UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2013

¨ 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: 000-53401

Bohai Pharmaceuticals Group, Inc.

(Exact name of registrant as specified in its charter)

Nevada	98-0697405
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

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)

Registrant’s telephone number (including area code): +86(535)-685-7928

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date 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). ¨

As of May 15, 2013, there were 17,861,085 shares of company common stock issued and outstanding.

Bohai Pharmaceuticals Group, Inc.

Quarterly Report on Form 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
Cautionary Note Regarding Forward-Looking Statements		3
Item 1.	Financial Statements (unaudited)	4
	Condensed Consolidated Balance Sheets as of March 31, 2013 and June 30, 2012	4
	Condensed Consolidated Statements of Income and Comprehensive Income for the Nine Months ended March 31, 2013 and 2012	5
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended March 31, 2013	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months ended March 31, 2013 and 2012	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
SIGNATURES		38

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements.  We cannot give any guarantee that the plans, intentions or expectations described in the forward looking statements will be achieved.  All forward-looking statements involve significant risks and uncertainties, and actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those factors described in the “Risk Factors” sections of our Annual Report for the fiscal year ended June 30, 2012 and our Quarterly Report for the quarter ended March 31, 2013. Readers should carefully review such risk factors as well as factors described in other documents that we file from time to time with the Securities and Exchange Commission.

In some cases, you can identify forward-looking statements by terminology such as “guidance,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential,” “proposed,” “intended,” or “continue” or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully, because they discuss our expectations about our future operating results or our future financial condition or state other “forward-looking” information. There may be events in the future that we are not able to accurately predict or control. You should be aware that the occurrence of any of the events described in our risk factors and other disclosures could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, and levels of activity, performance or achievements. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include, without limitation:

§	our ability to generate or obtain through financing sufficient working capital to (i) fund the acquisition of Yantai Tianzheng (a total of $12,827,185 is due); (ii) satisfy our obligations under our convertible notes due April 5, 2014 (currently $ 8,464,500 due) or (iii) otherwise to support our business plans;
§	our ability to integrate the business of Yantai Tianzheng and any future acquisitions into our business;
§	our ability to expand our product offerings and maintain the quality of our products;
§	the availability of government granted rights to exclusively manufacture or co-manufacture our products;
§	the availability of 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 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.

We cannot give any guarantee that our plans, intentions or expectations will be achieved.  All forward-looking statements involve significant risks and uncertainties, and actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those factors listed above and described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2012. Except as required by applicable law and including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

3

BOHAI PHARMACEUTICALS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2013 (UNAUDITED)		June 30, 2012
ASSETS
Current assets:
Cash	$	3,755,600	$	18,386,288
Restricted cash		8,454,021		9,449,905
Accounts receivable		40,997,730		29,670,552
Inventories		3,102,301		3,795,915
Prepaid expenses and other current assets		453,235		879,696
Total current assets		56,762,887		62,182,356
Non - current assets:
Property, plant and equipment, net		12,111,474		11,681,272
Prepayment for property, plant and equipment		3,136,857		594,508
Intangible assets - pharmaceutical formulas		13,899,132		25,610,557
Long term prepayments - land use right, net		37,334,529		18,739,297
Other intangible assets, net		28,823,066		21,497,890
Goodwill		5,124,766		5,092,139
Total Non - current assets		100,429,824		83,215,663
TOTAL ASSETS	$	157,192,711	$	145,398,019
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Convertible notes	$	8,464,500	$	10,036,000
Accounts payable		4,301,315		3,334,101
Accrued expenses		7,106,121		8,478,054
Land use right payable		12,750,833		0
Income taxes payable		1,635,772		2,338,825
Acquisition purchase price payable - current portion		0		5,000,000
Derivative liabilities - investor and agent warrants		0		1,211,236
Due to Related Party		48,556		36,002
Total current liabilities		34,307,097		30,434,218
Non - current liabilities:
Acquisition purchase price payable - non-current portion		12,827,185		20,300,000
Deferred tax liability		7,880,191		8,161,269
Total Non - current liabilities		20,707,376		28,461,269
TOTAL LIABILITIES		55,014,473		58,895,487
COMMITMENTS, CONTINGENCIES, AND OTHER MATTERS
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 150,000,000 shares authorized, 17,861,085 shares issued and  outstanding as of March 31, 2013 and June 30, 2012, respectively		17,861		17,861
Additional paid-in capital		24,615,353		24,615,353
Accumulated other comprehensive income		7,098,327		6,236,076
Statutory reserves		5,342,583		2,201,817
Retained earnings		65,104,114		53,431,425
Total stockholders’ equity		102,178,238		86,502,532
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	157,192,711	$	145,398,019

See accompanying notes to the condensed consolidated financial statements

4

BOHAI PHARMACEUTICALS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF

INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

	For the Three Months Ended March 31,						For the Nine Months Ended March 31,
	2013			2012			2013			2012
Net revenues	$	34,786,624		$	36,237,847		$	111,067,950		$	101,002,589
Cost of revenues		8,282,141			8,180,762			25,506,506			23,106,879
Gross profit		26,504,483			28,057,085			85,561,444			77,895,710
Operating expenses:
Selling, general and administrative expenses		20,476,092			19,153,512			60,230,015			52,866,932
Impairment Charge - drug formula		0			0			1,688,486			0
Depreciation and amortization		1,378,028			634,116			3,680,122			1,881,177
Total Operating expenses		21,854,120			19,787,628			65,598,623			54,748,109
Income from operations		4,650,363			8,269,457			19,962,821			23,147,601
Other income (expenses):
Interest income		2,796			13,039			29,122			51,205
Interest expenses		(456,930	)		(1,120,273	)		(1,396,286	)		(10,694,346	)
Other expenses		(142	)		(2,163	)		(16,733	)		(10,205	)
Change in fair value of derivative liabilities		0			317,986			1,211,236			458,724
Total other income (expenses)		(454,276	)		(791,411	)		(172,661	)		(10,194,622	)
Income before provision for income taxes		4,196,087			7,478,046			19,790,160			12,952,979
Provision for income taxes		(1,036,881	)		(2,174,128	)		(4,976,705	)		(6,288,779	)
Net income (loss)	$	3,159,206		$	5,303,918		$	14,813,455		$	6,664,200
Comprehensive income (loss):
Net income (loss)	$	3,159,206		$	5,303,918		$	14,813,455		$	6,664,200
Unrealized foreign currency translation gain		658,168			620,662			862,251			2,276,242
Comprehensive income (loss)	$	3,817,374		$	5,924,580		$	15,675,706		$	8,940,442
Net income (loss) per common share
Basic	$	0.18		$	0.30		$	0.83		$	0.37
Diluted	$	0.15		$	0.28		$	0.71		$	0.37
Weighted average common shares outstanding
Basic		17,861,085			17,861,085			17,861,085			17,861,085
Diluted		22,093,335			23,086,085			22,093,335			23,086,085

See accompanying notes to the condensed consolidated financial statements

5

BOHAI PHARMACEUTICALS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED MARCH 31, 2013

(UNAUDITED)

							Accumulated
	Common stock				Additional		other							Total
	Shares outstanding		Amount		paid-in capital		comprehensive income		Statutory reserves		Retained Earnings			Stockholders’ Equity
Balance at June 30, 2012		17,861,085	$	17,861	$	24,615,353	$	6,236,076	$	2,201,817	$	53,431,425		$	86,502,532
Statutory reserves										3,140,766		(3,140,766	)		0
Foreign currency translation adjustment		0		0		0		862,251		0		0			862,251
Net income		0		0		0		0		0		14,813,455			14,813,455
Balance at March 31, 2013		17,861,085	$	17,861	$	24,615,353	$	7,098,327	$	5,342,583	$	65,104,114		$	102,178,238

See accompanying notes to the condensed consolidated financial statements

6

BOHAI PHARMACEUTICALS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Nine Months Ended
	March 31,
	2013			2012
Cash flows from operating activities:
Net income	$	14,813,455		$	6,664,200
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,053,576			2,211,065
Impairment of intangible assets - pharmaceutical formulas		1,688,486			0
Amortization of debt issue costs		0			485,039
Non-cash interest-convertible notes		0			9,317,898
Change in fair value of warrants		(1,211,236	)		(458,724	)
Stock based compensation		0			44,000
Deferred income taxes		(331,999	)		700,734
Changes in operating assets and liabilities:
Accounts receivable		(11,091,285	)		(4,421,640	)
Prepaid expenses and other assets		426,946			494,576
Inventories		714,984			(771,500	)
Accounts payable		941,963			(843,544	)
Accrued liabilities		(1,415,975	)		1,330,250
Income taxes payable		(715,086	)		943,207
Net cash provided by operating activities		7,873,829			15,695,561
Cash flows used in investing activities:
Purchases of property, plant and equipment		(781,176	)		(509,118	)
Proceeds from disposal of property, plant and equipment		0			26,719
Land use rights payments		(6,349,206	)		(100,850	)
Property, plant and equipment deposits		(2,528,104	)		(594,113	)
Cash received in acquisition of business		0			1,358,078
Cash paid for acquisition of business		(12,472,815	)		(9,700,000	)
Deposit of restricted cash-convertible note escrow deposit		(1,494,964	)		666,321
Release of restricted cash- convertible note escrow deposit		2,546,786			(591,180	)
Net cash used in investing activities		(21,079,479	)		(9,444,143	)
Cash flows from financing activities:
Repayment of short term borrowings		0			(3,056,926	)
Borrowing from related party		12,349			11,109
Repayment of convertible notes		(1,571,500	)		0
Capital contribution from shareholder		0			6,286,738
Net cash flows (used in) provided by financing activities		(1,559,151	)		3,240,921
Effect of foreign currency translation on cash and cash equivalents		134,113			207,491
Net (decrease) increase in cash and cash equivalents		(14,630,688	)		9,699,830
Cash and cash equivalents at beginning of period		18,386,288			13,344,426
Cash and cash equivalents at end of period	$	3,755,600		$	23,044,256
Cash paid during the period for:
Interest	$	875,286		$	540,094
Income taxes	$	6,023,796		$	4,705,358
Supplemental cash flow information
Non-cash investing and financing activities:
Land use right liability		12,750,833			0
Acquisition liability	$	12,827,185		$	25,300,000

See accompanying notes to the condensed consolidated financial statements

7

BOHAI PHARMACEUTICALS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2013

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

The Company’s Operations

Bohai Pharmaceuticals Group, Inc. (“BPGI”) was incorporated under the laws of the State of Nevada on January 9, 2008 under the name of Link Resources, Inc. Prior to January 5, 2010, BPGI was a public “shell” company. BPGI became a public operating company on January 5, 2010 pursuant to a Share Exchange Transaction completed on January 5, 2010.

BPGI is engaged in the production, manufacturing and distribution of herbal pharmaceuticals based on traditional Chinese medicine (“TCM”) in the People’s Republic of China (“China” or the “PRC”) through the following two operating subsidiaries:

(i) Yantai Bohai Pharmaceuticals Group Co., Ltd., (“Bohai”) a PRC company and the Company’s original operating subsidiary BPGI controls Bohai through a variable interest entity arrangement (“VIE”) described below; and

(ii) Yantai Tianzheng Pharmaceuticals Company, Ltd., a PRC company (“Yantai Tianzheng”) which BPGI acquired effective July 1, 2011 through a newly formed PRC wholly-foreign owned enterprise subsidiary, Yantai Nirui Pharmaceuticals, Ltd. (“WFOE II”).

BPGI owns 100% of Chance High International Limited, a British Virgin Islands company (“Chance High”). Chance High owns 100% of the issued and outstanding shares of capital stock of a Chinese wholly-foreign owned enterprise known as Yantai Shencaojishi Pharmaceuticals Co., Ltd. (the “WFOE”). On December 7, 2009 (prior to the date of the Share Exchange Transaction), the WFOE entered into a series of variable interest entity contractual agreements (the “VIE Agreements”) with Bohai and its three shareholders, including Mr. Hongwei Qu, the Company’s current Chairman and Chief Executive Officer (“Mr. Qu”). Mr. Qu currently owns 96.7% of the outstanding equity interests of Bohai and two other shareholders who collectively own the remaining 3.3% of Bohai.

