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

Attached files

file	filename
EX-31.1 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC.	v193834_ex31-1.htm
EX-32.2 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC.	v193834_ex32-2.htm
EX-32.1 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC.	v193834_ex32-1.htm
EX-31.2 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC.	v193834_ex31-2.htm

U.S. 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 June 30, 2010

Commission File No. 000-1484042

WEIKANG BIO-TECHNOLOGY GROUP COMPANY, INC.

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

Nevada	26-2816569
(State or other jurisdiction of incorporation or formation)	(I.R.S. employer identification number)

No. 365 Chengde Street, Daowai District, Harbin

Heilongjiang Province, The People’s Republic of China 150020

(Address of principal executive offices) (Zip Code)

+(86) 0451-88355530

(Registrant’s telephone number, including area code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x

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

Large Accelerated Filer o		Accelerated Filer o
Non-Accelerated Filer o	(Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of shares outstanding of the registrant's common stock on August 13, 2010 was 28,024,388.

WEIKANG BIO-TECHNOLOGY GROUP COMPANY, INC.

Quarterly Period Ended June 30, 2010

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at June 30, 2010 (Unaudited) and December 31, 2009	3
	Consolidated Statements of Income and Comprehensive Income for the Three and Six Months ended June 30, 2010 and 2009 (Unaudited)	4
	Consolidated Statements of Cash Flows for the Six Months ended June 30, 2010 and 2009 (Unaudited)	5
	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23
Item 4.	Controls and Procedures	23

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Default on Senior Securities	24
Item 5.	Other Information	24
Item 6.	Exhibits	24
SIGNATURES		25

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

WEIKANG BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	JUNE 30, 2010			DECEMBER 31, 2009
	(Unaudited)
ASSETS

CURRENT ASSETS
Cash & cash equivalents	$	20,485,278		$	11,380,019
Advances to suppliers and other receivables		150,537			26,079
Inventory		1,045,905			285,395
Deferred tax asset		132,788			-

Total current assets		21,814,508			11,691,493

NONCURRENT ASSETS
Property and equipment, net		9,768,826			10,162,946
Construction in progress		446,823			-
Intangible assets		15,500,960			15,558,731

Total noncurrent assets		25,716,609			25,721,677

TOTAL ASSETS	$	47,531,117		$	37,413,170

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$	13,669		$	12,668
Unearned revenue		-			11,716
Taxes payable		1,522,402			2,247,410
Due to related party		25,034			-

Total current liabilities		1,561,105			2,271,794

ADVANCE FORM OFFICER		650,000			650,000

OTHER PAYABLES		7,720,321			7,620,321

CONTINGENCIES

DEFERRED TAX LIABILITY		3,421,953			3,450,005

STOCKHOLDERS' EQUITY
Common stock, $.00001 par value; authorized shares 100,000,000; issued and outstanding shares 28,024,388 and 25,486,800 at June 30, 2010 and December 31, 2009, respectively		280			255
Additional paid in capital		4,967,720			139,245
Deferred compensation		(753,306	)		-
Statutory reserve		1,404,276			1,069,507
Accumulated other comprehensive income		1,067,168			844,526
Retained earnings		27,491,600			21,367,517

Total stockholders' equity		34,177,738			23,421,050

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	47,531,117		$	37,413,170

The accompanying notes are an integral part of the consolidated financial statements

WEIKANG BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

	SIX MONTHS ENDED JUNE 30,						THREE MONTHS ENDED JUNE 30,
	2010			2009			2010			2009

Net sales	$	24,452,199		$	23,306,974		$	10,493,659		$	13,195,767
Cost of goods sold		10,014,363			10,564,767			4,374,061			6,103,182

Gross profit		14,437,836			12,742,207			6,119,598			7,092,585

Operating expenses
Selling expenses		1,794,301			918,214			1,103,042			485,371
General and administrative		2,617,383			747,756			1,427,532			541,287
Research and development		802,907			1,937,928			732,579			1,937,928

Total operating expenses		5,214,591			3,603,898			3,263,153			2,964,586

Income from operations		9,223,245			9,138,309			2,856,445			4,127,999

Non-operating income (expenses)
Interest income		36,190			1,616			19,946			1,371
Other income		194			521,913			1			265,635
Other (expenses)		(1,907	)		(35,433	)		(1,224	)		(22,464	)

Total non-operating income, net		34,477			488,096			18,723			244,542

Income before income tax		9,257,722			9,626,405			2,875,168			4,372,541
Income tax		2,798,867			2,438,475			957,758			1,038,216

