x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Nevada
(State
or other jurisdiction of
incorporation
or organization)
|
98-0588402
(I.R.S.
Employer Identification
No.)
|
c/o
Yantai Bohai Pharmaceuticals Group Co. Ltd.
No.
9 Daxin Road, Zhifu District
Yantai,
Shandong Province, China
|
264000
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
|
(Do
not check if a smaller reporting company)
|
PART
I – FINANCIAL INFORMATION
|
||
Cautionary
Note Regarding Forward-Looking Statements
|
||
Item
1.
|
Financial
Statements (unaudited)
|
|
Condensed
Consolidated Balance Sheets as of December 31, 2010 and June 30, 2010
(audited)
|
1
|
|
Condensed
Consolidated Statements of Income and Comprehensive Income for Three and
Six Months ended December 31, 2009 and 2010
|
2
|
|
Condensed
Consolidated Statements of Changes in Stockholders’ Equity for the
Six Months
Ended December 31, 2010
|
3
|
|
Condensed
Consolidated Statements of Cash Flows for Six Months ended December 31,
2009 and 2010
|
4
|
|
Notes
to Condensed Consolidated Financial Statements
|
5
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
31
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
44
|
Item
4(T).
|
Controls
and Procedures
|
44
|
PART
II – OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
46
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
46
|
Item
3.
|
Defaults
Upon Senior Securities
|
46
|
Item
4.
|
Removed
and Reserved
|
46
|
Item
5.
|
Other
Information
|
46
|
Item
6.
|
Exhibits
|
46
|
SIGNATURES
|
47
|
|
·
|
our
ability to obtain sufficient working capital to support our business
plans;
|
|
·
|
our
ability to expand our product offerings and maintain the quality of our
products;
|
|
·
|
the
availability of Chinese government granted rights to exclusively
manufacture or co-manufacture our
products;
|
|
·
|
the
availability of Chinese national healthcare reimbursement of our
products;
|
|
·
|
our
ability to manage our expanding operations and continue to fill customers’
orders on time;
|
|
·
|
our
ability to maintain adequate control of our expenses allowing us to
realize anticipated revenue growth;
|
|
·
|
our
ability to maintain or protect our intellectual
property;
|
|
·
|
our
ability to maintain our proprietary
technology;
|
|
·
|
the
impact of government regulation in China and elsewhere, including the
support provided by the Chinese government to the Traditional Chinese
Medicine and healthcare sectors in
China;
|
|
·
|
our
ability to implement product development, marketing, sales and acquisition
strategies and adapt and modify them as
needed;
|
|
·
|
our
ability to integrate any future
acquisitions;
|
|
·
|
our
implementation of required financial, accounting and disclosure controls
and procedures and related corporate governance policies;
and
|
|
·
|
our
ability to anticipate and adapt to changing conditions in the Traditional
Chinese Medicine and healthcare industries resulting from changes in
government regulations, mergers and acquisitions involving our
competitors, technological developments and other significant competitive
and market dynamics.
|
Notes
|
As of
December 31,
2010
|
As of
June 30,
2010
|
||||||||
|
(unaudited)
|
|||||||||
ASSETS
|
||||||||||
Current
assets:
|
||||||||||
Cash
and cash equivalents
|
$ | 12,422,418 | $ | 17,149,082 | ||||||
Restricted
cash
|
2,151,068 | 576,019 | ||||||||
Accounts
receivable
|
14,505,908 | 10,409,527 | ||||||||
Other
receivables and prepayments
|
4
|
2,073,434 | 1,449,590 | |||||||
Amount
due from equity holder
|
5
|
- | 40,160 | |||||||
Inventories
|
6
|
1,898,099 | 748,422 | |||||||
Total
current assets
|
33,050,927 | 30,372,801 | ||||||||
Non-current
assets:
|
||||||||||
Property,
plant and equipment, net
|
8
|
7,957,796 | 7,895,042 | |||||||
Prepayment
for land use right
|
19
|
12,426,268 | 7,343,654 | |||||||
Intangible
assets
|
7
|
25,118,727 | 17,342,772 | |||||||
Deferred
fees on convertible notes
|
14
|
956,552 | 1,562,617 | |||||||
Total
non-current assets
|
46,459,343 | 34,144,085 | ||||||||
TOTAL
ASSETS
|
$ | 79,510,270 | $ | 64,516,886 | ||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||||
Current
liabilities:
|
||||||||||
Accounts
payable
|
$ | 1,667,360 | $ | 741,621 | ||||||
Other
accrued liabilities
|
12
|
10,414,405 | 2,984,988 | |||||||
Amount
due to equity holder
|
11,980 | - | ||||||||
Income
taxes payable
|
18
|
1,416,227 | 700,326 | |||||||
Short-term
borrowings
|
9
|
899,906 | 4,398,849 | |||||||
Total
current liabilities
|
14,409,878 | 8,825,784 | ||||||||
Non-current
liabilities
|
||||||||||
Derivative
liabilities - investor and agent warrants
|
13
|
2,563,443 | 5,481,928 | |||||||
Convertible
notes, net of discount
|
13
|
213,938 | 124,820 | |||||||
Total
non-current liabilities
|
2,777,381 | 5,606,748 | ||||||||
TOTAL
LIABILITIES
|
17,187,259 | 14,432,532 | ||||||||
STOCKHOLDERS'
EQUITY
|
||||||||||
Common
stock , $0.001 par value, 150,000,000 shares authorized, 16,977,221 and