The VIE Agreements include (i) a Consulting Services Agreement, (ii) an Operating Agreement, and (iii) a Proxy Agreement, through which the WFOE has the right to advise, consult, manage and operate Bohai for an annual fee equal to all of Bohai’s yearly net profits after tax. Pursuant to these agreements, the WFOE indirectly owns but has 100% managerial and economic control of the business activities of Bohai including the right to appoint all executives and senior management and members of the board of directors of Bohai. Additionally, Bohai’s shareholders pledged their rights, titles and equity interest in Bohai as security for the WFOE to collect consulting and services fees provided to Bohai pursuant to an equity pledge agreement. In order to further reinforce the WFOE’s rights to control and operate Bohai, Bohai’s shareholders granted the WFOE an exclusive right and option to acquire all of their equity interests in Bohai through an option agreement. The VIE Agreements have perpetual terms unless otherwise determined by PRC law, and can (particularly in the case of the Consulting Services Agreement (which is the principal VIE Agreement) be terminated by the parties under certain circumstances, including material breach, the termination of Bohai’s business or a liquidation of Bohai. The WFOE (which is controlled indirectly by BPGI through Chance High) can also terminate the Consulting Services Agreement at will.

BPGI, its wholly owned subsidiary Chance High, WFOE, WFOE II, Bohai and Yantai Tianzheng are referred to herein collectively and as a consolidated basis as the “Company” or “we”, “us” or “our” or similar terminology. Mr. Qu currently serves the Company’s Chairman, Chief Executive Officer and President. As used herein, the term “Common Stock” means the common stock of BPGI, $0.001 par value per share.

BPGI is headquartered and maintains its principal operations in the city of Yantai, Shandong Province, China, and conducts business operations exclusively in the PRC.

8

Recent Developments

During the quarter ended December 31, 2012, management performed an evaluation of the Company’s product portfolio based on a confluence of factors that have emerged within China’s pharmaceutical industry and consumer markets. These factors include, among others, (i) current economic conditions in China and management’s expectations of future economic trends, (ii) changes in China’s Essential Drug Laws, (iii) the PRC Central Government’s policy designating lists of specific drugs eligible for reimbursement, (iv) consumers’ preference for drug delivery systems in the forms of pills, tablets and ingestible liquids, and (v) competition from other drug manufacturing companies within China. Based on these factors, management determined that the Company will streamline its operations to focus on the continued distribution of Lung Nourishing Syrup, Tongbi Capsules, Tongbi Tablets, Fangfengtongsheng Granule, and Zhengxintai Capsules and certain other products. As a consequence, management determined that it would be in the best interests of the Company and its stockholders to commit to a plan of (i) fully abandoning plans to create new products from a limited number of formulas purchase in 2005, and (ii) indefinitely suspending plans to develop and produce a more diversified portfolio that would be derived from a series of other approved formulas that the Company purchased in 2010 and 2005.

As a result, the Company (i) recorded an impairment charge of $1,688,486 for the aggregate carrying amount of certain product formulas that the Company will abandoned in their entirety, and (ii) reclassified $10,177,614 for the carrying amount of certain other product formulas that the Company will hold as defensive assets. Formulas to be held as defensive assets will be amortized over a period of 8 years (Note 6).

2. LIQUIDITY AND FINANCIAL CONDITION

The Company’s net income amounted to $3,159,206 and $14,813,455 for the three and nine-month periods ended March 31, 2013. The Company’s cash flows from operations amounted to $7,873,829 for the nine months ended March 31, 2013. The Company had working capital of approximately $22,455,790 as of March 31, 2013. The Company has historically financed its operations principally from cash flows generated from operating activities and external financing raised in the private placement of convertible notes described above.

On August 8, 2011, the Company, through WFOE II, signed a share transfer agreement with the shareholders of Yantai Tianzheng to acquire 100% of Yantai Tianzheng for total purchase consideration of US$35,000,000 (paid in its RMB equivalent, of which US$6,000,000 was paid as of the Execution Date of the acquisition and the remaining $29,000,000 was payable in series of installments which the Company is at its discretion, could elect to defer (Note 11). The Company paid $19,700,000 to date (of which $10,000,000 was paid during the six months ended March 31. 2013) and elected to defer $15,300,000. The Company also made $2,472,815 of individual income tax payments to tax authorities on behalf of the former Yantai Tianzheng shareholders concurrent with the $10,000,000 of principal payments. The tax payments made on behalf of the former Yantai Tianzheng shareholders were applied as a reduction of the remaining principal balance of the acquisition purchase price payable. As of March 31, 2013, the balance of $12,827,185 is payable as follows; $7,827,185 is due on August 8, 2014, and the remaining $5,000,000 is due on February 8, 2015.

The Company is expecting to gain the benefits of the economies of scale that management believes could be realized by having combined and streamlined the cost structures of the historical Bohai and the acquired Yantai Tianzheng businesses. As described above, the Company has committed to a plan of streamlining the combined business around a more focused portfolio of products that include non-prescription drug products acquired as part of the Yantai Tianzheng’s product portfolio.

On June 8, 2010, Yantai Tianzheng signed an agreement with Yantai Huanghai Construction Co. to construct certain portions of a factory. The total contract price amounted to approximately $3.07 million (RMB 19.5 million). Management estimates that construction is 85% completed and that the project will be completed by October 2013. The remaining commitment of the contract amounted to approximately $1.02 million (RMB 6.4 million) as of March 31, 2013.

On November 5, 2012, the Company acquired a new land use right of 266,668 square meters located in the high-tech development district of Laishan. The Company was granted the right to use the land for a period of 50 years at a total cost of approximately $19 million (RMB 120,000,000). As of March 31, 2013, the Company paid $6.37M (RMB 40,000,000). The Company is obligated to make two remaining installment payments of $6.37M (RMB 40,000,000) each by June 30, 2013 and December 31, 2013 (see Note 7).

9

The Company is also required to repay the remaining $8,464,500 convertible notes balance, which pursuant to four amendments to the original notes, is currently due on an extended maturity date of April 5, 2013. The Company is currently working with Euro Pacific as representative of the Investors on a fifth amendment to the Notes which would further extend the maturity date of the Notes from April 5, 2013 to April 5, 2014. In connection with such extension, the Company and Euro Pacific proposed to make a payment in the amount equal to 10% of the outstanding principal plus any accrued interest (at the current rate of 12% per annum) on each of April 5, 2013, October 5, 2013 and April 5, 2014.As of the date of this Quarterly Report, no written agreement has been entered into in this regard. The Company is unable to predict whether an agreement will be reached.

As described elsewhere herein, the Company has at times, been in temporary default of its obligation to repay the convertible notes at previously extended maturity dates. The Company is currently on default under the terms of the latest extended loan agreement. The Company cannot predict what the implications of the non-payment of the loan would be other than it would continue to experience difficulty converting sufficiency currency and will maintain an escrow account of restricted funds intended to secure their repayment. The non-payment of the notes could have a material adverse effect on the Company should the note holders pursue further action.

Management believes, based on the Company’s historical ability to fund operations using internally generated cash flow and the progress made towards integrating the business of Yantai Tianzheng, and subsequent commitment to focus on a more streamlined higher margin product portfolio, that the Company’s currently available cash and funds it expects to generate from operations and through potential short term loans financing from banks will enable it to operate the business and satisfy short term obligations through at least April 1, 2014. Notwithstanding, the Company still has substantial obligations as described herein and there is no assurance that unforeseen circumstances would not have a material adverse effect on the Company’s financial condition.

The Company will require significant additional capital in order to fund these obligations and execute its longer term business plan. If the Company is unable to generate sufficient operating cash flows or raise additional capital, or encounters unforeseen circumstances that place constraints on its capital resources, management will be required to take various measures to conserve liquidity. Such measures could include, but not necessarily be limited to, curtailing the Company’s business development activities (as was done recently when the Company determined to streamline its operations to focus on the continued distribution of a smaller number of key products as described in Note 1 above), suspending the pursuit of one or more elements of its business plan, and controlling overhead expenses. There is a material risk, and management cannot provide any assurances, that the Company will be able to raise additional capital if needed. The Company has not received any commitments for new financing, and cannot provide any assurance that new financing will be available to the Company on acceptable terms, if at all. The failure of the Company to fund its obligations when needed would have a material adverse effect on its business and results of operations.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of BPGI, its wholly-owned subsidiary Chance High, WFOE, WFOE II, Yantai Tianzheng and Bohai. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company, in determining whether it is required to consolidate investee businesses, considers both the voting and variable interest models of consolidation as required under applicable GAAP. The Company adopted FAS Accounting Standards Codification (“ASC”) 810-10-15-14 and also ASC 810-10-05-8, which requires that a VIE be consolidated if that company is entitled to receive a majority of the VIE’s residual returns and has direct ability to make decisions on all operating activities of the VIE. The Company controls Bohai through the VIE Agreements described in Note 1, under the following series of agreements entered into on December 7, 2009.

10

Under the Operating Agreement entered into between WFOE and Bohai, the WFOE has the direct ability to make decisions on all the operating activities and exercise all voting rights of Bohai. Under the Consulting Services Agreement entered into between WFOE and Bohai, Bohai agreed to pay all of its net income to WFOE quarterly as a consulting fee. Accordingly, WFOE has the right to receive the expected residual returns of Bohai. As such, the Company is the primary beneficiary of and maintains controlling managerial and financial interest in, Bohai in accordance with ASC 810-10-15-14. Accordingly, Bohai’s financial position and results of operations are consolidated with those of the Company for all periods presented.

We initially measured the assets, liabilities, and non-controlling interests of Bohai at their carrying amounts as of the date of the Share Exchange. We have subsequently accounted for the assets, liabilities, and non-controlling interest of Bohai as if it was consolidated based on voting interests. The usual accounting rules for which the VIE operates are applied as they would to a consolidated subsidiary as follows:

· Carrying amounts of the VIE are consolidated into the financial statements of the Company as the primary beneficiary, or Primary Beneficiary (“PB”); and

· Inter-company transactions and balances, such as revenues and costs, receivables and payables between or among the PB and the VIE(s) are eliminated in their entirety.

The carrying amount and classification of Bohai’s assets and liabilities included in the condensed consolidated balance sheets are as follows:

	March 31,		June 30,
	2013  (unaudited)		2012
Total current assets*	$	56,653,021	$	51,470,381
Total assets*		124,629,598		99,899,826
Total current liabilities**		24,275,690		11,689,137
Total liabilities**	$	27,799,131	$	15,277,230

*           Includes intercompany accounts in the amounts of $25,709,923 and $20,338,295 in current assets as of March 31, 2013 and June 30, 2012, respectively, that were eliminated in consolidation.

**          Includes intercompany accounts in the amounts of $3,462,798 and $2,490,528 in current liabilities as of March 31, 2013 and June 30, 2012, respectively, that were eliminated in consolidation.

Basis of Presentation

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2013 and the results of operations and cash flows for the periods presented. The results of operations for the nine months ended March 31, 2013 are not necessarily indicative of the operating results for the full fiscal year or any future period. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2012. The Company’s accounting policies are described in the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended June 30, 2012, filed on September 28, 2012, and updated, as necessary, in this Quarterly Report on Form 10-Q.

Business Segments

The Company’s operates its business through a single reporting segment.

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Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from those results.

Significant estimates and assumptions include allocating purchase consideration issued in business combinations, valuing equity securities and derivative financial instruments issued in financing transactions and in share-based payment arrangements, accounts receivable reserves, inventory reserves, and evaluating the carrying amounts and useful lives of intangible assets. Certain estimates, including accounts receivable and inventory reserves and the carrying amounts of intangible assets (including present value of future cash flow estimates for the Company’s pharmaceutical formulas) could be affected by external conditions including those unique to the Company’s industry and general economic conditions. It is reasonably possible that these external factors could have an effect on management’s estimates that could cause actual results to differ from management’s estimates.