Net income		6,458,855			7,187,930			1,917,410			3,334,325

Other comprehensive income
Foreign currency translation gain		222,642			7,145			213,335			10,285

Comprehensive Income	$	6,681,497		$	7,195,075		$	2,130,745		$	3,344,610

Basic and diluted weighted average shares outstanding		27,692,734			25,268,474			28,021,751			25,306,723

Basic and diluted net earnings per share	$	0.23		$	0.28		$	0.07		$	0.13

The accompanying notes are an integral part of the consolidated financial statements

WEIKANG BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	SIX MONTHS ENDED JUNE 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6,458,855		$	7,187,930
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		599,057			587,162
Stock issued for consulting expenses		65,200			127,500
Deferred compensation		1,812,494			-
Changes in deferred tax		(178,885	)		(50,671	)
(Increase) decrease in current assets:
Accounts receivable		-			(73,178	)
Advances to suppliers and other receivables		(124,277	)		(49,501	)
Inventory		(755,128	)		(275,882	)
Increase (decrease) in current liabilities:
Accounts payable		927			-
Unearned revenue		(11,721	)		(219,533	)
Other payables		109,948			5,296
Taxes payable		(743,596	)		364,740

Net cash provided by operating activities		7,232,874			7,603,863

CASH FLOWS FROM INVESTING ACTIVITIES:
Construction in progress		(444,577	)		-
Acquisition of property & equipment		(8,869	)		(2,187	)

Net cash used in investing activities		(453,446	)		(2,187	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in due from management		-			1,242,783
Net proceeds from shares issued		2,197,500			-
Payment for purchase of Tianfang		-			(3,812,283	)
Changes in due from related party		24,908			(117,628	)

Net cash provided by (used in) financing activities		2,222,408			(2,687,128	)

EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS		103,423			5,220

INCREASE IN CASH & CASH EQUIVALENTS		9,105,259			4,919,768

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		11,380,019			16,927

CASH & CASH EQUIVALENTS, END OF PERIOD	$	20,485,278		$	4,936,695

Supplemental Cash flow data:
Income tax paid	$	3,020,026		$	1,764,405
Interest paid	$	-		$	744

The accompanying notes are an integral part of the consolidated financial statements

WEIKANG BIO-TECHNOLOGY GROUP CO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED)

AND DECEMBER 31, 2009

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

Weikang Bio-Technology Group Co., Inc., a Nevada corporation (“Weikang” or “the Company”) was incorporated on May 12, 2004 in Florida as Expedition Leasing, Inc. (“Expedition”). The Company reincorporated in Nevada and changed to its present name on July 12, 2008, pursuant to a merger with Weikang, a wholly-owned subsidiary, with Weikang as the surviving entity. The Company is engaged in the development, manufacture and distribution of Traditional Chinese Medicine ("TCM") through its indirect wholly-owned operating subsidiary, Heilongjiang Weikang Biotechnology Group Co., Ltd. (“Heilongjiang Weikang”) in the People’s Republic of China (“PRC” or “China”).

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

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

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

Heilongjiang Weikang was incorporated in Heilongjiang Province, PRC on March 29, 2005, and was formerly known as Heilongjiang Province Weikang Bio-Engineering Co., Ltd. Heilongjiang Weikang is engaged in development, manufacture and distribution of TCM in the PRC.

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

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

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

WEIKANG BIO-TECHNOLOGY GROUP CO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED)

AND DECEBMER 31, 2009

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

The unaudited financial statements included herein were prepared by the Company, pursuant to the rules and regulations of the SEC. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) that are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) were omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and footnotes included in the Company’s 2009 audited financial statements included in the Company’s Annual Report on Form 10-K. The results for the six and three months ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year ending December 31, 2010.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICY

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Sinary, and the results of operations of Weikang, Sinary’s wholly-owned subsidiary, Tianfang, Weikang’s wholly-owned subsidiary from the date of acquisition (August 1, 2008). All significant inter-company accounts and transactions were eliminated in consolidation.

Use of Estimates

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

Cash and Cash Equivalents

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

Accounts Receivable

The Company’s policy is to maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. There was no bad debt allowance recorded based on the Company’s past payment collection experience.