16,500,000 shares issued and outstanding as of December 31,
2010 and June 30, 2010, respectively
|
10
|
16,977 | 16,500 | |||||||
Additional
paid-in capital
|
10
|
16,272,889 | 15,317,621 | |||||||
Accumulated
other comprehensive income
|
2,356,126 | 626,584 | ||||||||
Statutory
reserves
|
21
|
2,201,817 | 2,201,817 | |||||||
Retained
earnings
|
41,475,202 | 31,921,832 | ||||||||
Total
stockholders’ equity
|
62,323,011 | 50,084,354 | ||||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 79,510,270 | $ | 64,516,886 |
For The Three Months Ended
|
For The Six Months Ended
|
|||||||||||||||||
December 31,
|
December 31,
|
|||||||||||||||||
Notes
|
2010
|
2009
|
2010
|
2009
|
||||||||||||||
Net
revenues
|
$ | 22,204,348 | $ | 16,846,303 | $ | 39,233,996 | $ | 30,800,317 | ||||||||||
Cost
of revenues
|
( 4,681,045 | ) | ( 2,662,427 | ) | (8,128,311 | ) | (4,879,940 | ) | ||||||||||
Gross
profit
|
17,523,303 | 14,183,876 | 31,105,685 | 25,920,377 | ||||||||||||||
Selling,
general and administrative expenses
|
16
|
(11,105,260 | ) | (9,813,217 | ) | (19,720,019 | ) | (19,069,289 | ) | |||||||||
Income
from operations
|
6,418,043 | 4,370,659 | 11,385,666 | 6,851,088 | ||||||||||||||
Other
income (expenses)
|
||||||||||||||||||
Other
income
|
701 | 40,322 | 701 | 20,125 | ||||||||||||||
Interest
income
|
15,289 | - | 29,497 | - | ||||||||||||||
Amortization
of deferred financing fees
|
(244,059 | ) | - | (504,024 | ) | - | ||||||||||||
Interest
expense
|
17
|
(1,155,307 | ) | (51,814 | ) | (1,649,346 | ) | (149,594 | ) | |||||||||
Other
expenses
|
1,192 | (23,738 | ) | (1,922 | ) | (29,003 | ) | |||||||||||
Change
in fair value of derivative liabilities
|
2,949,039 | - | 2,918,485 | - | ||||||||||||||
Total
other income (expenses)
|
1,566,855 | (35,230 | ) | 793,390 | (158,472 | ) | ||||||||||||
Income
before provision for income taxes
|
7,984,898 | 4,335,429 | 12,179,056 | 6,692,616 | ||||||||||||||
Provision
for income taxes
|
18
|
(1,444,003 | ) | (1,057,890 | ) | (2,625,686 | ) | (1,613,261 | ) | |||||||||
Net
income
|
$ | 6,540,895 | $ | 3,277,539 | $ | 9,553,370 | $ | 5,079,355 | ||||||||||
Comprehensive
income:
|
||||||||||||||||||
Net
income
|
$ | 6,540,895 | $ | 3,277,539 | $ | 9,553,370 | $ | 5,079,355 | ||||||||||
Other
comprehensive income:
|
||||||||||||||||||
Unrealized
foreign currency translation gain
|
803,074 | 978 | 1,729,542 | 48,561 | ||||||||||||||
Comprehensive
income
|
$ | 7,343,969 | $ | 3,278,517 | $ | 11,282,912 | $ | 5,127,916 | ||||||||||
Earnings
per common share
|
||||||||||||||||||
Basic
|
11
|
$ | 0.39 | $ | 0.25 | $ | 0.57 | $ | 0.39 | |||||||||
Diluted
|
$ | 0.31 | $ | 0.25 | $ | 0.45 | $ | 0.39 | ||||||||||
Weighted
average common shares outstanding
|
||||||||||||||||||
Basic
|
11
|
16,925,928 | 13,162,500 | 16,716,691 | 13,162,500 | |||||||||||||
Diluted
|
22,266,662 | 13,162,500 | 22,258,835 |
13,162,500
|
Accumulated
|
||||||||||||||||||||||||||||
Common stock
|
Additional
|
other
|
||||||||||||||||||||||||||
Shares
|
paid-in
|
comprehensive
|
Statutory
|
Retained
|
||||||||||||||||||||||||
outstanding
|
Amount
|
capital
|
income
|
reserves
|
Earnings
|
Total
|
||||||||||||||||||||||
Balance
at June 30, 2010
|
16,500,000 | $ | 16,500 | $ | 15,317,621 | $ | 626,584 | $ | 2,201,817 | $ | 31,921,832 | $ | 50,084,354 | |||||||||||||||
Net
income for the period
|
9,553,370 | 9,553,370 | ||||||||||||||||||||||||||
Stock
based compensation
|
79,500 | 79,500 | ||||||||||||||||||||||||||
Option
based compensation
|
23,844 | 23,844 | ||||||||||||||||||||||||||
Conversion
of convertible notes
|
477,221 | 477 | 851,924 | 852,401 | ||||||||||||||||||||||||
Foreign
currency translation difference
|
1,729,542 | 1,729,542 | ||||||||||||||||||||||||||
Balance
at December 31, 2010
|
16,977,221 | $ | 16,977 | $ | 16,272,889 | $ | 2,356,126 | $ | 2,201,817 | $ | 41,475,202 | $ | 62,323,011 |
For The Six Months Ended
|
||||||||
December 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
income
|
$ | 9,553,370 | $ | 5,079,355 | ||||
Adjustments
to reconcile net income to net cash used in operating
activities:
|
||||||||
Depreciation
|
172,730 | 341,868 | ||||||
Loss
on disposal of property, plant and equipment
|
1,895 | 3,655 | ||||||
Accretion
of beneficial conversion feature
|
933,094 | - | ||||||
Amortization
of deferred fees on convertible notes
|
504,024 | - | ||||||
Interest
expense on convertible notes
|
110,466 | - | ||||||
Change
in fair value of warrants
|
(2,918,485 | ) | - | |||||
Stock
based compensation
|
103,344 | - | ||||||
Changes
in operating assets and liabilities:
|
||||||||
(Increase)
in accounts receivable
|
(3,724,323 | ) | (684,497 | ) | ||||
(Increase)/decrease
in other receivables and prepayments
|
(571,675 | ) | 1,257,905 | |||||
(Increase)
in inventories
|
(1,108,642 | ) | (464,670 | ) | ||||
Increase
in accrued liabilities
|
150,726 | 930,686 | ||||||
(Decrease)/increase
in accounts payable
|
888,629 | (216,150 | ) | |||||