Company management re-evaluates all of accounting estimates at least quarterly based on these conditions and records adjustments, when necessary.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. We maintain bank accounts in the PRC and a checking account in the United States of America that principally consist of demand deposits. We also have restricted cash accounts in the United States that include funds designated for interest payments due to convertible note holders and for use in investor relations programs pursuant to a securities purchase agreement.

Restricted Cash

The Company is required by its Note holders to maintain deposits in escrow accounts to fund the principal and interest payments under the Convertible Notes obligation. Escrow account balances amounted to $8,454,021 and $9,449,905 as of March 31, 2013 and June 30, 2012, respectively. As of March 31, 2013, the Company had one escrow account in China amounting to $8,447,427 and one escrow account in US amounting to $6,594. As of June 30, 2012, the Company had one escrow account in China amounting to $9,343,870 and one escrow account in US amounting to $106,035.

Accounts Receivable

Accounts receivable consists of amounts due from customers. We extend unsecured credit to our customers in the ordinary course of business but mitigate the associated risks by performing credit checks and actively pursuing past due accounts. Company’s credit terms generally range from 90 to 180 days. The Company’s policy with respect accounts receivable reserves is to establish an allowance for doubtful accounts based on management’s assessment of known requirements, aging of receivables, payment history, specific customer’s current credit worthiness, and the economic environment. The Company has a significantly low history of credit losses and no historical pattern of making any price or collection concessions with respect of its accounts receivable balances. Accordingly, an allowance for doubtful accounts is not considered necessary based on management’s assessment.

Inventories

Inventories are valued at the lower of cost, determined using the weighted average method, or market. Finished goods inventories include the costs of raw materials, direct labor and overhead associated with the manufacturing process. In assessing the ultimate realization of inventories, management makes judgments as to future demand requirements compared to current or committed inventory levels. Our reserve requirements generally increase/decrease due to management’s projected demand requirements, market conditions and product life cycle changes. As of March 31, 2013 and June 30, 2012, management does not believe that any inventory reserves are necessary.

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Property, Plant and Equipment

Property, plant and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets that range from 5 to 10 years for office equipment, machinery, and vehicles and 30 to 40 years for buildings. The cost of repairs and maintenance is charged to expense as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. We examine the possibility of impairment in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

Intangible Asset – Pharmaceutical Formulas

The Company has purchased pharmaceutical formulas that were approved by the State Food and Drug Administration of China (“SFDA”). These formulas can be renewed every 5 years without limitation for a minimum fee and are subject to certain protections under PRC drug regulations for an indefinite period of time. These regulations mitigate competition and the ability of other suppliers to replicate the Company’s products or produce comparable substitutes. These intangible assets are measured initially at cost not subject to amortization and are tested for impairment annually or in interim reporting periods if events or changes in circumstances indicate that the carrying amounts of these intangible assets might not be recoverable.

During the second quarter of our fiscal year ended June 30, 2013, we determined that we will no longer manufacture or seek to develop a market for ten of our products due to a change in our business strategy as more fully described in notes 1 and 2. As a result of this decision, we recorded an impairment charge in the amount of $1,668,486 during the quarter ended December 31, 2012. In addition to the above, we reclassified certain other formulas with an aggregate carrying amount of $10,177,615 to other intangible assets. The Company has suspended plans to develop and manufacture products to be derived from these formulas but intends to retain them to mitigate competition and maintain the option of using these formulas should they be useful in the future. Accordingly, the Company has determined these formulas, which are approved by the State Food and Drug Administration, should be held as defensive assets. The Company determined that there formulas have an estimated useful life of 8 years as defensive assets.

Fair Value Measurements and Fair Value of Financial Instruments

We adopted the guidance of ASC 820 for fair value measurements, which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the condensed consolidated balance sheets for cash, accounts receivable, other receivables, short-term borrowings, accounts payable and accrued expenses, customer advances, and amounts due from related parties approximate their fair market value based on the short-term maturity of these instruments.

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ASC 825-10 “ Financial Instruments, ” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. We use Level 3 inputs to value the Company’s derivative liabilities.

The following table reflects gains and losses for the three and nine months ended March 31, 2013 for all financial assets and liabilities categorized as Level 3.

	Three  months  (unaudited)
Liabilities:
Balance of warrant liabilities as of December 31, 2012	$	0
Change in the fair value of warrant liabilities		0
Balance of warrant liabilities as of March 31, 2013	$	0

	Nine months (unaudited)
Liabilities:
Balance of warrant liabilities as of June 30, 2012	$	1,211,236
Change in the fair value of warrant liabilities		(1,211,236	)
Balance of warrant liabilities as of March 31, 2013	$	0

Estimating the fair value of derivative financial instruments require the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. The assumptions used to value the Company’s derivatives, which had a direct effect on the fair values described above are more fully described in Note 10. In addition, valuation techniques are sensitive to changes in the trading market price of the our Common Stock and its estimated volatility interest rate changes and other variables or market conditions not within the Company’s control that can significantly affect management’s estimates of fair value and changes in fair value. Because derivative financial instruments are initially and subsequently carried at fair value, the Company’s net income may include significant charges or credits as these estimates and assumptions change.

The warrants expired on January 5, 2013. At the expiration time, the portion of this warrant not exercised prior thereto shall be and become void and of no value and this warrant shall be terminated and shall no longer be outstanding.

Foreign Currency Translation

The Company’s reporting currency is the U.S. dollar. The functional currency of the Company’s operating business based in the PRC is the RMB. For the Company’s subsidiaries and affiliates whose functional currencies are the RMB, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the exchange rate in effect as of the end of the period, and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the functional currency financial statements into U.S. dollars are included in comprehensive income.

Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods. All of the Company’s revenue transactions are transacted in the functional currency. The Company has not entered into any material transactions that are either originated, or to be settled, in currencies other than the RMB. Accordingly, transaction gains or losses have not had, and are not expected to have a material effect on the Company’s results of operations.

Period end exchange rates used to translate assets and liabilities and average exchange rates used to translate results of operations in each of the reporting periods are as follows:

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	Nine months ended March 31, 2013		Nine months ended March 31, 2012
Period end US$: RMB exchange rate		6.2741		6.3185
Average periodic US$: RMB exchange rate		6.3000		6.3626

Period end US$: RMB exchange rate as of June 30, 2012 is 6.3143. The RMB is not freely convertible into any other currencies. In addition, all foreign exchange transactions in the PRC must be conducted through authorized institutions. Accordingly, management cannot provide any assurance that the RMB underlying the condensed consolidated financial statement amounts could have been, or could be, converted into US dollars at the exchange rates used to translate the functional currency into the reporting currency.

Revenue Recognition

Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to distributors. Pursuant to the guidance of ASC Topic 605 and ASC Topic 36, revenue is recognized when all of the following criteria are met:

· 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.

We account for sales returns by establishing an accrual in an amount equal to management’s estimate of sales recorded for which the related products are expected to be returned. We determine the estimate of the sales return accrual primarily based on the Company’s historical experience regarding sales returns, but also by considering other factors that could impact sales returns. These factors include levels of inventory in the distribution channel, estimated shelf life, product discontinuances, and price changes of competitive products, introductions of generic products and introductions of competitive new products. For the three and nine months ended March 31, 2013 and 2012, the Company’s sales return rate is low and deemed immaterial and accordingly, no provision for sales returns was recorded.

Shipping costs

Shipping costs are included in selling, general and administrative expense. Shipping costs amounted to $216,032 and $336,813 for the three months ended March 31, 2013 and 2012, respectively. Shipping costs amounted to $770,013 and $970,542 for the nine months ended March 31, 2013 and 2012, respectively.

Advertising

Advertising and promotion costs are charged to expense as incurred. Advertising expense included in selling, general and administrative expenses amounted to $127,643 and $1,931,103 for the three months ended March 31, 2013 and 2012, respectively. Advertising expenses included in selling, general and administrative expenses amounted to $127,643 and $3,347,822 for the nine months ended March 31, 2013 and 2012, respectively.

Income Taxes

We are governed by the PRC’s Income Tax Laws and the Internal Revenue Code of the United States. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement and income tax base of assets and liabilities and operating loss and tax credit carry-forwards. Deferred tax assets are reduced by a valuation allowance to the extent that management concludes it is more likely than not that the benefit of such tax assets will not be realized in future periods. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the periods that include the enactment date.

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We account for certain tax positions based upon authoritative guidance that prescribes a recognition threshold and measurement processes for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance also provides direction on recognition, classification, interest and penalties, accounting in interim periods and related disclosure.

Our policy is to classify assessments, if any, for tax related to interest as interest expense and penalties as general and administrative expense.

Earnings per Share

We report earnings per share in accordance with ASC Topic 260, “Earnings Per Share”. Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Common equivalent shares are excluded from the computation of diluted shares in periods for which they have an anti-dilutive effect. Diluted shares underlying stock options and common stock purchase warrants are included in the determination of diluted earnings per share using the treasury stock method. Diluted shares underlying convertible debt obligations are included in the determination of diluted loss per share using the “if converted” method (Note 13).

4. INVENTORIES

Inventories consist of the following:

	March 31,		June 30,
	2013  (unaudited)		2012
Raw materials	$	2,091,824	$	2,079,480
Work in progress		523,414		882,005
Finished goods		487,063		834,430
Total inventories	$	3,102,301	$	3,795,915

5. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consist of the following:

	March 31,			June 30,
	2013  (unaudited)			2012
Buildings	$	8,985,752		$	8,928,545
Plant equipment		3,103,169			2,490,764
Office equipment		234,596			208,539
Motor vehicles		287,441			285,610
Total		12,610,958			11,913,458
Less: accumulated depreciation		(2,631,405	)		(2,188,340	)
Construction in progress		2,131,921			1,956,154
Property, plant and equipment, net	$	12,111,474		$	11,681,272

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Depreciation expense for property, plant and equipment for the three months ended March 31, 2013 and 2012 amounted to $139,789 and $142,733, respectively. Depreciation expense for property, plant and equipment for the nine months ended March 31, 2013 and 2012 amounted to $427,279 and $ 379,124, respectively.

On June 8, 2010, Yantai Huanghai Construction Co. signed an agreement with Yantai Tianzheng to perform certain portions of a factory construction located at the premises of Yantai Tianzheng. The total contract price is approximately $3.07 million (RMB 19.5 million) and the construction is estimated to be completed by the end of April 2013. The remaining commitment of the contract was approximately $1.02 million (RMB 6.4 million) as of March 31, 2013.

6. INDEFINITE LIVED INTANGIBLE ASSETS – PHARMACEUTICAL FORMULAS

The Company purchased, and currently owns exclusive rights to, a series of pharmaceutical formulas that were approved by the SFDA. This asset includes 12 formulas that are included in the Chinese government’s Essential Drug List (“EDL”) and 25 medicines included in the National Drug Reimbursement List (“NDRL”). The intellectual property underlying these formulas can be renewed every 5 years without limitation for a nominal fee and are subject to certain protections under PRC drug regulations for an indefinite period of time. These regulations mitigate competition and the ability of other suppliers to replicate the Company’s products or produce comparable substitutes. These intangible assets are measured initially at cost not subject to amortization and are tested for impairment annually or in interim reporting periods if events or changes in circumstances indicate that the carrying amounts of these intangible assets might not be recoverable.

Pharmaceutical formulas with indefinite lives consist of the following:

	March 31, 2013 (unaudited)		June 30, 2012
Pharmaceutical formulas, without amortization, at cost	$	13,899,132	$	25,610,557

During the three months period ended December 31, 2012, the Company recorded an impairment charge of $1,688,486,for a limited number of products formulas purchased in 2005 that will no longer be used to develop products. The Company also reclassified $10,177,614 for the cost of certain other SFDA approved drug formulas that the Company will retain as defensive assets, to other intangible assets (Notes 1 and 2). The Company has made a determination that that is in the Company best interests to retain these formulas to mitigate competition and provide the Company with the option of using them in future development efforts should it be advantageous to do so.