Inventory

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

Property and Equipment

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

WEIKANG BIO-TECHNOLOGY GROUP CO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED)

AND DECEBMER 31, 2009

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

Land Use Right

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

Impairment of Long-Lived Assets

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

Income Taxes

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

The Company adopted FASB ASC Topic 740 on August 31, 2007. At the time, the Company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by FASB ASC Topic 740. Based on those standards, the Company recognized no material adjustments to liabilities or stockholders’ equity. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the positions taken or the amount of the positions that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely to be realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interests associated with unrecognized tax benefits are classified as interest expenses and penalties are classified in selling, general and administrative expenses in the statements of income. At June 30, 2010 and December 31, 2009, the Company did not take any uncertain positions that would necessitate recording of tax related liability.

Revenue Recognition

The Company's revenue recognition policies are in compliance with FASB ASC Topic 605, “Revenue Recognition”. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all the relevant criteria for revenue recognition is met are recorded as unearned revenue.

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

WEIKANG BIO-TECHNOLOGY GROUP CO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED)

AND DECEBMER 31, 2009

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

Sales returns and allowances was $0 for the six and three months ended June 30, 2010 and 2009. The Company does not provide unconditional right of return, price protection or any other concessions to its dealers or other customers.

Cost of Goods Sold

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

Concentration of Credit Risk

Cash includes cash on hand and demand deposits in accounts maintained within the PRC and the United States. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits for the banks located in the United States. Balances at financial institutions within the PRC are not covered by insurance. As of June 30, 2010 and December 31, 2009, the Company had $0 deposits in the bank located in US which was in excess of federally insured limits; the Company had US$20,254,746 and US$11,372,437 deposits in the banks in China, respectively. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

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

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

Statement of Cash Flows

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

Fair Value of Financial Instruments

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

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

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

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

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

WEIKANG BIO-TECHNOLOGY GROUP CO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED)

AND DECEBMER 31, 2009

As of June 30, 2010 and December 31, 2009, the Company did not identify any assets and liabilities that were required to be presented on the balance sheet at fair value.

Foreign Currency Translation and Comprehensive Income (Loss)

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

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

The Company uses FASB ASC Topic 220, “Reporting Comprehensive Income”. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except the changes in paid-in capital and distributions to stockholders due to investments by stockholders. Comprehensive income for the six and three months ended June 30, 2010 and 2009 included net income and foreign currency translation adjustments.

Stock-Based Compensation

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

Basic and Diluted Earnings per Share (EPS)

Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similarly to basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted net earnings per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. For the six and three month ended June 30, 2010, the Company did not have any dilutive securities due to anti-dilution feature of the warrants issued in connection with the equity financing. For the six and three month ended June 30, 2009, the Company did not have any dilutive securities.

Segment Reporting

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

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

Research and Development

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

WEIKANG BIO-TECHNOLOGY GROUP CO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED)

AND DECEBMER 31, 2009

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

On March 20, 2010, the Company entered into a one year contract with a professional research and development team to research and develop licorice flavonoids extraction technology for industrialization of use in therapeutics. The Company is responsible for all the research and development expense with the total payment expected to be approximately $2.95 million. As of June 30, 2010, the Company paid research and development expenses of approximately $0.74 million under this agreement and is committed to pay an additional $1.47 million in September 2010, and the remaining $0.74 million to be paid upon the successful development of the technology. The Company will own the research and development results and related intellectual property. The Company recorded $0.74 million R&D expenses during the quarter ended June 30, 2010.

Reclassifications

Certain prior year amounts were reclassified to conform to the manner of presentation in the current year.

New Accounting Pronouncements

On July 1, 2009, the Company adopted Accounting Standards Update (“ASU”) No. 2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments based on Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“ASU No. 2009-01”). ASU No. 2009-01 re-defines authoritative GAAP for nongovernmental entities to be only comprised of the FASB Accounting Standards Codification (“Codification”) and, for SEC registrants, guidance issued by the SEC. The Codification is a reorganization and compilation of all then-existing authoritative GAAP for nongovernmental entities, except for guidance issued by the SEC. The Codification is amended to effect non-SEC changes to authoritative GAAP. Adoption of ASU No. 2009-01 only changed the referencing convention of GAAP in Notes to the Consolidated Financial Statements.

