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

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

JIANGBO PHARMACEUTICALS, INC.

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

Florida		65-1130026
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

Middle Section, Longmao Street, Area A, Laiyang Waixiangxing Industrial Park Laiyang City, Yantai, Shandong Province, People’s Republic of China 265200

(Address of principal executive offices)

(0086) 535-7282997

(issuer’s telephone number)

Genesis Pharmaceuticals Enterprises, Inc.

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

 

 

 

 

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JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES

(FORMERLY GENESIS PHARMACEUTICALS ENTERPRISES, INC.)

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

(UNAUDITED)

		For the Three Months Ended								For the Nine Months Ended
		March 31,								March 31,
		2009				2008				2009				2008
REVENUES:
Sales		$	25,725,837			$	26,231,191			$	85,991,330			$	66,648,051
Sales- related parties			-				1,869,092				243,943				4,611,849
TOTAL REVENUE			25,725,837				28,100,283				86,235,273				71,259,900
Cost of sales			6,853,810				5,896,113				19,705,020				16,626,461
Cost of sales -related parties			-				441,709				54,500				1,117,918
COST OF SALES			6,853,810				6,337,822				19,759,520				17,744,379
GROSS PROFIT			18,872,027				21,762,461				66,475,753				53,515,521
RESEARCH AND DEVELOPMENT EXPENSE			1,098,675				967,930				3,295,125				2,170,240
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			4,477,356				12,136,164				31,111,752				29,269,330
INCOME FROM OPERATIONS			13,295,996				8,658,367				32,068,876				22,075,951
OTHER (INCOME) EXPENSE:
Other (income) expense, net			(281,570	)			1,244,892				1,062,959				1,217,385
Other (income)-related parties			(76,552	)			(27,415	)			(313,276	)			(80,851	)
Non-operating (income) expense			150,466				(529	)			(471	)			(232	)
Interest expense, net			1,241,843				526,509				4,143,968				925,993
Loss from discontinued operations			103,008				228,812				1,693,830				341,743
OTHER EXPENSE , NET			1,137,195				1,972,269				6,587,010				2,404,038
INCOME BEFORE PROVISION FOR INCOME TAXES			12,158,801				6,686,098				25,481,866				19,671,913
PROVISION FOR INCOME TAXES			3,302,953				2,211,265				8,093,320				6,808,625
NET INCOME		$	8,855,848			$	4,474,833			$	17,388,546			$	12,863,288
OTHER COMPREHENSIVE INCOME:
Unrealized holding (loss) gain		$	(200,025	)		$	(270,351	)		$	(2,147,642	)		$	1,347,852
Foreign currency translation adjustment			(201,173	)			1,960,948				378,284				3,428,779
COMPREHENSIVE INCOME		$	8,454,650			$	6,165,430			$	15,619,188			$	17,639,919
BASIC WEIGHTED AVERAGE NUMBER OF SHARES			10,277,762				9,740,129				9,937,189				6,507,435
BASIC EARNINGS PER SHARE		$	0.86			$	0.46			$	1.75			$	1.98
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES			10,907,243				9,740,129				10,599,618				7,081,791
DILUTED EARNINGS PER SHARE		$	0.44			$	0.46			$	1.27			$	1.14

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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JIANGBO PHARMACEUTICALS, INC.  AND SUBSIDIARIES