Increase
in other payable
|
1,064,563 | - | ||||||
Increase
in income taxes payable
|
683,491 | 400,135 | ||||||
Increase
in restricted cash
|
299,069 | - | ||||||
Net
cash provided by operating activities
|
6,142,276 | 6,648,287 | ||||||
Cash
flows used in investing activities
|
||||||||
Purchases
of property, plant and equipment
|
(9,711 | ) | (238,431 | ) | ||||
Proceeds
from disposal of property, plant and equipment
|
4,462 | 2,925 | ||||||
Purchase
of leased land use rights
|
(4,783,102 | ) | - | |||||
Purchase
of intangible assets
|
(2,974,566 | ) | - | |||||
Net
cash used in investing activities
|
(7,762,917 | ) | (235,506 | ) | ||||
Cash
flows from financing activities
|
||||||||
Proceeds
from borrowings
|
884,933 | 3,073,365 | ||||||
Repayment
of borrowings
|
(4,454,413 | ) | (4,541,500 | ) | ||||
Repayment
from related party
|
52,799 | - | ||||||
Contributed
capital
|
- | 5,970 | ||||||
Proceeds
of note payable
|
- | 400,000 | ||||||
Net
cash flows used in financing activities
|
(3,516,681 | ) | (1,062,165 | ) | ||||
Effect
of foreign currency translation on cash and cash
equivalents
|
410,659 | 48,126 | ||||||
Net
(decrease) increase in cash and cash equivalents
|
(4,726,664 | ) | 5,398,742 | |||||
Cash
and cash equivalents at beginning of period
|
17,149,082 | 2,494,166 | ||||||
Cash
and cash equivalents at end of period
|
$ | 12,422,418 | $ | 7,892,908 | ||||
Cash
paid during the period for:
|
||||||||
Interest
paid
|
$ | 583,047 | $ | 200,068 | ||||
Income
taxes paid
|
$ | 1,942,195 | $ | 1,233,901 | ||||
Non-cash
investing and financing activities:
|
||||||||
Common
stock issued upon conversion of convertible notes and accrued
interest
|
$ | 852,401 | $ | - | ||||
Deposits
received from investors for future financing included in restricted
cash
|
$ | 1,874,117 | $ | - | ||||
Purchase
of intangible assets has not been paid and included in Other Payable as of
December 31, 2010
|
$ | 4,234,853 | $ | - |
Name of Company
|
Place of
incorporation
|
Date of
incorporation
|
Attributable
equity interest
|
Issued Capital
(US Dollars)
|
||||||||
Chance
High International Limited
|
British
Virgin Islands
|
July
2, 2009
|
100 | % | $ | 50,000 | ||||||
Yantai
Shencaojishi Pharmaceuticals Co., Ltd.
|
People’s
Republic of China
|
November
25, 2009
|
100 | % | $ | 10,000,000 | ||||||
Yantai
Bohai Pharmaceuticals Group Co., Ltd.
|
People’s
Republic of China
|
July
8, 2004
|
* |
$
|
2,918,000
(RMB20,000,000)
|
*
|
We
have an indirect controlling interest in Bohai under the VIE Agreements
entered on December 7, 2009, which are described in Note 1
above.
|
·
|
Carrying
amounts of the VIE are consolidated into the financial statements of the
Company as the primary
beneficiary, or Primary Beneficiary, or PB;
and
|
·
|
Inter-company
transactions and balances, such as revenues and costs, receivables and
payables between or among the Primary Beneficiary and the VIE(s) are
eliminated in their entirety.
|
Liabilities:
|
||||
Balance
of derivative liabilities as of September 30, 2010
|
$
|
5,512,482
|
||
Change
in the fair value of derivative liabilities
|
(2,949,039)
|
|||
Balance
of derivative liabilities as of December 31, 2010
|
$
|
2,563,443
|
Liabilities:
|
||||
Balance
of derivative liabilities as of June 30, 2010
|
$
|
5,481,928
|
||
Change
in the fair value of derivative liabilities
|
(2,918,485)
|
|||
Balance
of derivative liabilities as of December 31, 2010
|
$
|
2,563,443
|
December 31, 2010
|
June 30, 2010
|
|||||||||||||||
(unaudited)
|
||||||||||||||||
Country:
|
||||||||||||||||
United
States
|
$
|
7,951
|
-
|
%
|
$
|
-
|
-
|
%
|
||||||||
China
|
12,414,467
|
100.0
|
%
|
17,149,082
|
100.0
|
%
|
||||||||||
Total
cash and cash equivalents
|
$
|
12,422,418
|
100.0
|
%
|
$
|
17,149,082
|
100.0
|
%
|
Leasehold
land and buildings
|
30
to 40 years
|
|
Motor
vehicles
|
10
years
|
|
Plant
and machinery
|
10
years
|
|
Office
equipment
|
5
years
|
December 31,
2010
|
June 30,
2010
|
December 31,
2009
|
||||||||||
Period
end US$: RMB exchange rate
|
6.61180 | 6.80860 | 6.81663 | |||||||||
Average
periodic US$: RMB exchange rate
|
6.72367 | 6.83667 | 6.81942 |
·
|
Persuasive
evidence of an arrangement exists;
|
·
|
Delivery has occurred
or services have been
rendered;
|
·
|
The
seller’s price to the buyer is fixed
or determinable; and
|
·
|
Collectability
is reasonably assured.
|
4.
|
OTHER
RECEIVABLES AND PREPAYMENTS
|
As of
December 31,
2010
|
As of
June 30,
2010
|
|||||||
(unaudited)
|
||||||||
Prepayment
for advertising and promotion
|
$
|
1,702,101
|
$
|
1,198,484
|
||||
Prepayment
for director and officer insurance
|
13,542
|
29,792
|
||||||
Prepayment
for research and development
|
120,996
|
-
|
||||||
Other
receivables
|
236,795
|
221,314
|
||||||
Total
other receivables and prepayments
|
$
|
2,073,434
|
$
|
1,449,590
|
5.
|
AMOUNT
DUE FROM EQUITY HOLDER
|
As of
|
As of
|
|||||||
|
December 31,
|
June 30,
|
||||||
|
2010
|
2010
|
||||||
(unaudited)
|
||||||||
Mr.
