock, including shares of common stock issuable upon the exercise of warrants, The registration statement was declared effective on April 21, 2010.

In and around December 2010 and January 2011, the Company sold in a series of private placements 520,831 Units, each unit comprised (i) four shares of common stock, (ii) a three-year warrant to purchase one share of common stock at $3.60 per share, and (iii) a three-year warrant to purchase one share of common stock at $4.80 per share, for an aggregate purchase price of $4,999,973.60. In connection with the private placements, the company filed a registration statement, covering the 3,293,219 shares of common stock, including shares of common stock issuable upon the exercise of warrants. The registration statement was declared effective on February 18, 2011.

We, through Sinary, and indirectly through Heilongjiang Weikang and Tianfang, manufacture and distribute a series of health supplements under the trademark "Rongrun" and OTC pharmaceuticals under the trademark “Tianfang”. The "Rongrun" line of products presently includes: (1) Rongrun Energy Keeping Capsules, (2) Rongrun Vitamin Sugar Capsules, (3) Rongrun Intestine Cleansing Capsules, (4) Rongrun Artery Cleansing Capsules, (5) Rongrun Royal Jelly Extract, (6) Rongrun Kidney Boost Tonic, (7) Sha Bai Shuanghuai, (8) Gouqi Xi Pu, (9) Rongrun Perilla Seed, (10) Rongrun Yangshen Dan, (11) Rongrun Forest Frog Oil Soft Capsule and (12) HaGe Jiao Lan. The “Tianfang” line of products currently includes: (1)Ferrous Fumarate Granule, (2)Eucommia Ulmoides Oliv Granule, (3)Bushen Qiangshen Tablet, (4)Tinidazole Vaginal Effervescent Tablet, (5)Ranitidine Hydrochloride Capsule, (6) Shouwu Long Life and (7) Lysozyme Buccal.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which were prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis.

Basis of presentation

These accompanying consolidated financial statements have been prepared in accordance with US GAAP and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for annual or quarterly financial statements.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Sinary, and the results of operations of Heilongjiang Weikang, Sinary’s wholly-owned subsidiary; and Tianfang, Heilongjiang Weikang’s wholly-owned subsidiary. All significant inter-company accounts and transactions were eliminated in consolidation.

Accounts Receivable

Revenue Recognition

The Company's revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (“SAB”) 104, codified in FASB ASC Topic 480. Revenue is recognized at the date when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as unearned revenue.

Revenue represents the invoiced value of goods, net of value-added tax (or VAT). All of the Company’s products sold in the PRC are subject to Chinese value-added tax of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product. The Company recorded VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables.

NEW ACCOUNTING PRONOUNCEMENTS

Results of Operations

Comparison of the Three Months Ended September 30, 2011 and 2010

The following table summarizes our results of operations for the three months ended September 30, 2011. The table and the discussion below should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this report.

	Three Months Ended September 30,
	2011				2010
Net sales	$	19,404,100			$	17,426,211
Cost of goods sold		8,555,112	44	%		6,962,482	40	%
Gross profit		10,848,988	56	%		10,463,729	60	%
Operating expenses		7,401,155	38	%		2,335,701	13	%
Income from operations		3,447,833	18	%		8,128,028	47	%
Other income, net		110,303	1	%		263,406	2	%
Income taxes		2,381,403	12	%		2,325,991	13	%
Net income	$	1,176,733	6	%	$	6,065,443	36	%

Net sales. During the three months ended September 30, 2011, we had net sales of $19.40 million, compared to $17.43 million for the comparable period of 2010, an increase of $1.97 million or 11%. The increase in sales was primarily a result of 1) the production and sales of new products starting in the third quarter of 2010, which brought us approximately $1.76 million sales revenue during the third quarter of 2011; 2) the increase of average sales price of certain products, such as Eucommia Ulmoides Oliv Granule, Ranitidine Hydrochloride Capsule, Ferrous Fumarate Granule, Tinidazole Vaginal Effervescent Tablet, and Bushen Qiangshen Tablet due to strong demand which resulted in increased sales by $1.09 million.