(FORMERLY KNOWN AS GENESIS PHARMACEUTICALS ENTERPRISES, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Nine Months Ended
		March 31,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	17,388,546			$	12,863,288
Loss from discontinued operations			1,693,830				341,743
Income from continuing operations			19,082,376				13,205,031
Adjustments to reconcile net income to cash, net of acquisition,
provided by operating activities:
Depreciation			464,094				375,456
Amortization of intangible assets			371,925				113,578
Amortization of deferred debt issuance costs			510,227				47,583
Amortization of debt discount			2,679,526				671,296
Bad debt expense			368,840				(112,459	)
Realized (gain) loss on marketable securities			(106,865	)			19,819
Unrealized loss on marketable securities			1,255,522				1,150,516
Other non-cash settlement			(20,000	)			-
Stock-based compensation			43,340				28,750
Changes in operating assets and liabilities
Accounts receivable			2,353,566				(7,246,740	)
Accounts receivable - related parties			488,646				(1,403,383	)
Notes receivables			-				59,790
Inventories			205,471				27,542
Other receivables			63,170				(254,886	)
Other receivables - related parties			(317,303	)			(81,384	)
Advances to suppliers and other assets			1,602,693				(391,526	)
Accounts payable			3,171,180				1,159,105
Accrued liabilities			682,145				301,290
Other payables			194,283				2,146,659
Other payables - related parties			(58,580	)			(962,509	)
Customer deposit			4,100,600				-
Liabilities assumed from reorganization			(1,164,323	)			(1,162,133	)
Taxes payable			5,107,831				10,006,057
Net cash provided by operating activities			41,078,364				17,697,452
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used in acquisition			(8,581,970	)			-
Proceeds from sale of marketable securities			167,623				605,882
Prepayment for land use rights			-				(8,246,830	)
Cash receipt from reverse acquisition			-				534,950
Purchase of equipment			(130,814	)			(401,302	)
Net cash used in investing activities			(8,545,161	)			(7,507,300	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in restricted cash			4,149,305				(5,361,849	)
Proceeds from sale of common stock and options exercised			-				337,500
Proceeds from sale of treasury stock			-				1,977
Proceeds from convertible debt			-				5,000,000
Payments on debt issuance costs			-				(354,408	)
Dividends paid			-				(10,520,000	)
Proceeds from bank loans			2,196,750				3,255,360
Payments for bank loans			(2,782,550	)			(5,425,600	)
Proceeds from officers			-				27,128
Proceeds from notes payable			7,009,097				10,729,040
Principal payments on notes payable			(9,161,912	)			(5,367,191	)
Net cash provided by (used in) financing activities			1,410,690				(7,678,043	)
EFFECTS OF EXCHANGE RATE CHANGE IN CASH			198,836				1,324,727
INCREASE IN CASH			34,142,729				3,836,836
CASH, beginning			48,195,798				17,737,208
CASH, ending		$	82,338,527			$	21,574,044
			-
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid		$	1,130,837			$	331,431
Income taxes paid		$	4,883,039			$	3,615,867
Non-cash investing and financing activities:
Common stock issued to acquire Hongrui		$	2,597,132			$	-

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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 JIANGBO PHARMACEUTICALS, INC. AND SUBSIDIARIES

	Useful Life
Building and building improvements	5 – 40 Years
Manufacturing equipment	5 – 20 Years
Office equipment and furniture	5 – 10 Years
Vehicles	5 Years

 

Intangible assets

All land in the PRC is owned by the PRC government and cannot be sold to any individual or company. The Company has recorded the amounts paid to the PRC government to acquire long-term interests to utilize land underlying the Company’s facilities as land use rights. This type of arrangement is common for the use of land in the PRC. Land use rights are amortized on the straight-line method over the terms of the land use rights, which range from 20 to 50 years. The Company acquired land use rights in August 2004 and October 2007 in the amounts of approximately $879,000 and $8,871,000, respectively, which are included in intangible assets.

Patents and licenses include purchased technological know-how, secret formulas, manufacturing processes, technical and procedural manuals, and the certificate of drugs production, and is amortized using the straight-line method over the expected useful economic life of five years, which reflects the period over which those formulas, manufacturing processes, technical and procedural manuals are kept secret to the Company as agreed between the Company and the selling parties.

The estimated useful lives of intangible assets are as follows:

 

	Useful Life
Land use rights	50 Years
Patents	5 Years
Licenses	5 Years
Customer list and customer relationships	3 Years
Trade secrets - formulas and know how technology	5 Years

 

Impairment of long-lived assets

Long-lived assets of the Company are reviewed at least annually, more often if circumstances dictate, to determine whether their carrying values have become impaired. The Company considers assets to be impaired if the carrying values exceed the future projected cash flows from related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of March 31, 2009, the Company expects these assets to be fully recoverable.