Hongwei Qu
|
$
|
-
|
$
|
40,160
|
6.
|
INVENTORIES
|
As of
December 31, 2010
|
As of
June 30, 2010
|
|||||||
(unaudited)
|
||||||||
Raw
materials
|
$
|
1,051,261
|
$
|
445,693
|
||||
Finished
goods
|
846,839
|
302,729
|
||||||
Total
inventories
|
$
|
1,898,099
|
$
|
748,422
|
7.
|
INTANGIBLE
ASSETS
|
As of
December 31,
2010
|
As of
June 30,
2010
|
|||||||
(unaudited)
|
||||||||
Pharmaceuticals
formulas, at cost
|
$ | 25,118,727 | $ | 17,342,772 |
8.
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
As of
December
31, 2010
|
As of
June 30, 2010
|
|||||||
(unaudited)
|
|
|||||||
Cost
|
||||||||
Leasehold
land and buildings
|
$ | 7,856,590 | $ | 7,629,498 | ||||
Plant
and equipment
|
1,271,753 | 1,234,994 | ||||||
Office
equipment
|
97,585 | 85,174 | ||||||
Motor
vehicles
|
419,285 | 414,622 | ||||||
Total
|
9,645,213 | 9,364,288 | ||||||
Less:
accumulated depreciation
|
(1,687,417 | ) | (1,469,246 | ) | ||||
Property,
plant and equipment, net
|
$ | 7,957,796 | $ | 7,895,042 |
9.
|
SHORT-TERM
BORROWINGS
|
Loan from financial
institution
|
Loan period
|
Annual
interest rate
|
Secured by
|
Amount
|
||||||
Yantai
Laishan Rural Credit Union
|
September
21, 2010 to September 20, 2011
|
9.0270%
|
Bohai’s
machinery and vehicle
|
$ |
604,979
|
|||||
Yantai Laishan Rural Credit
Union
|
September 21, 2010 to September 20,
2011
|
6.9030%
|
Yantai Ka Wah Medical Equipment Co.
Ltd
|
294,927
|
||||||
TOTAL
|
$
|
899,906
|
Loan from financial
institution
|
Loan period
|
Annual
interest rate
|
Secured by
|
Amount
|
||||||
China
Construction Bank
|
February
24, 2010 to February 23, 2011
|
5.8410%
|
Shandong
Dai Xin Heavy Industries Co. Ltd.
|
$
|
3,524,954
|
|||||
Yantai
Laishan Rural Credit Union
|
September
28, 2009 to September 26, 2010
|
9.0270%
|
Yantai
Ka Wah Medical Equipment Co. Ltd
|
587,492
|
||||||
Yantai Laishan Rural Credit
Union
|
September 28, 2009 to September 26,
2010
|
6.9030%
|
Bohai’s
machinery and vehicle
|
286,403
|
||||||
TOTAL
|
$
|
4,398,849
|
10.
|
COMMON
STOCK
|
11.
|
EARNINGS
PER SHARE
|
Three
months
ended
|
Three
months
ended
|
Six months
ended
|
Six months
ended
|
|||||||||||||
December
31, 2010
|
December
31, 2009
|
December 31,
2010
|
December 31,
2009
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Net
income available for common shareholders
|
$ | 6,540,895 | $ | 3,277,539 | $ | 9,553,370 | $ | 5,079,355 | ||||||||
Effective
interest charge on convertible note
|
291,749 | - | 548,466 | - | ||||||||||||
Net
income for diluted earnings per common share
|
$ | 6,832,644 | $ | 3,277,539 | $ | 10,101,836 | $ | 5,079,355 |
Three
months
ended
|
Three
months
ended
|
Six months
ended
|
Six months
ended
|
|||||||||||||
December
31, 2010
|
December
31, 2009
|
December
31, 2010
|
December
31, 2009
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Basic
weighted average Common Stock outstanding
|
16,925,928 | 13,162,500 | 16,716,691 | 13,162,500 | ||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||
Warrants
- incremental shares based on assumed proceeds &
repurchases
|
- | - | - | - | ||||||||||||
Options
- incremental shares based on assumed proceeds &
repurchases
|
517 | - | 296 | - | ||||||||||||
Restricted
stock
|
14,130 | - | 7,065 | - | ||||||||||||
Common
shares if converted from Convertible Debt
|
5,326,087 | - | 5,534,783 | - | ||||||||||||
Diluted
weighted average for Common Stock outstanding
|
22,266,662 | 13,162,500 | 22,258,835 | 13,162,500 |
12.
|
OTHER
ACCRUED LIABILITIES
|
As of
|
As of
|
|||||||
December 31,
|
June 30,
|
|||||||
2010
|
2010
|
|||||||
(unaudited)
|
||||||||
Accrued
selling expenses
|
$
|
2,647,365
|
$
|
1,542,280
|
||||
Accrued
staff costs
|
250,953
|
221,810
|
||||||
Value
added tax payable
|
1,068,252
|
686,478
|
||||||
Other
taxes payable
|
147,913
|
78,370
|
||||||
Other
accrued expenses
|
190,952
|
456,050
|
||||||
Deposits
from investors for Common Stock sales (Note 19)
|
1,874,117
|
-
|
||||||
Payable
for intangible assets (Note 22)
|
4,234,853
|
-
|
||||||
Total
Other accrued liabilities
|
$
|
10,414,405
|
$
|
2,984,988
|
13.