7. LONG TERM PREPAYMENTS - LAND USE RIGHTS, NET

	March 31,			June 30,
	2013  (unaudited)			2012
Land use rights, at cost	$	39,496,560		$	20,240,623
Less: Accumulated amortization		(2,162,031	)		(1,501,326	)
Intangible assets – land use rights, net	$	37,334,529		$	18,739,297

The Company acquired a new land use right for 266,668 square meters on November 5, 2012. The Company was granted the right to use the land for a period of 50 years at a cost paid of approximately $19m (RMB 120,000,000). As of March 31, 2013, the Company has made a payment of $6.37M (RMB 40,000,000). The Company is obligated to make two remaining installment payments of $6.37M each by June 30, 2013 and December 31, 2013.

There is no private ownership of land in the PRC. All land is owned by the government, which grants land use rights for specified periods of time. Amortization expense for land use rights amounted to $259,027 and $154,252 for the three months ended March 31, 2013 and 2012, respectively.

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Amortization expense for land use rights amounted to $648,409 and $427,133 for the nine months ended March 31, 2013 and 2012, respectively.

Amortization is calculated over a period of 30-50 years. Amortization of land use rights for fiscal years ending subsequent to March 31, 2013 is as follows:

	Amortization
Remainder of FY2013	$	259,027
2014		1,036,106
2015		1,036,106
2016		1,036,106
2017		1,036,106
Thereafter		32,931,078
Total	$	37,334,529

8. OTHER INTANGIBLE ASSETS, NET

Other Intangible assets, net includes customer relationships and certain prescription drug product formulas. The Company acquired these assets in its business combination with Yantai Tianzheng. Customer relationships are amortized on a straight line basis over periods of 5 and 8 years. Pharmaceutical formulas are amortized on a straight line basis over periods of 7 to 8 years.

$10,177,614 for the carrying amount of certain other product formulas that the Company will hold as defensive assets reclassified from indefinite life drug formulas that will be amortized over a period of 8 years.

Other intangible assets at March 31, 2013 as follow:

	Customer			YTP Drug			Defensive
	Relationships			Formulas			Drug formulas			Total
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Cost	$	14,578,346		$	10,186,481		$	10,177,614		$	34,942,441
Accumulated Amortization		(3,247,796	)		(2,235,478	)		(636,101	)		(6,119,375	)
Net carrying amount	$	11,330,550		$	7,951,003		$	9,541,513		$	28,823,066

Amortization expense for customer relationships amounted to $463,396 and $460,711 for the three months ended March 31, 2013 and 2012, respectively. Amortization expense for customer relationships amounted to $1,386,190 and $1,382,132 for the nine months ended March 31, 2013 and 2012, respectively.

Amortization expense for YTP drug formulas amounted to $320,325 and $0 for the three months ended March 31, 2013 and 2012, respectively. Amortization expense for YTP drug formulas amounted to $958,212 and $0 for the nine months ended March 31, 2013 and 2012, respectively.

Amortization expense for defensive drug formulas amounted to $317,200 and $0 for the three months ended March 31, 2013 and 2012, respectively. Amortization expense for defensive drug formulas amounted to $633,486 and $0 for the nine months ended March 31, 2013 and 2012, respectively. Amortization expenses are recorded in general and administrative expenses.

Amortization expense for fiscal years ending subsequent to March 31, 2013 is as follows:

	Amortization
Remainder of FY2013	$	1,098,210
2014		4,392,842
2015		4,392,842
2016		4,392,842
2017		4,392,842
Thereafter		10,153,488
Total	$	28,823,066

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9. ACCRUED EXPENSES

Accrued expense consists of the following:

	March 31,		June 30,
	2013  (unaudited)		2012
Other accrued expense	$	797,149	$	1,557,472
Sales representatives commission and expenses		3,246,027		3,778,996
Other taxes payable		1,750,283		1,879,334
Compensation and related cost		282,816		357,975
Interest		1,029,846		516,269
Advertising expense		0		388,008
Total	$	7,106,121	$	8,478,054

10. CONVERTIBLE PROMISSORY NOTES IN DEFAULT AND DUE ON DEMAND

Convertible Notes

On January 5, 2010, pursuant to a Securities Purchase Agreement (the “Securities Purchase Agreement”) with 128 accredited investors (the “Investors”), BPGI sold 6,000,000 units for aggregate gross proceeds of $12,000,000, each unit consisting of an 8% senior convertible promissory note in the principal amount of $2 and one Common Stock purchase warrant (collectively, the “Investor Warrants”). By agreement with the Investors, each investor received: (i) A single Note representing the aggregate number of Notes purchased by them as part of the units (each, a “Note” and collectively, the “Notes”) and (ii) a single Investor Warrant exercisable at $2.40 per share subject to certain anti-dilution provisions. The majority of this debt is guaranteed by third-parties and our CEO, Mr. Qu, and a portion is secured by our inventories and fixed assets.

The Notes originally bore interest at 8% per annum, payable quarterly in arrears on the last day of each fiscal quarter of the Company. Principal was originally due on January 5, 2012. Each Note, plus all accrued but unpaid interest thereon, is convertible, in whole but not in part, at any time at the option of the holder, into shares of Common Stock at a conversion price of $2.00 per share, subject to adjustments for certain anti-dilution provisions.

The Convertible Notes were initially recorded at a discounted carrying amount of zero as a result of having allocated a portion of the proceeds to (i) the fair value of the warrants, which were recorded as liabilities stated at fair value, and (ii) a beneficial conversion feature that was not bifurcated as a free standing derivative at the time of issuance or at subsequent reporting dates based on periodic classification assessments. Accretion of the note discount amounted to $0 and $720,196 for the three months ended March 31, 2013 and 2012, respectively. Accretion of the note discount amounted to $0 and $9,317,898 for the nine months ended March 31, 2013 and 2012, respectively. Accretion of the discount was recorded as a component of interest expense in the accompanying statements of income and comprehensive income. Contractual interest expense amounted to $253,935 and $1,073,302for the three months ended March 31, 2013 and 2012, respectively. Original contractual effective interest expense amounted to $815,326 and $10,561,143 for the nine months ended March 31, 2013 and 2012, respectively.

The Notes contain certain events of default, including non-payment of interest or principal when due, bankruptcy, failure to maintain a listing of the Common Stock or to make required filings on a timely basis. No premium is payable by us if an event of default occurs. However, upon an Event of Default, and provided no more than 50% of the aggregate face amount of the Notes have been converted, the Investors holding Notes have the right to receive a portion, based on their pro-rata participation in the transaction, of 1,000,000 shares of our Common Stock that have been placed in escrow by our principal shareholder. The shares in escrow will be returned to our principal shareholder when 50% of the aggregate face amount of the Notes has been converted or, if later, when the Notes are repaid.

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On December 31, 2011, the Company’s Chinese operating subsidiary determined it was unable to convert a sufficient number of RMB’s needed to repay the notes on their original maturity date of January 5, 2012. As a result, the Company entered into a series of amendments to the Notes with Euro Pacific as representative of the Investors to extend to the maturity date and increase the interest rate on the Notes. Pursuant to the most recent amendment, the maturity date of the notes was extended April 5, 2013 and the interest rate was increased to 12% per annum. The Company is negotiating with Euro Pacific to extend the maturity date to April 5, 2014 and in connection with such extension, the Company and Euro Pacific proposed to make a payment in the amount equal to 10% of the outstanding principal plus any accrued interest (at the current rate of 12% per annum) on each of April 5, 2013, October 5, 2013 and April 5, 2014.

On June 27, 2012, Euro Pacific also agreed to release us from certain restrictions on our ability to incur debt, to incur liens or to make capital expenditures as stipulated in the note agreement. The purpose of the Third Amendment is to provide us with enhanced flexibility to seek potential sources of financing.

The Company has been and is currently in temporary default of this obligation at previously extended maturity dates. Should the Company be unable to repay the notes in time and in the absence of a further extension of the maturity date, this circumstance would constitute an event of default under the terms of loan agreement. The Company cannot predict what the implications of the non-payment of the loan would be other than it would continue to experience difficulty converting sufficiency currency and will maintain an escrow account of restricted funds intended to secure their repayment. The non-payment of the notes could have a material adverse effect on the Company should the note holders pursue further action.

As of March 31, 2013 and June 30, 2012, the Company’s principal shareholder, Mr. Qu, is obligated to deliver 1,000,000 shares of Common Stock to the Investors if certain Events of Default occur.

11. ACQUISITION PURCHASE PRICE PAYABLE

On August 8, 2011, the Company, through WFOE II, acquired 100% of Yantai Tianzheng’s equity interests for total purchase consideration of US$35,000,000 (paid in its RMB equivalent) of which US$6,000,000 was paid as of the Execution Date of the acquisition the remaining $29,000,000 was due in a series of contractual installments.

Certain provisions in the acquisition agreement provided the Company with the ability to elect, at its own discretion, to automatically convert any portion or all of the installment payments due into a two-year term loan, with interest accruing at the rate of six percent (6%) per annum.

As of March 31, 2013, $19,700,000 was paid. The Company also made $2,472,815 of individual withholding tax payments on behalf of the former Yantai Tianzheng shareholders including $10,000,000 of principal paid during the three months ended March 31, 2013. The $2,472,815 of withholding tax payments were applied as a reduction of the remaining balance of the acquisition purchase price payable. As of March 31, 2013, the balance of $12,827,185 is payable as follows; $7,827,185 is due on August 8, 2014, and the remaining $5,000,000 is due on February 8, 2015.

12. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

(a) Contract Research and Development Arrangement

On May 2009, the Company entered into a contract with Yantai Tianzheng Medicine Research and Development Co. to perform research and development on two new pharmaceutical products, namely Fern Injection and Forsythia Capsule. The total contract price is approximately $2,345,509 (RMB 15,000,000). Yantai Tianzheng Medicine Research and Development Co. committed to complete all research work required for the clinical trial within 3 years. As of March 31, 2013, the Company has paid $2,087,159 (RMB 13,095,044) and the remaining contract amount will be paid as the research services are performed. All payments of $2,087,159 (RMB 13,095,044) have been expensed. The Company extended the term of the contract to May 10, 2017 due to certain changes in government regulations that affected this research project. Research and development costs associated with this contract amounted to $0 for the nine months ended March 31, 2013 and 2012.

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(b) Supplier Concentrations

We have the following concentrations of business with each supplier constituting greater than 10% of the Company’s purchases of raw materials or other supplies:

	Three months			Three months			Nine months			Nine months
	ended			ended			ended			ended
	March 31,			March 31,			March 31,			March 31,
	2013 (unaudited)			2012 (unaudited)			2013 (unaudited)			2012 (unaudited)
Shandong Yantai Medicine Procurement and Supply Station		43.2	%		16.2	%		31.8	%		13.4	%
Anhui DeChang Pharmaceutical Co. Ltd.		*	%		14.5	%		*	%		16.1	%
Shanxi Guangsheng Capsule Co., Ltd.		10.4	%		*	%		*	%		*	%
Yantai Tianyi Bee Technology Development Co., Ltd.		10.2	%		*	%		*	%		*	%

* Constitutes less than 10% of the Company’s purchases.

We had a commitment to purchase certain raw materials totaling $2,290,299 as of March 31, 2013 that was fulfilled upon the delivery of the goods in April 2013.

(c) Sales Product Concentrations

Five of the Company’s products, namely Tongbi Capsules, Tongbi Tablets, Lung Nourishing Syrup, Zhengxintai Capsules and Fangfengtongsheng Tablets represented approximately 29.2 %, 12.3%, 22.9%, 12.8% and 19.6%, respectively, of total sales for the three months ended March 31, 2013.