Beneficial conversion feature of convertible notes

The Company accounts for the $5,000,000 and $30,000,000 secured convertible notes issued pursuant to the subscription agreements discussed in Note 14 under EITF 00-27, ‘‘Application of Issue 98-5 to Certain Convertible Instruments.” In accordance with EITF 00-27, the Company has determined that the convertible notes contained beneficial conversion feature because on November 6, 2007, the effective conversion price of the $5,000,000 convertible note was $5.48 when the market value per share was $16.00, and on May 30, 2008, the effective conversion price of the $30,000,000 convertible note was $4.69 when the market value per share was $12.00. Total value of beneficial conversion feature of $2,904,092 for the November 6, 2007 convertible note and $19,111,323 for the May 30, 2008 convertible debt was discounted from the carrying value of the convertible notes. The beneficial conversion feature is amortized using the effective interest method over the term of the note. As of March 31, 2009 and June 30, 2008, $18,776,786 and $20,453,441, respectively, remained unamortized relating to the beneficial conversion features.

 

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Income taxes

The Company accounts for income taxes in accordance with SFAS 109, “Accounting for Income Taxes” and FIN 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109." Under the asset and liability method as required by SFAS 109, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under SFAS 109, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized. Since the Company’s operations are domiciled in the PRC, and the taxable income mirrors that of GAAP income, there are no temporary differences that would result in deferred tax assets or liabilities. As such, no valuation allowances were necessary at March 31, 2009 and June 30, 2008.

FIN 48 clarifies the accounting and disclosure for uncertain tax positions and prescribes a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Under FIN 48, evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.

The Company’s operations are subject to income and transaction taxes in the United States and in the PRC jurisdictions. Significant estimates and judgments are required in determining the Company’s worldwide provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations, and as a result the ultimate amount of tax liability may be uncertain. However, the Company does not anticipate any events that would lead to changes to these uncertainties.

  

Value added tax

The Company is subject to value added tax (“VAT”) for manufacturing products and business tax for services provided. The applicable VAT rate is 17% for products sold in the PRC. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). Under the commercial practice of the PRC, the Company paid   VAT based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty, which can range from zero to five times the amount of the taxes which are determined to be late or deficient, and will be charged to operations in the period if and when a determination is been made by the taxing authorities that a penalty is due.

VAT on sales and VAT on purchases amounted to approximately $4,372,000 and $712,000, respectively, for the three months ended March 31, 2009, and approximately $4,807,000 and $259,000, respectively, for the three months ended March 31, 2008. VAT on sales and VAT on purchases amounted to approximately $14,659,000 and $1,867,000, respectively, for the nine months ended March 31, 2009, and approximately $12,114,000 and $443,000, respectively, for the nine months ended March 31, 2008. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government. VAT is not impacted by the income tax holiday.

Shipping and handling

Shipping and handling costs related to costs of goods sold are included in selling, general and administrative expenses. Shipping and handling costs amounted to approximately $153,000 and $107,000 for the three months ended March 31, 2009 and 2008, respectively. Shipping and handling costs amounted to approximately $405,000 and $253,000 for the nine months ended March 31, 2009 and 2008, respectively.

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Advertising

Expenses incurred in the advertisement of the Company and the Company’s products are charged to operations as incurred. Advertising expenses amounted to approximately $1,192,000 and $2,019,000 for the three months ended March 31, 2009 and 2008, respectively, and approximately $2,120,000 and $6,148,000 for the nine months ended March 31, 2009 and 2008, respectively.

Research and development

Research and development costs are expensed as incurred. These costs primarily consist of cost of materials used and salaries paid for the development of the Company’s products and fees paid to third parties to assist in such efforts. Research and development costs amounted to approximately $1,099,000 and $968,000 for the three months ended March 31, 2009 and 2008, respectively, and approximately $3,295,000 and $2,170,000 for the nine months ended March 31, 2009 and 2008, respectively.

  

Recent accounting pronouncements

In December 2007, the FASB issued SFAS 141(R), “Business Combinations,” which replaced SFAS 141. SFAS 141R retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting as well as requiring the expensing of acquisition-related costs as incurred. Furthermore, SFAS 141R provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is evaluating the impact, if any, that the adoption of this statement will have on its consolidated results of operations or consolidated financial position.

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51.” SFAS 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It is intended to eliminate the diversity in practice regarding the accounting for transactions between equity and noncontrolling interests by requiring that they be treated as equity transactions. Further, it requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. SFAS 160 also establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation, requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated, requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of a subsidiary, among others. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, with early adoption permitted, and it is to be applied prospectively. SFAS 160 is to be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements, which must be applied retrospectively for all periods presented. The Company is currently evaluating the impact that SFAS 160 will have on its consolidated financial position or consolidated results of operations.