On February 25, 2010, the FASB issued ASU No. 2010-09 Subsequent Events Topic 855 “Amendments to Certain Recognition and Disclosure Requirements,” effective immediately. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of US GAAP. The FASB believes these amendments remove potential conflicts with the SEC’s literature. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

On March 5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815 “Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the guidance within the derivative literature that exempts certain credit related features from analysis as potential embedded derivatives requiring separate accounting. The ASU specifies that an embedded credit derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another is not subject to bifurcation from a host contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives — Recognition. All other embedded credit derivative features should be analyzed to determine whether their economic characteristics and risks are “clearly and closely related” to the economic characteristics and risks of the host contract and whether bifurcation is required. The ASU is effective for the Company on July 1, 2010. Early adoption is permitted. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.

In April 2010, the FASB codified the consensus reached in Emerging Issues Task Force Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU No. 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. FASB ASU No. 2010-17 is effective for fiscal years beginning on or after June 15, 2010, and is effective on a prospective basis for milestones achieved after the adoption date. The Company does not expect this ASU will have a material impact on its financial position or results of operations when it adopts this update on January 1, 2011.

WEIKANG BIO-TECHNOLOGY GROUP CO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED)

AND DECEBMER 31, 2009

3. ADVANCES TO SUPPLIERS AND OTHER RECEIVABLES

Advances to suppliers and other receivables at June 30, 2010 and December 31, 2009 were as follows:

	2010		2009
Prepaid IR expense	$	116,712	$	-
Advance to suppliers		31,300		24,334

Advance to employees		2,525		1,745
Total	$	150,537	$	26,079

The Company prepaid $150,000 from financing proceeds to an IR firm for IR services over two years on January 20, 2010. For the six and three months ended June 30, 2010, the Company incurred $33,288 and $18,904 in IR expense, respectively.

4. INVENTORY

Inventory at June 30, 2010 and December 31, 2009 was as follows:

	2010		2009
Raw materials	$	219,150	$	148,519
Packing materials		121,850		54,777
Finished goods		704,905		82,099
Total	$	1,045,905	$	285,395

5. PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following at June 30, 2010 and December 31, 2009:

	2010		2009
Building	$	8,297,725	$	8,252,397
Building improvements		917,327		912,316
Production equipment		2,359,464		2,338,779
Office furniture and equipment		194,590		192,458
Vehicles		119,210		118,559
		11,888,316		11,814,509
Less: Accumulated depreciation		(2,119,490)		(1,651,563)
	$	9,768,826	$	10,162,946

Depreciation for the six months ended June 30, 2010 and 2009 was $456,549 and $486,028, respectively; and for the three months ended June 30, 2010 and 2009 was $229,390 and $243,120, respectively.

6. CONSTURCTION IN PROGRESS

At June 30, 2010, construction in progress consisted of the payment made for constructing a manufacturing line for producing licorice flavonoids.

7. INTANGIBLE ASSETS

Intangible assets consisted of the following at June 30, 2010 and December 31, 2009:

	2010		2009
Land use right	$	12,334,242	$	12,266,864
Goodwill arising from acquisition of Tianfang (Note 17)		3,601,387		3,581,715
Software		7,255		7,216
		15,942,884		15,855,795
Less: Accumulated amortization		(441,924)		(297,064)
	$	15,500,960	$	15,558,731

WEIKANG BIO-TECHNOLOGY GROUP CO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED)

AND DECEBMER 31, 2009

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

Amortization for the six months ended June 30, 2010 and 2009 was approximately $142,508 and $101,000, respectively. Amortization for the three months ended June 30, 2010 and 2009 was $68,300 and $50,500, respectively. Amortization for the next five years from June 30, 2010 is expected to be approximately $273,000, $273,000, $273,000, $272,000 and $272,000, respectively.

8. RELATED PARTY TRANSACTIONS

Advance from Officer

Advance from officer represented the payment of $650,000 made by an officer of Heilongjiang Weikang on behalf of Sinary to certain former shareholders of the Company in connection with the reverse acquisition between the Company and Sinary on December 7, 2007. The advance from officer bears no interest and is payable on demand. On August 6, 2010, the officer waived his right to repayment of this advance. The Company treated this waiver as a contribution to capital.

Dues to Related Party

At June 30, 2010, due to related party represented an advance of $25,034 from a related party company owned by one of the Company’s officers. This advance bears no interest and is payable upon demand.

9. MAJOR CUSTOMERS AND VENDORS

There were no customers who accounted for over 10% of the Company’s total sales for the six and three months ended June 30, 2010 and 2009, respectively.

Two vendors collectively provided 31% and 42% of the Company’s purchases of raw materials for the six and three months ended June 30, 2010, respectively. Each vendor accounted for 21%, and 10% of the purchases for the six months ended June 30, 2010, and 31% and 11% for the three months ended June 30, 2010, respectively. The Company did not have any outstanding accounts payable to these vendors at June 30, 2010.