Five of the Company’s products, namely Tongbi Capsules, Tongbi Tablets, Lung Nourishing Syrup, Zhengxintai Capsules and Fangfengtongsheng Tablets represented approximately 31.0%, 12.1%, 18.2%, 11.8% and 17.7%, respectively, of total sales for the nine months ended March 31, 2013.

Five of our products, namely Tongbi Capsules, Tongbi Tablets, Lung Nourishing Syrup, Zhengxintai Capsules and Fangfengtongsheng Tablets represented approximately 22.3%, 8.8%, 16.0%, 11.1% and 20.5%, respectively, of total sales for the three months ended March 31, 2012.

Five of our products, namely Tongbi Capsules, Tongbi Tablets, Lung Nourishing Syrup, Zhengxintai Capsules and Fangfengtongsheng Tablets represented approximately 22.6%, 9.1%, 16.8%, 10.4% and 18.3%, respectively, of total sales for the nine months ended March 31, 2012.

(d) Economic and Political Risks

The Company’s operations are conducted solely in the PRC. There are significant risks associated with doing business in the PRC, which include, among others, political, economic, legal and foreign currency exchange risks. The Company’s results may be adversely affected by changes in political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

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(e) Concentrations of Credit Risk

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is deposited in state-owned banks within the PRC, and no deposits are covered by insurance. We have not experienced any losses in such accounts and believe that the Company’s loss exposure is insignificant due to the fact that banks in the PRC are state owned and are generally high credit quality financial institutions. A significant portion of the Company’s sales are credit sales which are made primarily to customers whose ability to pay are dependent upon the industry economics prevailing in these areas. We continually monitor the credit worthiness of the Company’s customers in an effort to reduce credit risk.

At March 31, 2013 and June 30, 2012, the Company’s cash balances by geographic area were as follows:

	March 31,				June 30,
	2013  (unaudited)				2012
Country:
United States	$	13,602	0.36	%	$	23,406	0.13	%
China		3,741,998	99.64	%		18,362,882	99.87	%
Total cash and cash equivalents	$	3,755,600	100	%	$	18,386,288	100	%

(f) Certificate of land use right

The Company’s corporate headquarters is located at No. 9 Daxin Road, Zhifu District, Yantai, Shandong Province in China. Under the current PRC laws, land is owned by the state, and parcels of land in rural areas which are known as collective land are owned by the rural collective economic organization. “Land use rights” are granted to an individual or entity after payment of a land use right fee is made to the applicable state or rural collective economic organization. Land use rights allow the holder of the right to use the land for a specified long-term period.

We have 5 land use rights, for a total of approximately 3,675,364 square meters of land on which the Company maintains its manufacturing facility.

The Company has not obtained a land use right certificate for two piece of land located in the high-tech development district of Laishan district, including an area of 266,668 square meters expiring in 2052 and an area of 3,333,335 square meters expiring in expiring in 2051. In the process of the planning of Yantai City, the usage of the aforesaid land use right has been changed from “industrial use” to “commercial use” and therefore, the approval process for the land use right certificates on five relevant parcels of land including the land occupied by us is suspended until the completion of the planning. We cannot provide any assurance that the Company will eventually obtain the land use right certificate for this land. If the Company is asked by the local government to relocate the Company’s facility, management believes that estimated relocation and other costs will be reimbursed by the local government. The Company does not believe that a requirement to relocate operations would have a material adverse effect on the business.

(g) Business insurance

Business insurance is not readily available in the PRC. To the extent that the Company suffers a loss of a type that would normally be covered by insurance in the United States, such as product liability and general liability insurance, the Company would incur significant expenses in both defending any action and in paying any claims that could result from a settlement or judgment.

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13. NET INCOME PER SHARE

Basic earnings per share are computed on the basis of the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average number of shares of Common Stock plus the effect of potentially dilutive common shares outstanding during the period using the if-converted method for the convertible debt and equity securities and the treasury stock method for stock options and common stock purchase warrants. The following table sets forth the computation of basic and diluted net income per common share:

	Three months		Three months		Nine months		Nine months
	ended		ended		ended		ended
	March 31,		March 31,		March 31,		March 31,
	2013		2012		2013		2012
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Net income available to common stockholders-basic	$	3,159,206	$	5,303,918	$	14,813,455	$	6,664,200
Effective interest on convertible notes and amortization of debt issue costs		253,935		1,073,302		815,326		10,561,142
Net income available for common shareholders – diluted	$	3,413,141	$	6,377,220	$	15,628,781	$	17,225,342
Weighted average number of common shares outstanding - basic		17,861,085		17,861,085		17,861,085		17,861,085
Common shares if converted from Convertible Debt		4,232,250		5,225,000		4,232,250		5,225,000
Weighted average number of common shares outstanding - diluted		22,093,335		23,086,085		22,093,335		23,086,085
Earnings (loss) per share:
Basic	$	0.18	$	0.30	$	0.83	$	0.37
Diluted	$	0.15	$	0.28	$	0.71	$	0.37

14. OPERATING EXPENSE

For the three and nine months ended March 31, 2013 and 2012, operating expenses consisted of the following:

	Three months ended		Three months ended		Nine months ended		Nine months ended
	March 31, 2013 (unaudited)		March 31, 2012 (unaudited)		March 31, 2013 (unaudited)		March 31, 2012 (unaudited)
Sales Commissions	$	17,740,073	$	17,048,785	$	53,897,326	$	43,716,262
Advertising expense		127,643		226,328		127,643		3,347,822
Audit fees and consulting expenses		18,432		8,226		200,708		74,477
Depreciation and amortization		1,378,027		634,116		3,680,122		1,881,177
Staff costs (salary & welfare)		1,399,910		827,459		2,406,436		1,922,393
Other operating expenses		1,190,035		1,042,714		3,597,902		3,805,978
Impairment of drug formula		0		0		1,688,486		0
Total Operating expenses	$	21,854,120	$	19,787,628	$	65,598,623	$	54,748,109

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15. INCOME TAXES

The Company is incorporated under the laws of State of Nevada in the United States of America and has legal subsidiaries in the British Virgin Islands (“BVI”) and the PRC. The Company does not have any employees or assets nor or is it engaged in any income producing activities in the Unites States and in the BVI. The Company is currently filing Federal income tax returns in the United States and applicable franchise tax returns in the state of Nevada. The Company’s net operating losses that may be available to offset future taxable income in the United States, if any, amount to approximately $9,000,000 and expire through 2031. The Company has fully reserved for these and all other deferred tax assets generated in the Company’s US operations since it currently more likely than not that those assets will not be realized in future periods.

The Company’s only income producing activities are in the PRC. The statutory corporation income tax rate in the PRC is 25%, which is approximately equal to the effective income tax rate that the Company expects to use when recording income tax expense for financial reporting purposes for the year ending June 30, 2013. Accordingly, the Company is recording a tax provision at interim reporting dates for taxable income earned in the PRC using the effective rate expected to be in effect for the year ending June 30, 2013.

16. VIE

To satisfy PRC laws and regulations, the Company conducts certain business in the PRC through the VIEs.

As a result of the VIE Agreements signed between Yantai Shencaojishi Pharmaceuticals Co., Ltd (“WFOE”) and Yantai Bohai Pharmaceuticals Group Co. Ltd (“Bohai”), the Company includes the assets, liabilities, revenues and expenses of Bohai(the “VIE”) in its consolidated financial statements.

Substantially all of the Company’s assets, including those of Bohai which is considered the VIE and Yantai Tianzheng, which is an acquired subsidiary of the Company are accessible to Bohai through WFOE II creditors irrespective of the VIE arrangement.

The VIE Agreements include:

Equity Interest Pledge Agreement. The WFOE and Bohai Shareholders have entered into Equity Interest Pledge Agreements, pursuant to which each Bohai Shareholder has pledged all of his shares of Bohai to the WFOE in order to guarantee cash-flow payments under the applicable Consulting Services Agreement. The Equity Pledge Agreement further entitles the WFOE to collect dividends from Bohai during the term of the pledge.

Consulting Service Agreement. Bohai and the WFOE has entered into a Consulting Services Agreement, which provides that the WFOE will be the exclusive provider of technology services to Bohai and Bohai will pay all of its net income based on the quarterly financial statements to the WFOE for such services. Any such payment from the WFOE to the Company would need to comply with applicable Chinese laws affecting payments from Chinese companies to non-Chinese companies. See “Risk Factors – Risks Associated With Doing Business in China.”

Operating Agreement. Pursuant to the operating agreement among the WFOE, Bohai and each of Bohai Shareholder, the WFOE provides guidance and instructions on Bohai’s daily operations and financial affairs. The Bohai Shareholders must designate the candidates recommended by the WFOE as their representatives on their respective boards of directors. The WFOE has the right to appoint senior executives of Bohai. In addition, the WFOE agrees to guarantee Bohai’s performance under any agreements or arrangements relating to Bohai’s business arrangements with any third party. Bohai, in return, agrees to pledge its accounts receivable and all of its assets to the WFOE. Moreover, Bohai agrees that without the prior consent of the WFOE, Bohai will not engage in any transactions that could materially affect its assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a third party or transfer of any agreements relating to its business operation to any third party.

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These contractual arrangements may not be as effective in providing the Company with control over the VIEs as direct ownership. Due to its VIEs structure, the Company has to rely on contract right to effect control and management of the VIEs, which exposes it to the risk of potential breach of contract by the shareholders of Yantai Bohai Pharmaceuticals Group Co. Ltd. The VIE Agreements are subject to significant risks as set forth in the following risk factors.

Ÿ The PRC government may determine that the VIE Agreements used to control the Company’s operating subsidiary Bohai are not in compliance with applicable PRC laws, rules and regulations and that they are therefore unenforceable.

Ÿ There are risks involved with the operation of Bohai under the VIE Agreements. The Company has been advised by PRC legal counsel that if the PRC government determines the VIE Agreement used to control the operating company to be unenforceable as they circumvent the PRC restrictions relating to foreign investment restrictions, the relevant regulatory authorities would have broad discretion in dealing with such breach and could have a material adverse impact on our business, financial condition and results of operations.

Ÿ The Company depend upon the VIE Agreements in conducting its production, manufacturing, and distribution of traditional Chinese herbal medicines in the PRC, which may not be as effective as direct ownership.

Ÿ The Company conduct its production, manufacturing and distribution of traditional Chinese herbal medicines in the PRC and generate the revenues from the Bohai business through the VIE Agreements. The VIE Agreements may not be as effective in providing us with control over Bohai as direct ownership. The VIE Agreements are governed by PRC laws and provide for the resolution of disputes through arbitration proceedings pursuant to PRC laws. Accordingly, the VIE Agreements will be interpreted in accordance with PRC laws. If Bohai or its Shareholders fail to perform the obligations under the VIE Agreements, the Company may have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, and there is a risk that the Company may be unable to obtain these remedies. The legal environment in China is not as developed as in other jurisdictions. As a result, uncertainties in the PRC legal system could limit the Company’s ability to enforce the VIE Agreements.

Ÿ The pricing arrangement under the VIE Agreements may be challenged by the PRC tax authorities.

Ÿ The Company could face adverse tax consequences if the PRC tax authorities determine that the VIE Agreements were not entered into based on arm’s length negotiations. If the PRC tax authorities determine that the VIE Agreements were not entered into on an arm’s length basis, they may adjust the income and expenses of the Company for PRC tax purposes which could result in higher tax liability

17. SUBSEQUENT EVENTS

On May 7, 2013, the Company entered into a $4,776,000 credit arrangement (RMB 30,000,000) , with Weihai City Commercial Bank (the “Bank”). The current amount of credit owed to the Bank under the facility obtained in May 7, 2013 has a 6 month maturity. The Company paid a facility fee of approximately $4,800 to the bank at the inception of the arrangement. The Company entered into this credit following its execution of third party guaranty arrangement between the Company, the Bank and Laishan public assets management LLP (“Laishan”) in April 2013 (the “Guaranty”). Under the terms of the Guaranty, Laishan has agreed to act as guarantor of up to $4,776,000 (RMB 30,000,000) of any credit extended by the Bank to the Company at any time during the period of April 25, 2013 through April 25, 2014. Any amounts due to Laishan pursuant to the terms of the Guaranty shall be subordinate to any amounts owed to the Bank.