In February 2008, the FASB issued FSP No. 157-1 , "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13." FSP 157-1 indicates that it does not apply under SFAS 13, "Accounting for Leases," and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS 13. This scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under SFAS 141 or SFAS 141R, regardless of whether those assets and liabilities are related to leases.

Also in February 2008, the FASB issued FSP 157-2, "Effective Date of FASB Statement No. 157." With the issuance of FSP 157-2, the FASB agreed to: (a) defer the effective date in SFAS No. 157 for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), and (b) remove certain leasing transactions from the scope of SFAS 157. The deferral is intended to provide the FASB time to consider the effect of certain implementation issues that have arisen from the application of SFAS 157 to these assets and liabilities.

In March 2008, the FASB issued SFAS 161, "Disclosures about Derivative Instruments and Hedging Activities." SFAS 161 is intended to improve financial reporting of derivative instruments and hedging activities by requiring enhanced disclosures to enable financial statement users to better understand the effects of derivatives and hedging on an entity's financial position, financial performance and cash flows. The provisions of SFAS 161 are effective for interim periods and fiscal years beginning after November 15, 2008, with early adoption encouraged. The Company does not anticipate that the adoption of SFAS 161 will have a material impact on its consolidated results of operations or consolidated financial position.

In May 2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted Accounting Principles." SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities. SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles." The Company does not expect the adoption of SFAS 162 will have a material impact on its consolidated results of operations or consolidated financial position.

 

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On May 9, 2008, the FASB issued FASB FSP APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)." FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants." Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact that FSP APB 14-1 will have on its consolidated results of operations or consolidated financial position.

On June 16, 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” to address the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. FSP EITF 03-6-1 indicates that unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the requirements of FSP EITF 03-6-1 and the impact that its adoption will have on the consolidated results of operations or consolidated financial position.

In June 2008, the FASB issued EITF 07-5, “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock.” EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133 “Accounting for Derivatives and Hedging Activities,” specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. This standard triggers liability accounting on all options and warrants exercisable at strike prices denominated in any currency other than the functional currency of the operating entity in the PRC (Renminbi). The Company is currently evaluating the impact of the adoption of EITF 07-5 on the accounting for related warrants transactions.

In June 2008, FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5.”  The objective of EITF 08-4 is to provide transition guidance for conforming changes made to EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” that result from EITF 00-27 “ Application of Issue No. 98-5 to Certain Convertible Instruments,” and SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” EITF 08-4 is effective for financial statements issued for fiscal years ending after December 15, 2008. Early application is permitted. The adoption of EITF08-4 is not expected to have a material impact on the Company’s consolidated results of operations or consolidated financial position.

 

On October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS 157 when the market for a financial asset is inactive. Specifically, FSP 157-3 clarifies how (1) management’s internal assumptions should be considered in measuring fair value when observable data are not present, (2) observable market information from an inactive market should be taken into account, and (3) the use of broker quotes or pricing services should be considered in assessing the relevance of observable and unobservable data to measure fair value. The Company is currently evaluating the impact of adoption of FSP 157-3 on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.”  FSP 157-4 amends SFAS 157 and provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased and also includes guidance on identifying circumstances that indicate a transaction is not orderly for fair value measurements. FSP 157-4 shall be applied prospectively with retrospective application not permitted. FSP 157-4 shall be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP 157-4 must also early adopt FSP 115-2 and 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” Additionally, if an entity elects to early adopt either FSP 107-1 and 28-1, “Interim Disclosures about Fair Value of Financial Instruments” or FSP 115-2 and 124-2, it must also elect to early adopt this FSP. The Company is currently evaluating this new FSP but does not believe that it will have a material impact on the consolidated financial statements.

 

In April 2009, the FASB issued FSP 115-2 and 124-2. FSP 115-2 amends SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,” and EITF 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to make the other-than-temporary impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This FSP will replace the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. This FSP provides increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold and also requires increased and more frequent disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. Although this FSP does not result in a change in the carrying amount of debt securities, it does require that the portion of an other-than-temporary impairment not related to a credit loss for a held-to-maturity security be recognized in a new category of other comprehensive income and be amortized over the remaining life of the debt security as an increase in the carrying value of the security. This FSP shall be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP 157-4. Also, if an entity elects to early adopt either FSP 157-4 or FSP 107-1 and 28-1, the entity also is required to early adopt this FSP. The Company is currently evaluating this new FSP but does not believe that it will have a material impact on the consolidated financial statements.