|
CONVERTIBLE PROMISSORY NOTES
AND WARRANTS
|
Warrant
Shares
|
Exercisable
Shares
|
Exercise Price per
Common Stock Range
|
||||||||||
Balance,
June 30, 2010
|
6,600,000
|
6,000,000
|
$
|
2.40
|
||||||||
Granted
or vested during the six months ended December 31,
2010
|
-
|
-
|
-
|
|||||||||
Exercised
during the six months ended December 31, 2010
|
-
|
-
|
-
|
|||||||||
Expired
during the six months ended December 31, 2010
|
-
|
-
|
-
|
|||||||||
Balance,
December 31, 2010 (unaudited)
|
6,600,000
|
6,000,000
|
$
|
2.40
|
Warrants Outstanding
|
|||||||||||||||
Number
|
|||||||||||||||
Outstanding
|
Weighted
|
Weighted Average
|
|||||||||||||
Number
|
Currently
|
Average
|
Exercise Price of
|
||||||||||||
Outstanding
|
Exercisable
|
Remaining
|
Warrants
|
||||||||||||
Exercise
|
at December
|
at
|
Contractual Life
|
currently
|
|||||||||||
Price
|
31, 2010
|
December
31, 2010
|
(Years)
|
exercisable
|
|||||||||||
$ |
2.40
|
6,600,000
|
6,000,000
|
2.02
|
$
|
2.40
|
December
31, 2010
|
June 30, 2010
|
|||||||
(Unaudited)
|
||||||||
Convertible
notes payable, at face value
|
$
|
10,550,000
|
$
|
11,500,000
|
||||
Less:
unamortized beneficial conversion feature and warrants discount on
convertible notes
|
(10,336,062
|
)
|
(11,375,180
|
)
|
||||
Convertible
notes, net
|
$
|
213,938
|
$
|
124,820
|
14.
|
DEFERRED
FEES ON CONVERTIBLE NOTES
|
As of
December 31,2010
(unaudited)
|
As of
June 30,2010
|
|||||||
Deferred
fees, beginning balance
|
$ | 1,562,617 | $ | 2,152,454 | ||||
Transferred
to equity on conversion
|
(102,041 | ) | (79,120 | ) | ||||
Amortization
of deferred fees
|
(504,024 | ) | (510,717 | ) | ||||
Deferred
fee, ending balance
|
$ | 956,552 | $ | 1,562,617 |
15.
|
STOCK
OPTIONS
|
Options Outstanding
|
|||||||||||||||
Number
|
|||||||||||||||
Outstanding
|
Weighted
|
Weighted Average
|
|||||||||||||
Number
|
Currently
|
Average
|
Exercise Price of
|
||||||||||||
Outstanding
|
Exercisable
|
Remaining
|
Warrants
|
||||||||||||
Exercise
Price
|
at December
31, 2010
|
at
December 31, 2010
|
Contractual Life
(Years)
|
currently
exercisable
|
|||||||||||
$ |
2.00
|
26,000
|
26,000
|
4.79
|
$
|
2.00
|
Options
Shares
|
Vested and
Exercisable
Shares
|
Exercise Price per
Common Stock Range
|
||||||||||
Balance,
June 30, 2010
|
-
|
-
|
$
|
-
|
||||||||
Granted
or vested during the six months ended December 31,
2010
|
26,000
|
26,000
|
2.00
|
|||||||||
Exercised
during the six months ended December 31, 2010
|
-
|
-
|
-
|
|||||||||
Expired
during the six months ended December 31, 2010
|
-
|
-
|
-
|
|||||||||
Balance,
December 31, 2010 (unaudited)
|
26,000
|
26,000
|
$
|
2.00
|
16.
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSE
|
Three months
ended
|
Three months
ended
|
Six months
ended
|
Six months
ended
|
|||||||||||||
December 31,
2010
|
December 31,
2009
|
December 31,
2010
|
December 31,
2009
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Travel
and accommodation
|
$ | 2,466,783 | $ | 1,841,831 | $ | 4,017,741 | $ | 3,056,177 | ||||||||
Advertising
and promotion
|
3,671,269 | 3,346,014 | 6,498,981 | 5,964,703 | ||||||||||||
Audit
fees
|
70,213 | - | 89,051 | - | ||||||||||||
Commission
|
1,404,465 | 1,276,259 | 1,472,970 | 2,403,953 | ||||||||||||
Conference
|
1,446,069 | 1,280,228 | 2,891,927 | 2,331,599 | ||||||||||||
Depreciation
|
10,048 | 9,101 | 20,006 | 18,476 | ||||||||||||
Staff
costs
|
558,061 | 305,460 | 1,139,573 | 963,137 | ||||||||||||
Research
and development costs
|
187,464 | - | 371,821 | 295,406 | ||||||||||||
Other
operating expenses
|
1,290,888 | 1,754,324 | 3,217,949 | 4,035,838 | ||||||||||||
Total
selling, general and administrative expenses
|
$ | 11,105,260 | $ | 9,813,217 | $ | 19,720,019 | $ | 19,069,289 |
17.
|
INTEREST
EXPENSE
|
Three months
ended
|
Three months
ended
|
Six months
ended
|
Six months
ended
|
|||||||||||||
December 31,
2010
|
December 31,
2009
|
December 31,
2010
|
December 31,
2009
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Interest
on short-term bank borrowings and notes payable
|
$ | 77,887 | $ | 51,814 | $ | 167,786 | $ | 149,594 | ||||||||
Amortization
of beneficial conversion feature and warrants discount on convertible
notes converted
|
785,671 | - | 933,094 | - | ||||||||||||
Effective
interest charge on Convertible Notes
|
291,749 | - | 548,466 | - | ||||||||||||
Total
interest expenses
|
$ | 1,155,307 | $ | 51,814 | $ | 1,649,346 | $ | 149,594 |
18.