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Item 2. Management’s Discussion and Analysis of Financial Conditions of Operations.

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in our unaudited condensed consolidated financial statements for the nine months ended March 31, 2013, and should be read in conjunction with such financial statements and related notes included in this report.  Those statements in the following discussion that are not historical in nature should be considered to be forward looking statements that are inherently uncertain. Actual results and the timing of the events may differ materially from those contained in these forward looking statements due to a number of factors, including those discussed in the “Cautionary Note on Forward Looking Statements” set forth elsewhere in this Report.

Overview

We are engaged in the production, manufacturing and distribution in China of herbal pharmaceuticals based on traditional Chinese medicine, which we refer to herein as Traditional Chinese Medicine, or TCM. We are based in the city of Yantai, Shandong Province, China and our operations are exclusively in China.

Our medicines address rheumatoid arthritis, viral infections, gynecological diseases, cardio vascular issues and respiratory diseases. Our initial operating subsidiary Bohai obtained Drug Approval Numbers (or DANs) for 29 varieties of traditional Chinese herbal medicines in 2004, an additional 14 varieties in December 2010. Through our acquisition of Yantai Tianzheng in August 2011, we obtained DANs for another 5 varieties in August 2011. We currently produce 7varieties of approved traditional Chinese herbal medicines in seven delivery systems: tablets, granules, capsules, formulations, concentrated powder, tincture and medicinal wine. Of these 7 products, 5 of which are prescription drugs and 2 of which are over the counter (or OTC) products.

Three of Bohai’s lead products, Tongbi Capsules and Tablets and Lung Nourishing Syrup, were eligible for reimbursement under China’s National Medical Insurance Program (or NRDL). In addition to these lead products, three of our current products and five of our formulas we acquired in 2010 are eligible for NRDL reimbursement. As a significant development, Lung Nourishing Syrup, one of the Company's key products, has been included in the new national "Essential Drugs List" (or EDL) issued by the Ministry of Health of China on March 15, 2013. The new EDL superseded its previous version formerly issued in 2009 and became effective on May 1, 2013. In addition to Lung Nourishing Syrup, the Company , through Yantai Tianzheng, manufactures another product, Fangfengtongsheng Granule, which was listed in the 2009 version and is again included in the new EDL. The Company believes the inclusion on EDL and/or NRDL would significantly increase the marketability of our products because inclusion on either the EDL or NRDL allows for up to 100% insurance coverage by the Chinese government. All rural hospitals/clinics in China have been mandated by law to limit their prescriptions to just EDL listed products. All level 2 and above hospitals in China have been mandated by law to limit their prescriptions to EDL and NRDL listed products. The inclusion on the EDL would thus substantially expand the distribution network for Lung Nourishing Syrup and Fangfengtongsheng Granule, especially in the rural areas, where a majority of China's population resides. In addition, Yantai Tianzheng owns five prescription products approved by the State Food and Drug Administration of China (which we refer to herein as the SFDA) and currently manufactures two of such products. Among Yantai Tianzheng’s products, Fangfengtongsheng Granule, as discussed above, has an exclusive status and is on the EDL and NDRL, and Zhengxintai Capsule is in the process of renewal for its protective status and is currently under the NDRL.

Prior to January 5, 2010, we were a public “shell” company operating under the name “Link Resources, Inc.” On January 5, 2010, we consummated a share exchange transaction (the “Share Exchange”) pursuant to which we acquired Chance High, the indirect parent company of Bohai, our principal operating subsidiary, which is a Chinese variable interest entity that we (through a Chinese wholly-owned foreign enterprise subsidiary) control through certain contractual arrangements. On August 8, 2011, WFOE II, a PRC company and a newly formed subsidiary of Chance High, entered into a Share Purchase Agreement pursuant to which we acquired, from the three individual holders thereof, one hundred percent (100%) of the outstanding shares of Yantai Tianzheng, which became our second operating subsidiary effective as of July 1, 2011. Our current organizational structure is summarized below:

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Recent Developments

During the nine months ended March 31, 2013, management performed an evaluation of the Company’s product portfolio based on a confluence of factors that have emerged within China’s pharmaceutical industry and consumer markets. These factors principally include, but are not necessarily limited to (i) current economic conditions in China and management’s expectations of future economic trends, (ii) changes in China’s Essential Drug Laws, (iii) the PRC Central Government’s policy designating lists of specific drugs eligible for reimbursement, (iv) consumers’ preference for drug delivery systems in the forms of pills, tablets and ingestible liquids, and (v) competition from other drug manufacturing companies within China. Based on these factors, management has determined that the Company will streamline its operations to focus on the continued distribution of Lung Nourishing Syrup, Tongbi Capsules, Tongbi Tablets, Fangfengtongsheng Granule, and Zhengxintai Capsules and certain other products. As a consequence, management determined that it would be in the best interests of our company and its stockholders to commit to fully ceasing or suspending indefinitely plans to develop and produce a more diversified portfolio that would be derived from a series of approved formulas that the Company purchased in 2010.

As a result, the Company (i) recorded an impairment charge of $1,688,486 for the aggregate carrying amount of certain product formulas that the Company will abandon in their entirety, and (ii) reclassified $10,177,615 for the carrying amount of certain other product formulas that the Company will hold as defensive assets. Management believes it is in the best interests of the Company and its stockholders to retain ownership of these formulas, which are approved by the SFDA, to mitigate the risks of competition and provide the Company with the option of using the formulas to develop products in the future should it be advantageous to do so.

On November 5, 2012, the Company acquired land use right with respect to a 266,668 square meters land located in high-tech development district of Laishan district. The land use right grants to the Company the right to use the land for a period of 50 years at a total cost of approximately $19 million (RMB 120,000,000). As of March 31, 2013, the Company paid $6.37M (RMB 40,000,000). The Company is obligated to make two remaining installment payments of $6.37M (RMB 40,000,000) each by June 30, 2013 and December 31, 2013. The Company plans to build workshops, logistic system and R&D centre on the land to better prepare the Company for the future development.

Principal Factors Affecting Our Financial Performance

We believe that the following factors will continue to affect our financial performance:

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Sales of Key Products

Our top selling products as a percentage of total net revenue consist of the following:

	For the three months ended						For the nine months ended
	March 31,						March 31,
	2013 (unaudited)			2012 (unaudited)			2013 (unaudited)			2012 (unaudited)
Lung Nourishing Syrup		22.9	%		16.0	%		18.2	%		16.8	%
Tongbi Capsules		29.2	%		22.3	%		31.0	%		22.6	%
Tongbi Tablets		12.3	%		8.8	%		12.1	%		9.1	%
Zhengxintai Capsule		12.8	%		11.1	%		11.8	%		10.4	%
Fangfengtongsheng Granule		19.6	%		20.5	%		17.7	%		18.3	%
Other Products		3.2	%		21.3	%		9.2	%		22.8	%
Total Sales		100	%		100	%		100	%		100	%

We expect that a significant portion of our future revenue will continue to be derived from sales of our top five products, and we recently shifted our corporate strategy to focus primarily on such seven products.

We held Certificates for a Protected Variety of Traditional Chinese Medicine (Grade Two) issued by the SFDA for Tongbi Capsules and Anti-flu Granules which gave the Company exclusive or near-exclusive rights to manufacture and distribute these two medicines. Tongbi Capsules’ certificates expired in September 2009. We filed an application for extending the protection period on March 12, 2009 and received certification extension until September 13, 2016. Lung Nourishing Syrup received a patent with duration of 20 years from the State Intellectual Property Office of the PRC and the patent will expire on September 12, 2027.

Experienced Management

Management’s marketing strategies and business relationships gives us the ability to expand our product market areas, which provides us with leverage to acquire less sophisticated operators, increase production volumes, and implement quality standards. Our future prospects depend substantially on the continued services of our senior management team, especially our President, Chief Executive Officer and Chairman of the Board, Mr. Qu.

Price Control of Drugs by PRC Government and SDRC

The State Development and Reform Commission of the PRC (“SDRC”) and the price administration bureaus of the relevant provinces of the PRC in which the pharmaceutical products are manufactured are responsible for retail price controls over our pharmaceutical products. The SDRC sets the price ceilings for certain pharmaceutical products in the PRC. All of our products except those under the protection periods are subject to such price controls and could affect our future revenue growth. However, due to the direct support of TCM by the Chinese government, China’s immense market, and our protected drugs, management believes that there is continuous growth potential for TCM in China.

Operating Results

Comparison of the three months ended March 31, 2013 and 2012

Net Revenues

Net revenues are comprised of sales of 11 traditional Chinese medicines (corresponding to 7 formulas) in China during the three months ended March 31, 2013. We made a strategic decision to focus on products described from our top seven formulas. Net revenues for the three months ended March 31, 2013 decreased by $1,451,223, or 4.0%, to $34,786,624 as compared to $36,237,847 for the three months ended March 31, 2012. Net revenues were $23,492,378 and $11,294,246 for Bohai and Yantai Tianzheng, respectively, for the three months ended March 31, 2013. Net revenues were $23,601,089 and $12,636,758 for Bohai and Yantai Tianzheng, respectively, for the three months ended March 31, 2012. Revenue from Bohai remained stable for the quarter ended March 31, 2013 compared to the same period last year. Lung Nourishing Syrup, Tongbi Capsules, and Tongbi Tablets are three lead products in Bohai and together accounted for over 95.4% of our total net revenues for Bohai for the quarter ended March 31, 2013. Lung Nourishing Syrup, Tongbi Capsules, Tongbi Tablets, and Shangtongning Tablets are four lead products in Bohai and together accounted for over 82.0% of our total net revenues for Bohai for the quarter ended March 31, 2012. We have discontinued production of 11 of our products recently.  The increased revenue from Lung Nourishing Syrup, Tongbi Capsules, and Tongbi Tablets offset the decrease sales from discontinued products. Our leading Bohai products are listed for coverage and eligible for reimbursement under China national medical insurance program. The decrease in Tianzheng’s revenue was primarily attributing to our decision to no longer produce Tianzheng Niuhuang Xiaoyan Tablets and Tongmai Granule. Sale of our prescription drug products for the three months ended March 31, 2013 represented 74% of total net revenue compared to 78% for the same period in last year. The decrease in prescription drug sales relates to our decision to focus on selling more OTC products during the three months ended March 31, 2013.

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Cost of Revenues

Cost of revenues is comprised of raw material costs, labor cost, overhead costs associated with the manufacturing processes and related expenses which are directly attributable to our revenues. Our cost of revenues for the three months ended March 31, 2013 was $8,282,141 as compared to $8,180,762 for the three months ended March 31, 2012, representing an increase of $101,379, or 1.2%. Cost of revenues were $5,486,951 and $2,795,190 for Bohai and Yantai Tianzheng, respectively, for the three months ended March 31, 2013. Cost of revenues were $4,751,410 and $3,429,352 for Bohai and Yantai Tianzheng, respectively, for the three months ended March 31, 2012. The increase in cost of revenues for the three months ended March 31, 2013, compared to the same period in last year, was mainly due to an increase in total costs of raw materials, labor, and overhead as a result of an increase in overall sales.

Gross Profit

Gross profit represents the difference between net revenues and cost of revenues. We achieved gross profit of $26,504,483 for the three months ended March 31, 2013, as compared to $28,057,085 for the same period in 2012, representing a decrease of $1,552,602, or 5.5%, over the same period in 2012. The decrease of the gross profit is mainly due to decreased revenues and increased cost of revenues.