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In April 2009, the FASB issued FSP 107-1 and 28-1. This FSP amends SFAS 107, to require disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as in annual financial statements. Prior to this FSP, fair values for these assets and liabilities were only disclosed annually. This FSP applies to all financial instruments within the scope of SFAS 107 and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. This FSP shall be effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP 157-4 and 115-2 and 124-2. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. The Company is currently evaluating the disclosure requirements of this new FSP.

Reclassifications

Certain amounts in the prior period’s consolidated financial statements have been reclassified to conform to the current period presentation with no impact on the previously reported net income or cash flows.

Note 3 - Acquisition

On January 23, 2009, Laiyang Jiangbo entered into an asset acquisition agreement (the “Agreement”) with Shandong Traditional Chinese Medicine College (the “Medicine College”) and Shandong Hongrui Pharmaceutical Factory (“Shandong Hongrui” or “Hongrui”), a wholly-owned subsidiary of Medicine College,  pursuant to  which Laiyang Jiangbo purchased the majority of the assets owned by Hongrui, including all tangible assets, all manufacturing and office buildings, land, equipment and inventories and all rights to manufacture and distribute Hongrui’s 22 Traditional Chinese Medicines (“TCMs”), for an original contract purchase price of approximately $12 million consisted of approximately $9.6 million in cash and 643,651 shares of Jiangbo’s common stock. The $4.035 fair value of each common share was based on the weighted average trading price of the common stock of 5 days prior to the execution of the Agreement and amounted to $2,597,132. On February 10, 2009, the Agreement was amended to revise the total purchase price to approximately $11 million consisting of approximately $8.6 million in cash. However, the Company is still obligated to issue 643,651 shares of Jiangbo’s common stock to Medicine College within one year of the date of the execution of the Agreement. As of March 31, 2009, Laiyang Jiangbo paid approximately $8.6 million in cash in full. The 643,651 shares of Jiangbo’s common stock issuable to Medicine College in connection with the acquisition of Hongrui have been included in the accompanying consolidated balance sheet as outstanding shares.

The Company accounted for this acquisition using the purchase method of accounting in accordance with SFAS 141, “Business Combinations.” The purchase price was determined based on an arm's length negotiation and no finder's fees or commissions were paid in connection with this acquisition.

The following represents the allocation of the purchase price to the net assets acquired based on their respective fair values.  The accompanying consolidated financial statements include the acquisition of Hongrui, effective February 5, 2009, under the purchase method of accounting in accordance with SFAS 141.  The following represents the allocation of the purchase price to the net assets acquired based on their respective fair values.

Inventory		$	147,250
Plant and equipments			3,223,808
Intangible assets			7,810,974
Total assets acquired			11,182,032
Net assets acquired			11,182,032
Total consideration paid		$	11,182,032

 

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The following unaudited pro forma consolidated results of operations for the nine months ended March 31, 2009 and 2008, as if the acquisition of Hongrui had been completed as of the beginning of each period presented.  The pro forma information gives effect to actual operating results prior to the acquisition.  The pro forma amounts does not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred as of the beginning of the periods presented and is not intended to be a projection of future results:

		Nine Months Ended March 31, 2009				Nine Months Ended March 31, 2008
Net Revenues		$	93,574,164			$	83,101,150
Income from Operations			32,412,705				23,578,314
Net Income			17,742,804				13,895,939
Net Income Per Shares
Basic		$	1.70			$	1.94
Diluted		$	1.29			$	1.17
Weighted Average number of shares outstanding
Basic			10,421,103				7,151,086
Diluted			10,756,955				7,725,442

Note 4 - Earnings per share

The Company reports earnings per share in accordance with the provisions of SFAS 128, “Earnings Per Share.” SFAS 128 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.

All share and per share amounts used in the Company’s consolidated financial statements and notes thereto have been retroactively restated to reflect the 40-to-1 reverse stock split, which occurred on September 4, 2008.