A break-down of our sales by major product line for each of the three months ended September 30, 2011 and 2010 is as follows:

	For the Three Months Ended September 30,
	2011							2010
Product Category	Quantity (Unit)		Sales US$		% of Sales			Quantity (Unit)		Sales US$		% of Sales
Rongrun Youth Keeping Capsules		0		0		0			21,309		215,138		1.23	%
Rongrun Energy Keeping Capsules		72,840		766,528		3.95	%		75,206		759,290		4.36	%
Rongrun Vitamin Sugar Capsules		94,350		992,889		5.12	%		100,172		1,011,350		5.80	%
Rongrun Intestine Cleansing Capsules		68,820		724,223		3.73	%		81,731		825,167		4.74	%
Rongrun Artery Cleansing Capsules		79,500		836,614		4.31	%		83,648		844,522		4.85	%
Rongrun Royal Jelly Extract		83,360		877,234		4.52	%		87,206		880,444		5.05	%
Oral Liquid		292,080		1,037,369		5.35	%		214,518		541,450		3.11	%
Rongrun Kidney Boost Tonic		6,210		490,129		2.53	%		8,000		605,768		3.48	%
Sha Bai Shuanghuai		24,210		531,838		2.74	%		0		0		0.00	%
Gouqi Xi Pu		24,010		527,444		2.72	%		0		0		0.00	%
Rongrun Perilla Seed		16,680		592,417		3.05	%		16,000		545,191		3.13	%
Rongrun Yangshen Dan		56,910		426,708		2.20	%		80,000		575,480		3.30	%
Rongrun Forest Frog Oil Soft Capsule		14,580		393,169		2.03	%		20,000		517,427		2.97	%
HaGe Jiao Lan		24,050		528,323		2.72	%		0		0		0.00	%
Ferrous Fumarate Granule		1,106,908		1,863,783		9.61	%		1,904,454		2,824,959		16.21	%
Eucommia Ulmoides Oliv Granule		1,040,120		2,417,765		12.46	%		1,873,527		2,832,202		16.25	%
Bushen Qiangshen Tablet		1,164,240		1,500,847		7.73	%		1,224,689		1,514,851		8.69	%
Tinidazole Vaginal Effervescent Tablet		1,204,400		1,711,049		8.82	%		2,031,140		2,529,947		14.52	%
Ranitidine Hydrochloride Capsule		3,373,200		1,996,744		10.28	%		1,506,420		403,025		2.31	%
Shouwu Long Life		617,160		755,003		3.89	%		0		0		0.00	%
LysozymeBuccal		485,050		434,024		2.24	%		0		0		0

Total		9,848,678		19,404,100					9,328,020		17,426,211

Cost of goods sold. Cost of goods sold increased $1.60 million or 23%, from $6.96 million in the three months ended September 30, 2010 to $8.56 million for the comparable period of 2011. The cost of goods sold as a percentage of sales for the three months ended September 30, 2011, was 44% compared to 40% for the same period of 2010, which was attributable to the increase in cost of goods sold for Tianfang, from 43.54% to 48.49% of its sales; the cost of goods sold for Heilongjiang Weikang was 36.46% of its sales, an increase of 5.29% as compared to the third quarter of 2010. The increase in cost of goods sold for Tianfang and Heilongjiang Weikang between the corresponding periods was mainly due to the increase in price of raw materials and direct labor costs as a result of overall inflation in the PRC.

Gross profit. Gross profit was $10.85 million for the three months ended September 30, 2011, compared to $10.46 million for the comparable period of 2010, or gross margin of 56% and 60% of sales, respectively. The decrease in our gross profit margin in the three months ended September 30, 2011 was mainly due to increased cost of goods sold.

Operating expenses. Total operating expenses were $7.40 million for the three months ended September 30, 2011 compared to $2.34 million for the three months ended September 30, 2010, an increase of $5.06 million or 216%. This increase in operating expenses was mainly attributable to the increased marketing expenses and travelling expenses for promoting activities including a series of commercial advertisements, the increased freight resulted from the increased sales, and stock related compensation expenses of $5.87 million for stocks issued to financial and investor relations consultants which were non-cash expenses. Operating expenses as a percentage of sales were 38% for the three months ended September 30, 2011 compared to 13% for the same period of 2010. The increase of operating expenses as a percentage of sales was mainly due to increased stock compensation expense for financial and investor relations consultants.