Our overall gross profit margins as a percentage of net revenues decreased by approximately 1.6% from 77.4% to 76.2% this fiscal quarter at March 31, 2013, as compared to the same period in 2012.The decrease of the gross profit margin is attributable to the average cost of revenue increased faster than the average selling price did.

Operating Expenses

Our operating expenses increased by $2,066,492 or 10.4% to $21,854,120, for the three months ended March 31, 2013, as compared to $19,787,628 for the same fiscal period in 2012. The overall increase in selling, general, and administrative expenses was mainly related to increased amortization expenses, sales commissions and staff related expenses. The percentage of operating expenses to net revenues was 62.8% and 54.6% for the three months ended March 31, 2013 and 2012, respectively, representing an increase of 15.1% as a percentage of net revenues. The increase of percentage of net revenue is due to more rapid increase in operating expense than the increase in net revenue this quarter compared to the same period last year.

Sales commissions increased by $691,288 or 4% to $17,740,073, for the three months ended March 31, 2013, as compared to $17,048,785 for the same fiscal period in 2012. Sales commissions represent 51.0% and 47.0% of total revenue for the three months ended March 31, 2013 and 2012, respectively. This is because the Company sold more products with high stipulated ratio of sales commissions than the same period last year.

Depreciation and amortization expenses increased by $743,912 or 117% to $1,378,027 for the three months ended March 31, 2013, as compared to $634,116 for the same fiscal period in 2012.. The Company reclassified $10,177,615 for the carrying amount of certain product formulas that the Company will hold as defensive assets that will be amortized over a period of 8 years commencing from October 1, 2012. Amortization expense for defensive drug formulas amounted to $317,200 and $0 for the three months ended March 31, 2013 and 2012, respectively. The increase is also due to increased intangible assets including acquisition of land use right for $19,021,652 on November 5, 2012. Amortization expense for land use rights amounted to $259,027 and $154,252 for the three months ended March 31, 2013 and 2012, respectively.

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Staff expenses increased by $572,451 or 69% to $1,399,910 for the three months ended March 31, 2013, as compared to $827,459 for the same fiscal period in 2012.The Company paid bonus amounted to $958,696 and $698,425 for the three months ended March 31, 2013 and 2012, respectively.

Other operating expenses amounted to $1,190,034 and $1,042,714 for the three months ended March 31, 2013 and 2012, respectively.

Total Other Income (Expenses)

Total other income (expenses) is comprised of interest income (expenses), changes in fair value of derivative instruments and other income (expenses). Total other expenses were $454,276 for the three months ended March 31, 2013 compared to total other expenses of $791,411 for the period ended March 31, 2012, a decrease of total other expenses of $337,135. The decrease in total other expenses were principally due to a net decrease of $663,343 for interest expenses and a net increase in non-cash expense in fair value of warrants for $317,986 for convertible notes in connection with our private placement on January 5, 2010. The effective interest expense for convertible notes is calculated using a constant effective interest rate, applied to the carrying value of the notes each month. As the carrying value increases, so does the interest expense.

On March 31, 2012, the Company’s Chinese operating subsidiary determined it was unable to convert a sufficient number of RMB’s needed to repay the notes on their original maturity date of January 5, 2012. As a result, the Company entered into a series of amendments to the Notes with Euro Pacific as representative of the Investors to extend to the maturity date and increase the interest rate on the Notes. Pursuant to the most recent amendment, the maturity date of the notes was extended April 5, 2013 and the interest rate was increased to 12% per annum. The Company is negotiating with Euro Pacific to extend the maturity date to April 5, 2014 and in connection with such extension, the Company and Euro Pacific proposed to make a payment in the amount equal to 10% of the outstanding principal plus any accrued interest (at the current rate of 12% per annum) on each of April 5, 2013, October 5, 2013 and April 5, 2014. There is no written agreement related to the foregoing as of the date of this Quarterly Report and we cannot assure you that such agreement will be entered into. Contractual interest expense amounted to $253,935 and $1,073,302for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, there were 4,232,250 shares of the Company’s Common Stock issuable upon conversion of the outstanding convertible notes (see Note 10).

Provision for Income Tax

Our provision for income taxes for the three months ended March 31, 2013 and 2012 were $1,036,881 and $2,174,128, a decrease of $1,137,247, or 52.3%, from this fiscal quarter to date over the same period last year. The decrease in provision for income tax was principally due to a decrease in taxable income under the PRC law from Bohai and from Yantai Tianzheng. The effective income tax rates were 25% and 29% for the three months ended March 31, 2013 and 2012, respectively.

Net Income

We had a net income of $3,159,206 for the three months ended March 31, 2013, as compared to net income of $5,303,918 for the three months ended March 31, 2012, a decrease in net income of $2,144,172, or 40.4%. This translates into basic earnings (loss) per common share of $0.18 and $0.30, and diluted earnings per common share of $0.14 and $0.28, for the three months ended March 31, 2013 and 2012, respectively. The decrease in net income was primarily attributable to a decrease in total gross profit of $1,552,602 and a decrease in total other expenses (resulting from mostly effective interest charges) of $337,135, offset by an increase in operating expenses of $2,066,492 for this fiscal quarter as compared to the same period of prior year.

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Net income margin was 9.1% for the three months ended March 31, 2013 as compared to net income margin 14.6% for the same period last year, a decrease of 38.0%. The decrease was mainly due to decrease in gross profit and increased selling and general and administrative expenses.

Total other income included a non-cash charge in effective interest expenses of $0 for the three months ended March 31, 2013 compared to $731,808 for the same period in 2012.

Total other income for the three months ended March 31, 2013 also comprised of a non-cash credit for fair value of warrants of $0.

Comparison of the nine months ended March 31, 2013 and 2012

Net Revenues

Net revenues are comprised of sales of 20 traditional Chinese medicines (corresponding to 16 drug formulas) in China during the nine months ended March 31, 2013.We previously sold 20 medicines (corresponding to 16 drug formulas) following our acquisition of Yantai Tianzheng on August 8, 2012, but have recently made the strategic choice to narrow our focus to just our top 11 products (corresponding to 7 drug formulas). Net revenues for the nine months ended March 31, 2013 increased by $10,065,361, or 10.0%, to $111,067,950 as compared to $101,002,589 for the nine months ended March 31, 2012. Net revenues were $77,022,160 and $34,045,790 for Bohai and Yantai Tianzheng, respectively, for the nine months ended March 31, 2013. Net revenues were $68,818,996 and $32,183,593 for Bohai and Yantai Tianzheng, respectively, for the nine months ended March 31, 2012. The increase in Bohai’s revenue was primarily due to a net increase in revenues of 26.1% from our four lead products in Bohai: Lung Nourishing Syrup, Tongbi Capsules, Tongbi Tablets, and Shangtongning Tablets, which together accounted for over 92.7% of our total net revenues for Bohai for the nine months ended March 31, 2013. Lung Nourishing Syrup, Tongbi Capsules, Tongbi Tablets, and Shangtongning Tablets together accounted for over 78.4% of our total net revenues for Bohai for the nine months ended March 31, 2012.We stopped production of and Shangtongning Tablets since October 2012. The increased revenue from Lung Nourishing Syrup, Tongbi Capsules, and Tongbi Tablets offset the decreased sales from Shangtongning Tablets. All of our lead products from Bohai are listed for coverage and reimbursement under national medical insurance program starting in December 2009. The increase in Tianzheng’s revenue was primarily due to a net increase of 11.9% in revenue derived from our two lead products in Tianzheng: Zhengxintai Capsule, Fangfengtongsheng Granule. The sale of our prescription drug products for the nine months ended March 31, 2013 represented 78% of total net revenue compared to 77 % for the same period in last year. The increase in prescription sales was primary due to increases in sales volume of our two prescription drugs, Tongbi Capsules and Tongbi Tablets as well as prescription product sales from Yantai Tianzheng. The increase of the Company’s revenue is primarily due to increase in market demand for the company’s key products that are included in the government’s essential drug list. The government encourages hospital and doctors to prescribe essential drugs to the patients. The increase of the revenue is also a result of the increased sales caused by the temporary revised commission policy that increased the 5% of the stipulated ratio from July to December, 2012.

Cost of Revenues

Cost of revenues is comprised of raw material costs, labor cost, overhead costs associated with the manufacturing processes and related expenses which are directly attributable to our revenues. Our cost of revenues for the nine months ended March 31, 2013 was $25,506,506 as compared to $23,106,879 for the nine months ended March 31, 2012, representing an increase of $2,399,627, or 10.4%. Cost of revenues were $16,808,480 and $8,698,026 for Bohai and Yantai Tianzheng, respectively, for the nine months ended March 31, 2013. Cost of revenues were $14,440,286 and $8,666,593 for Bohai and Yantai Tianzheng, respectively, for the nine months ended March 31, 2012. The increase in cost of revenues for the nine months ended March 31, 2013, compared to the same period in last year, was mainly due to an increase in total costs of raw materials, labor, and overhead as a result of an increase in overall sales.

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Gross Profit

Gross profit represents the difference between net revenues and cost of revenues. We achieved gross profit of $85,561,444 for the nine months ended March 31, 2013, as compared to $77,895,710 for the same period in 2012, representing an increase of $7,665,734, or 9.8%, over the same period in 2012. The increase of the gross profit is mainly due to increased revenues.

Our overall gross profit margins as a percentage of net revenues decreased by approximately 0.1% from 77.1% to 77.0% this first three fiscal quarters at March 31, 2013, as compared to the same period in 2012.

Operating Expenses

Our operating expenses increased by $10,850,514 or 19.8% to $65,598,623, for the nine months ended March 31, 2013, as compared to $54,748,109 for the same fiscal period in 2012. The overall increase in selling, general, and administrative expenses was due to increased sales commissions in line with an overall increase in sales activities, increased impairment cost, increased salary and welfare cost, and increased amortization expenses offset by decreased advertisement cost. The percentage of operating expenses to net revenues was 59.1% and 54.2% for the nine months ended March 31, 2013 and 2012, respectively, representing an increase of 9.0% as a percentage of net revenues. The increase of percentage of net revenue is because operating expenses increased faster than the increase of revenue this period compared to the same period last year.

Sales commissions increased by $10,181,064 or 23% to $53,897,326 for the nine months ended March 31, 2013, as compared to $43,716,262 for the same fiscal period in 2012. Sales commissions accounted for 48.5% and 43.3% of the total revenue for the nine months ended March 31, 2013 and 2012, respectively. The Company increased commission rates for key products as part of its strategy to streamline operation around a more focused product portfolio during the six months ended December 31, 2012. The company also increased commission rates on certain products lines that are being discontinued in order to clear such inventories from stock.

Depreciation and amortization expenses increased by $1,798,945 or 96% to $3,680,122 for the nine months ended March 31, 2013, as compared to $1,881,177 for the same fiscal period in 2012. The Company reclassified $10,177,615 for the carrying amount of certain other product formulas that the Company will hold as defensive assets that will be amortized over a period of 8 years commencing from October 1, 2012. Amortization expense for defensive drug formulas amounted to $633,486 and $0 for the nine months ended March 31, 2013 and 2012, respectively. The increase is also due to increased intangible assets including acquisition of land use right for $19,021,652 on November 5, 2012. Amortization expense for land use rights amounted to $648,409 and $427,133 for the nine months ended March 31, 2013 and 2012, respectively.

Advertising expenses are charged to expense as incurred. Advertising expenses decreased by $ 3,220,179 or 96% to $127,643 for the nine months ended March 31, 2013, as compared to $3,347,822 for the same fiscal period in 2012. The Company did TV advertising in 2012 and incurred approximately $1,860,000 advertising expenses for the nine months ended March 31, 2012. The Company switched to airline advertisement during the nine months ended March 31, 2013 and the expenses for such advertisement decreased by approximately $1,136,000 compared with the same period last year.

Other operating expenses amounted to $3,597,902 and $3,805,978 for the nine months ended March 31, 2013 and 2012, respectively.