The following is a reconciliation of the basic and diluted earnings per share computations for the three months ended March 31, 2009 and 2008:

In connection with the $5,000,000 November 2007 Convertible Debentures, 6% convertible subordinated debentures note, the Company issued a three-year warrant to purchase 250,000 shares of common stock, at an exercise price of $12.80 per share. The calculated fair value of the warrants granted with this private placement was computed using the Black-Scholes option-pricing model. Variables used in the option-pricing model include (1) risk-free interest rate at the date of grant (4.5%), (2) expected warrant life of three years, (3) expected volatility of 197%, and (4) zero expected dividends. In connection with the May 2008 Financing, the exercise price of outstanding warrants issued in November 2007 was reduced to $8 per share and the total number of warrants to purchase common stock was increased to 400,000.

 

In connection with the $30,000,000 May 2008 Convertible Debentures, the Company issued a five-year warrant to purchase 1,875,000 shares of common stock, at an exercise price of $10 per share. The calculated fair value of the warrants granted with this private placement was computed using the Black-Scholes option-pricing model. Variables used in the option-pricing model include (1) risk-free interest rate at the date of grant (4.5%), (2) expected warrant life of five years, (3) expected volatility of 95%, and (4) zero expected dividends.

On February 15, 2009, the Company granted 40,000 stock warrants to a consultant at an exercise price of $6.00 per share exercisable for a period of three years. The warrants fully vest on July 15, 2009.  The fair value of this warrant grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) risk-free interest rate at the date of grant (1.83%), (2) expected warrant life of three years, (3) expected volatility of 106%, and (4) zero expected dividends. In connection with these warrants, the Company recorded stock-based deferred compensation of $123,908 for the three months and nine months ended March 31, 2009.

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A summary of the warrants as of March 31, 2009, and changes during the period are presented below:

 

		Number of warrants
Outstanding as of June 30, 2007			74,085
Granted			2,275,000
Forfeited			-
Exercised			-
Outstanding as of June 30, 2008			2,349,085
Granted			40,000
Forfeited			(74,085)
Exercised			-
Outstanding as of March 31, 2009			2,315,000

The following is a summary of the status of warrants outstanding at March 31, 2009:

 

Outstanding Warrants
Exercise Price			Number			Average  Remaining  Contractual Life (Years)
$	6.00			40,000		2.88
$	8.00			400,000		3.61
$	10.00			1,875,000		4.17
	Total			2,315,000

As a result of the share exchange transaction, our primary operations consist of the business and operations of Karmoya and its subsidiaries, which are conducted by Laiyang Jiangbo in the PRC. Laiyang Jiangbo produces and sells western pharmaceutical products in China and focuses on developing innovative medicines to address various medical needs for patients worldwide.

 

OTHER EXPENSES . Our other expenses consisted of financial expenses and non-operating expenses. We had other expenses of $6.6 million for the nine months ended March 31, 2009 as compared to other expenses $2.4 million for the nine months ended March 31, 2008, an increase of $4.2 million   or approximately 174%. For the three months ended March 31, 2009, we had other expenses of $1.1 million as compared to $2.0 million for the three months ended March 31, 2008, a decrease of $0.8 million or 42.3%. The increase for the nine months ended March 31, 2009 in net other expenses was primarily due to the increase in interest expense and amortization of debt discounts related to our financing in November 2007 and May 2008 of $4.1 million, and loss from discontinued operation of $1.7 million for the nine months ended March 31, 2009 and partially offset by the increase in other income – related parties of $0.3 million and interest income $0.4 million.

NET INCOME. Our net income for the nine months ended March 31, 2009 was $17.4 million as compared to $12.9 million for the nine months ended March 31, 2008, an increase of $4.5 million or 35.2 %. The net income for the three months ended March 31, 2009 was $8.9 million as compared to $4.5 million for the three months ended March 31, 2008, an increase of $4.4 million or 97.9%.  The increase in our net income for the nine months and three months ended March 31, 2009 was primarily due to the increase in our income from operations.  Management believes that net income will continue to be strong in the remainder of fiscal year 2009 as we have completed the Hongrui acquisition and we have started generating sales from the products acquired in the acquisition. We also intend to continue to strengthen our sales efforts to gain market share for our products and control our spending.