Net other income. Net other income was $0.11 million in the three months ended September 30, 2011 compared to $0.26 million in the three months ended September 30, 2010. Other income during the three months ended September 30, 2011 mainly consisted of interest income of $80,000 from our deposits in the PRC bank.

Net income. Our net income for the three months ended September 30, 2011 was $1.18 million compared to $6.07 million for the three months ended September 30, 2010, a decrease of $4.89 million or 80.56%. The decrease was mainly attributed to decreased gross profit margin and increased operating expenses.

We do not believe inflation had a significant negative impact on our results of operations during the three months ended September 30, 2011.

Comparison of the Nine Months Ended September 30, 2011 and 2010

The following table summarizes our results of operations for the nine months ended September 30, 2011 and 2010. The table and the discussion below should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this report.

	Nine Months Ended September 30,
	2011				2010
Net sales	$	64,627,022			$	41,878,410
Cost of goods sold		25,902,325	40	%		16,976,845	41	%
Gross profit		38,724,697	60	%		24,901,565	59	%
Operating expenses		14,559,517	23	%		7,550,292	18	%
Income from operations		24,165,180	37	%		17,351,273	41	%
Other income, net		743,574	1	%		297,883	1	%
Income taxes		8,682,260	13	%		5,124,858	12	%
Net income	$	16,226,494	25	%	$	12,524,298	30	%

Net sales. Net sales for the nine months ended September 30, 2011 were $64.63 million, compared to $41.88 million for the nine months ended September 30, 2010, an increase of $22.75 million or 54%. The increase in sales was primarily a result of 1) the production and sales of new products starting in the third quarter of 2010, which brought us approximately $12.02 million sales revenue during the first nine months of 2011; 2) the increase in the average sales price of certain highly demanded products, such as Ferrous FumarateGranule, Eucommia Ulmoides Oliv Granule, Tinidazole Vaginal Effervescent Tablet, Bushen Qiangshen Tablet, and Ranitidine Hydrochloride Capsule, which resulted in increased sales by $2.78 million; 3) a six-month promotion plan starting from the fourth quarter of 2010 to the end of first quarter of 2011, which is the peak season for sales of health care products in the PRC due to the Chinese New Year Holiday and Chinese tradition of having tonic in winter, which brought us 12% of total sales.

A break-down of our sales by major product line for each of the nine months ended September 30, 2011 and 2010 is as follows:

	For the Nine Months Ended September 30,
	2011			2010
Product Category*	Quantity (Unit)	Sales US$	% of Sales	Quantity (Unit)		Sales US$		% of Sales
Rongrun Youth Keeping Capsules	0	0	0.00%	126,209		1,274,603		3.05%
Rongrun Energy Keeping Capsules	232,430	2,445,963	3.78%	211,966		2,140,404		5.12%
Rongrun Vitamin Sugar Capsules	264,410	2,782,503	4.31%	242,002		2,443,663		5.85%
Rongrun Intestine Cleansing Capsules	223,440	2,351,358	3.64%	217,091		2,192,149		5.25%
Rongrun Artery Cleansing Capsules	237,850	2,503,001	3.87%	221,128			2,232,908		5.34%
Rongrun Royal Jelly Extract	246,180	2,590,661	4.01%	228,776			2,310,195		5.53%
Oral Liquid	790,350	2,807,056	4.34%		473,878		1,196,428		2.86%
Rongrun Kidney Boost Tonic	33,040	2,607,709	4.04%		8,000		605,768		1.45%
Sha Bai Shuanghuai	93,290	2,049,365	3.17%		0		0		0.00%
Gouqi Xi Pu	93,194	2,047,257	3.17%		0		0		0.00%
Rongrun Perilla Seed	62,090	2,205,227	3.41%		16,000		545,191		1.30%
Rongrun Yangshen Dan	275,420	2,065,086	3.20%		80,000		575,480		1.38%
Rongrun Forest Frog Oil Soft Capsule	61,650	1,662,474	2.57%		20,000		517,427		1.24%
HaGe Jiao Lan	58,416	1,283,264	1.99%		0		0		0.00%
Ferrous FumarateGranule	4,112,937	6,948,084	10.75%		5,625,755		7,496,257		17.94%
Eucommia Ulmoides Oliv Granule	3,178,003	6,542,391	10.50%		5,505,414		7,555,711		18.08%
Bushen Qiangshen Tablet	4,666,718	6,015,968	8.93%		2,874,875		3,556,297		8.51%
Tinidazole Vaginal Effervescent Tablet	4,425,964	6,287,811	9.73%		5,687,613		6,384,758		15.28%
Ranitidine Hydrochloride Capsule	9,753,656	5,773,615	8.93%		3,221,709		760,171		1.82%
Shouwu Long Life	1,783,484	2,181,826	3.38%		0		0		0.00%
LysozymeBuccal	1,650,185	1,476,403	2.28%		0		0		0.00%