|
INCOME
TAXES
|
Three months
ended
December 31,
2010
|
Three months
ended
December 31,
2009
|
Six months
ended
December 31,
2010
|
Six months
ended
December 31,
2009
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Current
taxes
|
||||||||||||||||
United
States
|
$ | - | $ | - | $ | - | $ | - | ||||||||
PRC
|
1,444,003 | 1,057,890 | 2,625,686 | 1,613,261 | ||||||||||||
Deferred
taxes
|
||||||||||||||||
United
States
|
(237,546 | ) | - | (503,818 | ) | - | ||||||||||
PRC
|
- | (500 | ) | - | (500 | ) | ||||||||||
Change
in valuation allowance
|
237,546 | 500 | 503,818 | 500 | ||||||||||||
Total
income tax expenses
|
$ | 1,444,003 | $ | 1,057,890 | $ | 2,625,686 | $ | 1,613,261 |
Three months
ended
December 31,
2010
|
Three months
ended
December 31,
2009
|
Six months
ended
December 31,
2010
|
Six months
ended
December 31,
2009
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
United
States Tax at statutory rate
|
$ | 2,714,865 | $ | 1,474,046 | $ | 4,140,879 | $ | 2,275,489 | ||||||||
Foreign
tax rate difference
|
(585,003 | ) | (454,239 | ) | (1,048,691 | ) | (636,357 | ) | ||||||||
Change
in valuation allowance
|
237,546 | 500 | 503,818 | 500 | ||||||||||||
Permanent
difference
|
(187,861 | ) | 37,583 | (295,287 | ) | (26,371 | ) | |||||||||
Other
reconciling items
|
(735,544 | ) | - | (675,033 | ) | - | ||||||||||
Income
tax expense
|
$ | 1,444,003 | $ | 1,057,890 | $ | 2,625,686 | $ | 1,613,261 |
As of
|
As of
|
|||||||
December 31,
|
June 30,
|
|||||||
2010
|
2010
|
|||||||
(unaudited)
|
||||||||
Deferred
tax asset:
|
||||||||
Net
operating loss carry forward
|
$
|
558,056
|
$
|
308,406
|
||||
Stock
options and warrants
|
254,167
|
-
|
||||||
Total
gross deferred tax asset
|
812,224
|
308,406
|
||||||
Less:
valuation allowance
|
(812,224)
|
(308,406)
|
|
|||||
Net
deferred tax asset
|
$
|
-
|
$
|
-
|
Three months
ended
December 31,
2010
|
Three months
ended
December 31,
2009
|
Six months
ended
December
31, 2010
|
Six months
ended
December
31, 2009
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Net
value added tax expenses
|
$ | 3,024,821 | $ | 2,475,751 | $ | 5,261,236 | $ | 4,540,913 |
19.
|
COMMITMENTS
AND CONTINGENCIES
|
20.
|
SIGNIFICANT
CONCENTRATIONS
|
(a)
|
Customer Concentrations
|
(b)
|
Supplier Concentrations
|
Three
months
ended
|
Three
months
ended
|
Six
months
ended
|
Six
months
ended
|
|||||||||||||
December
31,
2010
|
December
31,
2009
|
December
31,
2010
|
December
31,
2009
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Shandong
Yantai Medicine Procurement and Supply Station
|
19.0 | % | 15.2 | % | 18.5 | % | 14.8 | % | ||||||||
Anguo
Jinkangdi Chinese Herbal Medicine Co. Ltd
|
10.5 | % | * | 11.6 | % | * | ||||||||||
Anhui
DeChang Pharmaceutical Co. Ltd.
|
* | 10.8 | % | * | 12.0 | % | ||||||||||
Yantai
Tianyifeng Science and Technology Development Co., Ltd.
|
* | 10.9 | % | * | 10.4 | % | ||||||||||
* Constitutes
less than 10% of our purchase.
|
21.
|
STATUTORY
RESERVES
|
22.
|
SUBSEQUENT
EVENTS
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||||||||||
December 31,
|
December 31,
|
|||||||||||||||||||||||
Increase
|
Increase
|
|||||||||||||||||||||||
2010
|
2009
|
(Decrease)
|
2010
|
2009
|
(Decrease)
|
|||||||||||||||||||
Net
Income available to Common shareholders -GAAP
|
$ | 6,540,895 | $ | 3,277,539 | $ | 3,263,356 | $ | 9,553,370 | $ | 5,079,355 | $ | 4,474,015 | ||||||||||||
Add
Back (Subtract):
|
||||||||||||||||||||||||
Change
in fair value of warrants
|
(2,949,039 | ) (a) | - | (2,949,039 | ) | (2,918,485 | ) (a) | - | (2,918,485 | ) | ||||||||||||||
Unamortized
beneficial conversion features on convertible notes
converted
|
785,671 | (a) | - | 785,671 | 933,094 | (a) | - | 933,094 | ||||||||||||||||
Change
in Option and Equity Based Compensation
|
81,344 | (b) | - | 81,344 | 103,344 | (b) | - | 103,344 | ||||||||||||||||
Adjusted
Net Income available to Common shareholders -non-GAAP
|
$ | 4,458,871 | $ | 3,277,539 | $ | 1,181,332 | $ | 7,671,323 | $ | 5,079,355 | $ | 2,591,968 | ||||||||||||
Basic
earning per share – GAAP
|
$ | 0.39 | $ | 0.25 | $ | 0.14 | $ | 0.57 | $ | 0.39 | $ | 0.18 | ||||||||||||
Add
back (Subtract):
|
||||||||||||||||||||||||
Change
in fair value of warrants
|
(0.17 | ) (a) | - | (0.17 | ) | (0.17 | ) (a) | - | (0.17 | ) | ||||||||||||||
Unamortized
beneficial conversion features on convertible notes
converted
|