  

LIQUIDITY AND CAPITAL RESOURCES

 

              Net cash provided by operating activities for the nine months ended March 31, 2009 was $41.1 million as compared to net cash provided by operating activities of $17.7 million for the nine months ended March 31, 2008. For the nine months ended March 31, 2009, the significant increase in cash provided by operating activities included the following: 1) increase in income from continuing operations of $5.9 million;  2) an add-back of bad debt expenses of $0.4 million; 3) an increase in add-back of  amortization on debt discount and deferred debt costs of $2.5 million; 4) a decrease in changes in accounts receivable and accounts receivable from related parties totaling $11.5 million; 5) decrease in changes in advances to suppliers and other assets of $2.0 million;  6) increase in changes  in accounts payable of $2.0  million; 7) increase changes in other payables- related parties of $0.9 million; and  7) increase in changes in customer deposit of $4.1 million, partially offset by a) the decrease in changes in other payable of $2.0 million  b) an increase in changes in liabilities assumed from reorganization of $1.2 million and c) decrease in changes in taxes payable of $5.1 million.

 

Net cash used in investing activities for the nine months ended March 31, 2009 of $8.5 million was mainly attributable to cash used in Hongrui acquisition of $8.6 million  and cash used in purchase of equipments of $0.1 million and offset by proceeds from sale of marketable securities of $0.2 million. Net cash used by investing activities for the nine months ended March 31, 2008 was $7.5 million attributable to payments on land use rights of $8.2 million and purchases of equipments of $0.4 million and offset by cash acquired in reverse merger of $0.5 million and proceeds from the sale of marketable securities totaling $0.6 million.

Net cash provided by financing activities was $1.4 million for the nine months ended March 31, 2009 and was primarily attributable to decrease in restricted cash of $4.1 million, proceeds from bank loans of $2.2 million and offset by decrease on notes payable of $2.2 million and the principal payments on short term bank loans of $2.8 million. Net cash used in financing activities was $7.7 million for the nine months ended March 31, 2008 and was attributable to payments on debt issuance cost of $0.4 million, payments on dividend payable of $10.5 million, payments for bank loans of $5.4 million and a in increase in notes payable of $5.4 million and offset by proceeds from bank loans of $3.3 million, proceeds from sale of common stock of $0.3 million, proceeds from issuance of convertible debt of $5 million, and increase in restricted cash of $5.4 million.

We reported a net increase in cash for the nine months ended March 31, 2009 of $34.1 million as compared to a net increase in cash of $3.8 million for the nine months ended March 31, 2008.

1. We have started training our internal accounting staff on US GAAP and financial reporting requirements. Additionally, we are also taking steps to hire additional accounting personnel to ensure we have adequate resources to meet the requirements of segregation of duties.

2.   We plan on involving both internal accounting and operations personnel and outside consultants with US GAAP technical accounting expertise, as needed, early in the evaluation of a complex, non-routine transaction to obtain additional guidance as to the application of generally accepted accounting principles to such a proposed transaction. During the nine months ended March 31, 2009, our senior management has started interviewing and selecting outside internal control consultants. In December 2008, we engaged a reputable independent accounting firm as internal control consultants to provide advice and assistance on improving our internal controls. The internal control consultants have began working with our internal audit department to implement new policies and procedures within the financial reporting process with adequate review and approval procedures.

3.   We have continued to evaluate the internal audit function in relation to the Company’s financial resources and requirements. During the nine months ended March 31, 2009, we have established an internal audit department and the department has started evaluating the Company’s current internal control over financial reporting process. To the extent possible, we will implement procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals.

 

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We believe that the foregoing steps will remediate the significant deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate to insure that the foregoing do not become material weaknesses. We plan to fully implement the above remediation plan by December 31, 2009.

A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting.

 

Our management is not aware of any material weaknesses in our internal control over financial reporting, and nothing has come to the attention of management that causes them to believe that any material inaccuracies or errors exist in our financial statements as of March 31, 2009.  The reportable conditions and other areas of our internal control over financial reporting identified by us as needing improvement have not resulted in a material restatement of our financial statements.  Nor are we aware of any instance where such reportable conditions or other identified areas of weakness have resulted in a material misstatement or omission in any report we have filed with or submitted to the Commission.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

(b)     Changes in internal controls over financial reporting . During the nine months covered by this quarterly report, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Such limitations include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures, such as simple errors or mistakes or intentional circumvention of the established process.