Total	3,242,707	64,627,022			24,760,416		41,787,410

Cost of goods sold. Cost of goods sold increased $8.92 million or 53%, from $16.98 million for the nine months ended September 30, 2010 to $25.90 million for the comparable period of 2011. The cost of goods sold as a percentage of sales for the nine months ended September 30, 2011, was 40% compared to 41% for the same period of 2010, which was attributable to decreased cost of goods sold for Tianfang, from 47.11% to 44.42% of its sales; the cost of goods sold for Heilongjiang Weikang was 34.88% of its sales, an increase of 3.88% as compared to the same period of 2010. The slight decrease in cost of goods sold between the corresponding periods for Tianfang was mainly due to our continuous efforts to control costs, including the implementation of strict cost control procedures for purchasing, manufacturing, storage and transportation and the minimization of the labor costs, despite increase in price of raw material. The increase in cost of goods sold for Heilongjiang Weikang between the corresponding periods was mainly due to the increased costs of raw materials. The costs of our major raw materials, including honey, propolis extract, cinnamon and polygonatum, have increased 2.09% on the average.

Gross profit. Gross profit was $38.72 million for the nine months ended September 30, 2011, compared to $24.90 million for the comparable period of 2010, our gross margin was 60% and 59% of sales for the nine months ended September 30, 2011 and September 30, 2010, respectively. The increase in our gross profit margin for the nine months ended September 30, 2011 was mainly due to increased sales prices and sales volume.

Operating expenses. Total operating expenses were $14.56 million for the nine months ended September 30, 2011 compared to $7.55 million for the same period of 2010, an increase of $7.01 million or 93%. This increase in operating expenses was mainly attributable to the increased marketing expenses and travelling expense for promoting activities including a series of commercial advertisements, the increased freight resulted from the increased sales, and stock related compensation expenses of $9.26 million for stocks issued to financial and investor relations consultants which were non-cash expenses. Operating expenses as a percentage of sales were 23% for the nine months ended September 30, 2011 compared to 18% for the same period of 2010. The increase of operating expenses as a percentage of sales was mainly due to significant increase in stock related compensation for consultants in the nine months ended September 30, 2011.

Net other income. Net other income was $0.74 million in the nine months ended September 30, 2011 compared to $0.30 million in the comparable period of 2010. Other income for the nine months ended September 30, 2011 mainly consisted of lease income of $0.54 million from leasing a workshop and interest income of $0.20 million from our deposits in the PRC banks.

Net income. Net income for the nine months ended September 30, 2011 was $16.23 million compared to $12.52 million for the same period of 2010, an increase of $3.71 million or 30%. The increase was mainly attributed to increased net sales. Our management believes net income will increase as we continue to offer products of better quality and greater variety and continue to improve our manufacturing efficiency.

We do not believe inflation had a significant negative impact on our results of operations during the first nine months of 2011.

Liquidity and Capital Resources

At September 30, 2011, the Company had cash and equivalents of $51.48 million, other current assets of $12.08 million, and current liabilities of $3.90 million. In addition, at September 30, 2011, working capital was $59.65 million and the ratio of current assets to current liabilities was 16.29-to-1.