0.05 | (a) | - | 0.05 | 0.06 | (a) | - | 0.06 | ||||||||||||||||
Change
in Option and Equity Based Compensation
|
0.00 | (b) | - | 0.00 | 0.00 | (b) | - | 0.00 | ||||||||||||||||
Adjusted
basic earning per share non-GAAP
|
$ | 0.27 | $ | 0.25 | $ | 0.02 | $ | 0.46 | $ | 0.39 | $ | 0.07 | ||||||||||||
Diluted
earning per share-GAAP
|
$ | 0.31 | $ | 0.25 | $ | 0.06 | $ | 0.45 | $ | 0.39 | $ | 0.06 | ||||||||||||
Add
back (Subtract):
|
||||||||||||||||||||||||
Change
in fair value of warrants
|
(0.13 | ) (a) | - | (0.13 | ) | (0.13 | ) (a) | - | (0.13 | ) | ||||||||||||||
Unamortized
beneficial conversion features on convertible notes
converted
|
0.04 | (a) | - | 0.04 | 0.04 | (a) | - | 0.04 | ||||||||||||||||
Change
in Option and Equity Based Compensation
|
0.00 | (b) | - | 0.00 | 0.01 | (b) | - | 0.01 | ||||||||||||||||
Adjusted
diluted earning per share non-GAAP
|
$ | 0.22 | $ | 0.25 | $ | (0.03 | ) | $ | 0.37 | $ | 0.39 | $ | (0.02 | ) | ||||||||||
Weighted
average number of shares
|
||||||||||||||||||||||||
Basic
|
16,925,928 | 13,162,500 | 16,716,691 | 13,162,500 | ||||||||||||||||||||
Diluted
|
22,266,662 | 13,162,500 | 22,258,835 | 13,162,500 |
|
For the three months ended
|
For the six months ended
|
||||||||||||||
|
December 31
|
December 31
|
||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Tongbi
Capsules
|
27.1 | % | 22.5 | % | 27.4 | % | 22.6 | % | ||||||||
Tongbi
Tablets
|
14.5 | % | 13.6 | % | 14.8 | % | 14.2 | % | ||||||||
Lung
Nourishing Syrup
|
25.7 | % | 26.0 | % | 26.6 | % | 25.2 | % | ||||||||
Others
|
32.7 | % | 37.9 | % | 31.2 | % | 38.0 | % | ||||||||
Total
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
|
·
|
Net
revenues for the three months ended December 31, 2010 increased
32% to $22.2 million compared to the same period in 2009. Net
revenues for the six months ended December 31, 2010 increased
27.4% to $39.2 million compared to the same period in
2009.
|
|
o
|
Net
revenues for five new products that were introduced in April 2010
increased from $720,000 for the three months ended September 30, 2010 to
$1,271,000 for the three months ended December 31, 2010, an increase of
77%.
|
|
o
|
Increase
in net revenues was mostly derived from increase of sales from
our lead products, Lung Nourishing Syrup, Tongbi Capsules and Tongbi
Tablets, which together represented over 67% of our total net revenues for
the three months ended December 31,
2010.
|
|
o
|
62%
of net revenue was derived from sales of
prescription products and 38% was from
Over-the-Counter products for the three months ended December
31, 2010.
|
|
·
|
Net
income for the three months ended December 31, 2010 increased
100% to $6.5 million compared to the same period in
2009.
|
|
o
|
Net
income from operations increased 47% to $6.4
million.
|
|
o
|
Net
income margin increased to 30 % this quarter compared to 20% from the
same quarter last year.
|
|
o
|
Included
in net income was a non-cash gain of $2.9 million for changes in fair
value of warrants and non-cash charges for approximately $867,000 for
restricted stock and option based compensation as well as charges for
unamortized beneficial conversion for our convertible
notes.
|
|
·
|
Basic
earnings per share increased to $0.57 and diluted earnings per share
increased to $0.45 for the six months ended December 31,
2010.
|
|
o
|
Diluted
earnings per share increased 15% despite an increase in average shares
outstanding by 9 million shares for the six months ended December 31, 2010
compared to the same period in
2009.
|
|
o
|
Basic
earnings per share increased 46% for the six months ended December
31, 2010 compared to the same period in
2009.
|
|
·
|
Including
restricted cash, our total cash balance was $14.6 million and cash
flow from operating activities was $10.3 million for the six months
ended December 31, 2010.
|
|
o
|
Total
cash and cash equivalents decreased by $4.7 million for six months
ended December 31, 2010 compared to June 30,
2010.
|
|
o
|
Major
cash payments activities for the six months ended December 31, 2010
included $4.8 million made for deposits on the purchase of prepaid land
use rights from the Shandong provincial government for future
factory expansion, repayment of short term bank loan of $3.6
million to China Construction Bank, and
partial payments of $3 million to Shandong Daxin Microbiology
Pharmaceutical Industry Co. for the 14 SFDA approved
TCM.