Total Other Income (Expenses)

Total other income (expenses) are comprised of interest income (expenses), changes in fair value of derivative instruments, other income (expenses), and amortization of deferred financing fees. Total other income were $172,661 for the nine months ended March 31, 2013 compared to total other expenses of $10,194,622 for the period ended March 31, 2012, a decrease of total other expenses of $10,021,961. The decrease in total other expenses were principally due to a net decrease of $9,298,060 for interest expenses and a net increase in non-cash income in fair value of warrants for $752,512 for convertible notes in connection with our private placement on January 5, 2010. The effective interest expense for convertible notes is calculated using a constant effective interest rate, applied to the carrying value of the notes each month. As the carrying value increases, so does the interest expense.

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On March 31, 2012, the Company’s Chinese operating subsidiary determined it was unable to convert a sufficient number of RMB’s needed to repay the notes on their original maturity date of January 5, 2012. As a result, the Company entered into a series of amendments to the Notes with Euro Pacific as representative of the Investors to extend to the maturity date and increase the interest rate on the Notes. Pursuant to the most recent amendment, the maturity date of the notes was extended April 5, 2013 and the interest rate was increased to 12% per annum. The Company is negotiating with Euro Pacific to extend the maturity date to April 5, 2014 and in connection with such extension, the Company and Euro Pacific proposed to make a payment in the amount equal to 10% of the outstanding principal plus any accrued interest (at the current rate of 12% per annum) on each of April 5, 2013, October 5, 2013 and April 5, 2014. There is no written agreement related to the foregoing as of the date of this Quarterly Report and we cannot assure you that such agreement will be entered into.

Contractual interest expense amounted to $815,326 and $10,561,143 for the nine months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, there were 4,232,250 shares of the Company’s Common Stock issuable upon conversion of the outstanding convertible notes (see Note 10).

Provision for Income Tax

Our provision for income taxes for the nine months ended March 31, 2013 and 2012 were $4,976,705 and $6,288,779, a decrease of $1,312,074, or 20.9 %, from this fiscal quarter to date over the same period last year. The decrease in provision for income tax was principally due to a decrease in taxable income under the PRC law from Bohai and from Yantai Tianzheng. The effective income tax rates were 25% and 49% for the nine months ended March 31, 2013 and 2012, respectively.

Net Income

We had a net income of $14,813,455 for the nine months ended March 31, 2013, as compared to net income of $6,664,200 for the nine months ended March 31, 2012, an increase in net income of $8,149,155, or 122.3%. This translates into basic earnings per common share of $0.83 and $0.37, and diluted earnings per common share of $0.67 and $0.37, for the nine months ended March 31, 2013 and 2012, respectively. The increase in net income was primarily attributable to an increase in total gross profit of $7,665,734 and a decrease in total other expenses (resulting from mostly effective interest charges) of $10,021,961, offset by an increase in operating expenses of $10,850,514 for this first three fiscal quarters as compared to the same period of prior year.

Net income margin was 13.3% for the nine months ended March 31, 2013 as compared to net income margin 6.6% for the same period last year, an increase of 6.7%. The increase was mainly due to the net decrease in certain non-cash activities such as effective interest charges from convertible notes and increase in gross profit, offset by increased selling and general and administrative expenses.

Total other income included a non-cash charge in effective interest expenses of $0 for the nine months ended March 31, 2013 compared to $9,747,509 for the same period in 2012.

Total other income for the nine months ended March 31, 2013 also comprised of a non-cash credit for fair value of warrants of $1,211,236.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate adequate amounts of cash to meet its needs for cash. As of March 31, 2013, we had cash and cash equivalents of $3,755,600 and restricted cash of $8,454,021, substantially almost all of which is located in financial institutions in China. The following table provides detailed information about our net cash flow for financial statement periods presented in this report:

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Summary of Cash Flow Statements

	For the nine months ended
	March 31
	2013 (unaudited)			2012 (unaudited)
Net cash provided by operating activities	$	7,873,829		$	15,695,561
Net cash used in investing activities		(21,079,479	)		(9,444,143	)
Net cash (used in) provided by financing activities		(1,559,151	)		3,240,921
Effect of foreign currency translation on cash and cash equivalents		134,113			207,491
Net increase in cash and cash equivalents	$	(14,630,688	)	$	9,699,830

Net Cash Provided by Operating Activities

Net cash provided by operating activities totaled $7,873,829 for the nine months ended March 31, 2013 as compared to net cash provided by operating activities of $15,695,561 for the nine months ended March 31, 2012. The decrease in net cash provided by operating activities, for the nine months ended March 31, 2013 compared to the same period 2012, was primarily due to increased net income of $8.1 million, increased inventories of $1.5 million, increased impairment of amortization $1.7 million, increased depreciation and amortization of $1.8 million, offset by a decrease of $9.3 million in the effective interest on convertible notes, an increase of $6.7 million in accounts receivables, and an increase in accrued expenses of $2.7 million. We expect our cash flow from operating activities to maintain a positive flow due to our continuous cash flow management.

Net Cash Used In Investing Activities

Net cash used in investing activities was $21,079,479 for the nine months ended March 31, 2013 and $9,444,143 for the nine months ended March 31, 2012. The net increase in cash used in investing activities was due to a cash payment of approximately $12,472,815 for our Yantai Tianzheng acquisitions and a cash payment of $6.3 million from land use rights for the quarter ended March 31, 2013.

Net Cash (Used in) Provided by Financing Activities

Net cash used in financing activities totaled $1,559,151 for the nine months ended March 31, 2013 as compared to net cash provided by financing activities of $3,240,921 for the same period in 2012. The reason for the decrease in cash provided by financing activities was due to a cash receipt of $6.3 million from an equity shareholder, Mr. Qu (our Chairman and CEO) the nine months ended March 31, 2012. Mr. Qu made a permanent equity capital contribution of approximately $6.3 million (RMB 40,000,000) into Bohai on August 3, 2011 to support its future capital needs.

Cash Position

As of March 31, 2013, we had cash of $3,755,600 as compared to $18,386,288 as of June 30, 2012, a decrease of $14,630,688. This decrease was due primarily to an increase in net income of approximately $8.1 million, an increase of inventories of $1.5 million, offset by increased accounts receivable of $6.7 million, purchase of land use right of $6.3 million, a decrease of $9.3 million in the effective interest on convertible notes, and decreased capital contribution by shareholder of $6.3 million.

We believe that we can meet our liquidity and capital requirements for our ongoing operations from our currently available working capital and maintain our operations at our current levels.

However, during the current fiscal year and thereafter, we will be required to fund two significant obligations (as well as others described under “Obligations under Material Contracts” below):

(i) the repayment our convertible promissory ($8.465 million due on demand as of March 31, 2013); and

(ii) the payment of approximately $12,751,000 payable in 2013 for a new land use right we acquired in November 2012 (due in two equal installments at June 30 and December 31, 2013).

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As such, we will be required to raise substantial additional capital to fund these obligations, either through the issuance of debt or equity securities, bank loans or other methods. Readers are cautioned that additional funding, capital or loans may be unavailable to us on favorable terms, if at all. If adequate funds are not available, we would likely have to renegotiate the terms of these obligations, which we may be unable to do on favorable terms. We may thus be required to agree to unfavorable terms that could have a material adverse effect on us, our financial condition and our results of operations in 2013 and beyond. Moreover, to the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership and potentially economic dilution to existing shareholders.

In addition, if we are faced with worldwide financial and credit crises as occurred in recent years, it may make the future cost of raising funds through the debt or equity markets more expensive or make financial markets unavailable to us at times when we require additional financings.

Finally, it has been very difficult over the past several years for U.S.-listed Chinese companies to raise financing from investors. As a result, our ability to raise needed financing may be particularly compromised.

Critical Accounting Policies and Estimates

As discussed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, we consider our use of estimates, accounts receivable, revenue recognition, inventories, property plant and equipment, intangible assets and income taxes to be the most critical accounting policies in understanding the judgments that are involved in preparing our condensed consolidated financial statements. There have been no significant changes to these estimates in the nine months ended March 31, 2013.

Recent Accounting Pronouncements Adopted

See Note 3 to the condensed consolidated unaudited financial statements included in Item 1, Financial Information, of this Quarterly Report on Form 10-Q.

Recent Accounting Pronouncements Not Yet Adopted

See Note 3 to the condensed consolidated unaudited financial statements included in Item 1, Financial Information, of this Quarterly Report on Form 10-Q.

Obligations under Material Contracts

The following table summarizes our contractual obligations as of March 31, 2013, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

	Payments Due by Period (unaudited)
	Less than		1-3		4-5		5
	Total		1 year		Years		years		Years+
Contractual Obligations:
Convertible notes	$	8,464,500	$	8,464,500	$	0	$	0	$	0
Construction In Process		1,016,660		1,016,660		0		0		0
Yantai Tianzheng acquisition		12,827,185		12,827,185		0		0		0
Land use right payable		12,750,833		12,750,833		0		0		0
Advertising		239,683		239,683		0		0		0
Equipment purchase		1,427,492		1,427,492		0		0		0
Contract Research and Development Arrangement		258,350		0		0		0		258,350
Total Contractual Obligations:	$	36,984,703	$	36,726,353	$	0	$	0	$	258,350

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Other than discussed above, there are no other foreseeable material commitments or contingencies as of March 31, 2013.

Off-Balance Sheet Arrangements

We did not engage in any “off-balance sheet arrangements” (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) during the nine months ended March 31, 2013. We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our condensed 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.

Currency Exchange Risk

Our reporting currency is the U.S. dollar and our operations in China use their local currency as their functional currencies. Substantially all of our revenue and expenses are in the Chinese currency, the Renminbi. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies. For example, the value of the Renminbi depends to a large extent on Chinese government policies and China’s domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rate for the conversion of the Renminbi to the U.S. dollar had generally been stable and the Renminbi had appreciated slightly against the U.S. dollar. In July 2005, the Chinese government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under this policy, which was halted in 2008 due to the worldwide financial crisis, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. In June 2010, the Chinese government announced its intention to again allow the Renminbi to fluctuate within the 2005 parameters. It is possible that the Chinese government could adopt an even more flexible currency policy, which could result in more significant fluctuation of Renminbi against the U.S. dollar, or it could adopt a more restrictive policy. We can offer no assurance that the Renminbi will be stable against the U.S. dollar or any other foreign currency.

Our consolidated financial statements are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign consolidated subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign consolidated subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to hedge our exchange rate risks. Most of our transactions are settled in Renminbi and U.S. dollars. We are not exposed to significant foreign currency risk.

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Credit Risk

Our potential credit risk is mainly attributable to its debtors and bank balances. In respect of debtors, we have policies in place to ensure that it will only accept customers from countries which are politically stable and customers with an appropriate credit history. In addition, all the bank balances were made with financial institutions with high-credit quality. Thus, we are not considered to be subject to significant credit risk.

Interest Rate Risk

Our interest rate risk is primarily attributable to its short-term borrowings, loan to a third party and loan to equity holders. Our borrowings carry interest at fixed rate. Our management has not used any interest rate swaps to hedge its exposure to interest rate risk.

Inflation

In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. During the past ten years, the rate of inflation in China has been as high as 20.7% and as low as -2.2%. These factors have led to the adoption by Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. While inflation has been more moderate since 1995, high inflation may in the future cause Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.

PART II - OTHER INFORMATION

Item 1.     Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm business. We are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.

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

None.

Item 3.     Defaults Upon Senior Securities

None.

Item 4.     Mine Safety Disclosures

Not applicable.

Item 5.     Other Information

None.

Item 6.     Exhibits

(a)  Exhibits

Exhibit Number	Description of Exhibit
31.1*	Certification of Principal Executive and 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 and principal financial officer).

* Filed herewith

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Bohai Pharmaceuticals Group, Inc.
May 15, 2013	By:	/s/ Hongwei Qu
		Hongwei Qu
		Chief Executive Officer
		(Principal Executive Officer and Principal
		Financial Officer)

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