The following is a summary of cash provided by or used in each of the indicated types of activities during nine months ended September 30, 2011 and 2010, respectively:

	2011			2010
Cash provided by (used in):
Operating Activities	$	11,928,596		$	16,327,845
Investing Activities	$	(14,944,395	)	$	(482,831	)
Financing Activities	$	2,018,602		$	2,222,475

Net cash provided by operating activities was $11.93 million for the nine months ended September 30, 2011, compared to $16.33 million for the same period of 2010. The decrease in net cash inflow from operating activities was mainly due to a significant increase in accounts receivable outstanding as a result of increased sales, increased prepayment to suppliers and taxes.

Net cash used in investing activities was $14.94 million for the nine months ended September 30, 2011, compared to cash used in investing activities was $0.48 for the nine months ended September 30, 2010. The cash outflow during the nine months of 2011 was mainly due to construction of a new workshop building and acquisition of manufacturing equipment.

Net cash provided by financing activities was $2.02 million for the nine months ended September 30, 2011 compared to $2.22 million cash inflow for the comparable period of 2010. The cash inflow in financing activities during the first nine months of 2011 mainly consisted of proceeds of $2.02 million from common stock and warrants issued in a series of private placements. The net cash inflow in financing activities during the nine months of 2010 mainly consisted of proceeds of $2.2 million from common stock and warrants issued in another private placement.

Off-Balance Sheet Arrangements

We have not made any other financial guarantees or other commitments to guarantee the payment obligations of any third party. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

N/A.

Item 4. Controls and Procedures.

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including Yin Wang , the Company’s Chief Executive Officer (“CEO”), and Baolin Sun, the Company’s Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the three months ended September 30, 2011. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

Our management, with the participation of our Chief Executive Officer, performed an evaluation as to whether any change in our internal controls over financial reporting occurred during the quarter ended September 30, 2011. Based on that evaluation, our Chief Executive Officer concluded that no change occurred in the Company's internal controls over financial reporting during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

To our knowledge, there is no material litigation pending or threatened against us.

Item 1A. Risk Factors.

Not applicable.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.

On July 3, 2011, the Company issued 1,500,000 restricted shares of common stock to Jihua Liu, a consultant for his business and technical consulting services rendered.

On September 14, 2011, the Company entered into a consulting agreement with Bespoke Growth Partners, Inc. (“Bespoke Growth”) for provision of services related to public market communications and issued Bespoke Growth a total of 400,000 restricted shares of common stock in partial consideration of such services.

The issuance of the foregoing securities was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Regulation S and Regulation D promulgated thereunder.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved).

Item 5. Other Information.

None.

Item 6. Exhibits.

(a) Exhibits

31.1		Certification pursuant to Section 302 of Sarbanes Oxley Act of 2002.

31.2		Certification pursuant to Section 302 of Sarbanes Oxley Act of 2002.

32.1		Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002.*

32.2		Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002.*

101.INS		XBRL Instance Document.**

101.SCH		XBRL Taxonomy Extension Schema Document.**

101.CAL		XBRL Taxonomy Calculation Linkbase Document.**

101.PRE		XBRL Taxonomy Presentation Linkbase Document.**

101.LAB		XBRL Taxonomy Label Linkbase Document.**

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.**

* The Exhibits attached to this report shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.

** Attached as Exhibits 101 to this Form 10-Q are the following financial statements from the Company’s Form 10-Q for the quarterly period ended September 30, 2011 formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these consolidated financial statements tagged as blocks of text.

The XBRL related information in Exhibits 101 to this Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Exchange Act, as amended, or otherwise subject to the liabilities of those sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	WEIKANG BIO-TECHNOLOGY GROUP COMPANY, INC.

Dated: November 21, 2011	By:	/s/ Yin Wang
		Yin Wang
		Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Baolin Sun
		Baolin Sun
		Chief Financial Officer
		(Principal Accounting & Financial Officer)

WEIKANG BIO-TECHNOLOGY GROUP CO., INC. - FORM 10-Q - November 21, 2011

Attached files

WEIKANG BIO-TECHNOLOGY GROUP CO., INC. Reports