DERIVATIVE LIABILITY

9 Months Ended

Dec. 31, 2011

DERIVATIVE LIABILITY

NOTE 13 – DERIVATIVE LIABILITY

On February 28, 2011, the Company entered into a purchase agreement with L.Y. Research Corp., a New Jersey corporation (“LY Research”); and the purchase agreement was amended and restated on August 15, 2011 (the “Purchase Agreement”). Pursuant to the terms of the Purchase Agreement, the Company acquired a patent (the “LY Patent”) from L.Y. (HK) Biotech Limited, a wholly owned company by L.Y. Research corp., in exchange for 44,254,952 shares of common stock at the acquisition date. In addition, 11,063,968 shares of common stock will be issued to the seller upon the occurrence of the quotation of the Company’s common stock on the OTCQB or OTCBB; and 20,546,711 shares will be issued to the seller upon the receipt by the Company of a minimum of $20,000,000 in gross proceeds from a debt or equity financing, or a series of debt and/or equity financings (the “Financing”); or upon the quotation of its common stock on NASDAQ or a major stock exchange located outside of the United States (collectively, “Events”). On September 9, 2011, the Company’s stock became quoted at OTCQB, therefore, 11,063,968 shares of common stock became issuable on September 9, 2011.

On October 21, 2011, the Purchase Agreement was further amended to state that if either of the Events should not occur within one year from October 21, 2011; the shares issued pursuant to the Purchase Agreement shall be returned to the Company and the LY Patent shall be returned to LY Research and the Purchase Agreement, as amended, shall be cancelled and of no further force or effect. Because the Company is required to acquire the issued shares by returning the US patent if the predetermined financing event is not met, the term meets the definition under the ASC 480-10-25-8, “Obligations to Repurchase Issuer’s Equity Shares by Transferring Assets”. Per ASC 480-10-25-8, the obligation to repurchase an issuer’s own shares by transferring asset should be recognized as a liability at inception.

In addition, because the acquisition is not a certain future event as of October 21, 2011 and December 31, 2011, the Company considers the contingent obligation to repurchase its own shares as a written put option. Per ASC 480-10-30-7, all financial instruments, recognized under the guidance in Section 480-10-25, other than certain physically settled forward purchase contracts, shall be measured initially at fair value.

The fair value of the obligation on October 21, 2011 should be the market price of the shares that the company is obligated to repurchase if the financing is failing and weighted by the probability of the Company failing to meet the financing target of $20,000,000 or achieving the listing on NASDAQ or a major foreign stock exchange. On October 21, 2011, the company had issued and was obligated to issue 55,318,920 common shares to Dr. Liu. Therefore, the number of potential shares we would need to repurchase was 55,318,920 on October 21, 2011 and December 31, 2011

Determination of the market price of the shares:

Per ASC 820-10-20 “Readily Determinable Fair Value”, “ The fair value of an equity security is readily determinable if sales prices or bid-and-asked quotations are currently available on a securities exchange registered with the U.S. Securities and Exchange Commission (SEC) or in the over-the-counter market, provided that those prices or quotations for the over-the-counter market are publicly reported by the National Association of Securities Dealers Automated Quotations systems or by Pink Sheets LLC. Restricted stock meets that definition if the restriction terminates within one year. ” Because the sales price of the company’s common stock shares was currently available in the over-the-counter market, the fair value of the company’s stock is readily determinable and is the sales price of the stock on October 21, 2011. Because the company’s common stock was not traded on October 21, 2011 and December 31, 2011, the closest quotations were the prices on October 23, 2011, which was $0.40/per share and December 22, 2011, which was $0.40/per share as well. Therefore, the fair values per share for both dates were $0.40.

Determination of the probability of the Company failing to meet the predetermined event:

The Company determined that on October 21, 2011 and December 31, 2011, the chance that the final contingency would not be met, thereby triggering our obligation to repurchase those shares, was around 15%. Thus, the probability weighting that we assigned to the final contingency not being met and thereby triggering our obligation to repurchase those shares was 15% for both dates.

Our estimate of the probability of the financial contingency not being met by October 21, 2011 and December 31, 2011 was based on the following considerations:

· In early September 2011, our Director of the Company’s Investment Division came to the United States to meet with the placement agent that we had been working with since late 2010. Our placement agent advised us that they believed that they could complete the financing for $20 million based on the due diligence that had been done by the placement agent since 2010, subject to certain conditions, including, but not limited to, satisfactory completion of its due diligence on the Company’s recent operations, reaching agreement with the Company on the Company’s valuation in light of current market conditions.

· Although there could be no assurance of completion of the financing, the placement agent and the Company were renewed their engagement agreement on October 21, 2011. During the period from October 21, 2011 to December 31, 2011, we discussed plans to engage an advisor to develop a business plan and to engage an investment relations company. We thought that these efforts would contribute to a successful completion of the financing, although the offering is being done on a best efforts basis.

· Our placement agent recommenced its due diligence in November 2011. Prior to December 31, 2011, the placement agent had not advised us of any new conditions which would lead us to believe that the likelihood that the placement agent could complete the financing by October 2012 had changed between October 21, 2011 and December 31, 2011. .

We believed that we had a well-developed business model and our operations continued to be profitable during in the global economic downturn and have continued to be profitable . In addition, our financing target was only $20 million, which we determined with the placement agent to be the appropriate amount for the financing based on the Company’s capital requirements and the potential investors which the placement agent expected to approach.

We also identified the events that, if any of them occur, will increase the probability of failing to reach the financing target. These events include, but not limited to, the following:

· Both the Company and L.Y. Research Corp,, for any reason, determine that they are not willing to continue the contract and terminate the contract before the contract expires;

· The placement agent, for any reasons, discontinues its effort to complete the financing for the Company;

· The financial market for private placements for Chinese companies whose securities are registered in the United States remains weak or becomes less attractive before the end of the period for completing the financing, and the placement agent informs the Company that the financing target is unlikely to be met before October 21, 2012.

· The Company and the placement agent are unable to agree on terms for the financing..

Therefore, as of December 31, 2012, we were confident that we would be able to attract investors and achieve the $20,000,000 financing target and we used a probability of 15% for failing to achieve the financing target by October 2012. During the period from October 21, 2011 to December 31, 2011, there were no events that decreased the probability of failing to reach the financing target. In this circumstance, we used the same probability of failing to achieve the financing as of October 21, 2011 and December 31, 2011.

Calculation of the derivative liability as of October 21, 2011 and December 31, 2011:

The fair value of the derivative obligation at October 21, 2011 and December 31, 2011 is calculated as followed:

$3,319,135 = 55,318,920 x $0.40/per share x 15%