|
For The Three Months Ended
|
||||||||||||||||
December 31,
|
||||||||||||||||
Percentage
|
||||||||||||||||
2010
|
2009
|
Differences
|
Increase
|
|||||||||||||
Net
revenues
|
$ | 22,204,348 | $ | 16,846,303 | $ | 5,358,045 | 31.8 | % | ||||||||
Cost
of revenue
|
(4,681,045 | ) | (2,662,427 | ) | (2,018,618 | ) | 75.8 | % | ||||||||
Gross
profit
|
17,523,303 | 14,183,876 | 3,339,427 | 23.5 | % | |||||||||||
Selling,
general, and administrative expenses
|
(11,105,260 | ) | (9,813,217 | ) | (1,292,043 | ) | 13.2 | % | ||||||||
Income
from operations
|
6,418,043 | 4,370,659 | 2,047,384 | 46.8 | % | |||||||||||
Total
other income (expenses)
|
1,566,855 | (35,230 | ) | 1,602,085 | N/A | |||||||||||
Income
before provision for income taxes
|
7,984,898 | 4,335,429 | 3,649,469 | 84.2 | % | |||||||||||
Provision
for income taxes
|
(1,444,003 | ) | (1,057,890 | ) | (386,113 | ) | 36.5 | % | ||||||||
Net
income
|
$ | 6,540,895 | $ | 3,277,539 | $ | 3,263,356 | 99.6 | % |
For The Three Months Ended
|
||||||||
December 31,
|
||||||||
2010
|
2009
|
|||||||
Net
revenues
|
100.0 | % | 100.0 | % | ||||
Cost
of sales
|
(21.1 | )% | (15.8 | )% | ||||
Gross
profit
|
78.9 | % | 84.2 | % | ||||
Selling,
general, and administrative expenses
|
(50.0 | )% | (58.3 | )% | ||||
Income
from operations
|
28.9 | % | 25.9 | % | ||||
Total
other income(expenses)
|
7.1 | % | (0.2 | )% | ||||
Income
before provision for income taxes
|
36.0 | % | 25.7 | % | ||||
Provision
for income taxes
|
(6.5 | )% | (6.2 | )% | ||||
Net
income
|
29.5 | % | 19.5 | % |
For The six Months Ended
|
||||||||||||||||
December 31,
|
||||||||||||||||
Percentage
|
||||||||||||||||
2010
|
2009
|
Differences
|
Increase
|
|||||||||||||
Net
revenues
|
$ | 39,233,996 | $ | 30,800,317 | $ | 8,433,679 | 27.4 | % | ||||||||
Cost
of revenues
|
(8,128,311 | ) | (4,879,940 | ) | (3,248,371 | ) | 66.6 | % | ||||||||
Gross
profit
|
31,105,685 | 25,920,377 | 5,185,308 | 20.0 | % | |||||||||||
Selling,
general, and administrative expenses
|
(19,720,019 | ) | (19,069,289 | ) | (650,730 | ) | 3.4 | % | ||||||||
Income
from operations
|
11,385,666 | 6,851,088 | 4,534,578 | 66.2 | % | |||||||||||
Total
other income (expenses)
|
793,390 | (158,472 | ) | 951,862 | N/A | |||||||||||
Income
before provision for income taxes
|
12,179,056 | 6,692,616 | 5,486,440 | 82.0 | % | |||||||||||
Provision
for income taxes
|
(2,625,686 | ) | (1,613,261 | ) | (1,012,425 | ) | 62.8 | % | ||||||||
Net
income
|
$ | 9,553,370 | $ | 5,079,355 | $ | 4,474,015 | 88.1 | % |
For The six Months Ended
|
||||||||
December 31,
|
||||||||
2010
|
2009
|
|||||||
Net
revenues
|
100.0 | % | 100.0 | % | ||||
Cost
of sales
|
(20.7 | )% | (15.8 | )% | ||||
Gross
profit
|
79.3 | % | 84.2 | % | ||||
Selling,
general, and administrative expenses
|
(50.3 | )% | (62.0 | )% | ||||
Income
from operations
|
29.0 | % | 22.2 | % | ||||
Total
other income(expenses)
|
2.0 | % | (0.5 | )% | ||||
Income
before provision for income taxes
|
31.0 | % | 21.7 | % | ||||
Provision
for income taxes
|
(6.7 | )% | (5.2 | )% | ||||
Net
income
|
24.3 | % | 16.5 | % |
For the six months ended
|
||||||||
December 31
|
||||||||
2010
|
2009
|
|||||||
Net cash provided by operating activities
|
$ | 6,142,276 | $ | 6,648,287 | ||||
Net
cash (used in) investing activities
|
(7,762,917 | ) | (235,506 | ) | ||||
Net
cash (used in) financing activities
|
(3,516,681 | ) | (1,062,165 | ) | ||||
Effect
of foreign currency translation on cash and cash
equivalents
|
410,659 | 48,126 | ||||||
Net
(decrease) increase in cash and cash equivalent
|
$ | (4,726,664 | ) | $ | 5,398,742 |
Payments Due by Period
|
||||||||||||||||||||
Total
|
Less than 1 year
|
1-3 Years
|
4-5 years
|
5 Years+
|
||||||||||||||||
Contractual
Obligations:
|
||||||||||||||||||||
Purchase
of land use rights
|
$ | 2,320,132 | $ | 2,320,132 | $ | - | $ | - | $ | - | ||||||||||
Bank
loans
|
899,906 | 899,906 | - | - | - | |||||||||||||||
Research
and development
|
1,013,400 | 1,013,400 | - | - | - | |||||||||||||||
Convertible
notes
|
10,550,000 | - | 10,550,000 | - | - | |||||||||||||||
Purchase
of intangible assets (Drug Approval Numbers for Chinese
medicines)
|
4,234,800 | 4,234,800 | - | - | - | |||||||||||||||
Total
Contractual Obligations:
|
$ | 19,018,238 | $ | 8,468,238 | $ | 10,550,000 | $ | - | $ | - |
Item
3.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
Item
4T.
|
Controls
and Procedures
|
Item
1.
|
Legal
Proceedings
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
Item
4.
|
Removed
and Reserved
|
Item
5.
|
Other
Information
|
Item
6.
|
Exhibits
|
Exhibit
Number
|
Description
of Exhibit
|
|
31.1*
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
promulgated under the Securities and Exchange Act of 1934, as
amended.
|
|
31.2*
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a),
promulgated under the Securities and Exchange Act of 1934, as
amended.
|
|
32.1*
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer).
|
|
32.2*
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer).
|
Bohai
Pharmaceuticals Group, Inc.
|
||
February
14, 2011
|
By:
|
/s/
Hongwei Qu
|
Hongwei
Qu
Chief
Executive Officer
(Principal
Executive Officer)
|
||
February
14, 2011
|
By:
|
/s/ Gene
Hsiao
|
Gene
Hsiao
Chief
Financial Officer
(Principal
Accounting
Officer)
|