Three vendors collectively provided 66% and 74% of the Company’s purchases of raw materials for the six and three months ended June 30, 2009, respectively. Each vendor accounted for 50%, 10%, and 6% of the purchases for the six months ended June 30, 2009, and 57%, 10% and 7% for the three months ended June 30, 2009, respectively.

10. TAXES PAYABLE

Taxes payable consisted of the following at June 30, 2010 and December 31, 2009:

	2010		2009
Income tax payable	$	1,118,668	$	1,679,250
Value added tax payable		384,034		505,545
Sales tax payable		-		29,290
Other		19,700		33,325
	$	1,522,402	$	2,247,410

WEIKANG BIO-TECHNOLOGY GROUP CO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED)

AND DECEBMER 31, 2009

11. OTHER PAYABLES

At June 30, 2010 and December 31, 2009, other payables mainly represented $7.72 million that Sinary was obligated to pay Heilongjiang Weikang’s former owners within one year from the closing of the acquisition of Heilongjiang Weikang. This payable does not bear any interest, and was extended to June 30, 2010. On August 6, 2010, the officer waived his right to repayment of this amount. The Company treated this waiver as a contribution to capital.

12. DEFFERED TAX ASSET (LIABILITY)

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

At June 30, 2010 and December 31, 2009, deferred tax asset (liability) consisted of the following:

	2010			2009
Deferred tax asset from Weikang R&D expense - current	$	132,788			-
Deferred tax asset (net) on property and equipment for basis differences since acquisition of Heilongjiang Weikang and Tianfang - noncurrent	$	189,923		$	142,141
Deferred tax asset arising from the acquisition of Heilongjiang Weikang - noncurrent		29,783			29,620
Deferred tax liability arising from the acquisition of Tianfang - noncurrent		(3,641,659	)		(3,621,766	)
Deferred tax liability, net - noncurrent	$	(3,421,953	)	$	(3,450,005	)

13. INCOME TAXES

Weikang and Sinary were incorporated in the US and have net operating losses (NOL) for income tax purposes. Weikang and Sinary had NOL carry forwards for income taxes of $2,050,000 and $669,000 at June 30, 2010; $139,500 and $650,000 at December 31, 2009, respectively, which may be available to reduce future years’ taxable income as NOL; NOLs can be carried forward up to 20 years from the year the loss is incurred. Management believes the realization of benefits from these losses are uncertain due to the Company’s limited operating history and continuing losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.

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

statements after appropriate tax adjustments.

Foreign pretax earnings approximated $11,188,000 and $11,612,000 for the six months ended June 30, 2010 and 2009, respectively. Pretax earnings of a foreign subsidiary are subject to U.S. taxation when effectively repatriated. The Company provides income taxes on the undistributed earnings of non-U.S. subsidiaries except to the extent that such earnings are indefinitely invested outside the US. At June 30, 2010, $30,211,000 of accumulated undistributed earnings of non-U.S. subsidiaries was indefinitely invested. At the existing U.S. federal income tax rate, additional taxes of $2,719,000 would have to be provided if such earnings were remitted currently.

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the six and three months ended June 30, 2010 and 2009:

	For the Six Months						For the Three Months
	2010			2009			2010			2009
US statutory rates		34.0	%		34.0	%		34.0	%		34.0	%
Tax rate difference		(10.9	)%		(9.0	)%		(11.8	)%		(10.9	)%
Valuation allowance for US NOL		7.1	%		-	%		11.1	%		-	%
Tax per financial statements		30.2	%		25.0	%		33.3	%		23.1	%

The provisions for income tax expenses for the six and three months ended June 30, 2010 and 2009 consisted of the following:

	For the Six Months								For the Three Months
	2010				2009				2010				2009
Income tax expense - current		$	2,845,632			$	2,489,146			$	980,689			$	1,062,702
Income tax benefit - deferred			(46,765	)			(50,671	)			(22,931	)			(24,486	)
Total income tax expenses		$	2,798,867			$	2,438,475			$	957,758			$	1,038,216

WEIKANG BIO-TECHNOLOGY GROUP CO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED)

AND DECEBMER 31, 2009

14. COMMON STOCK

Common Stock with Warrants Issued for Cash

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

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

The Series A and Series B Warrants expire January 20, 2013. The Warrants provide for antidilution adjustments to the exercise price for certain convertible securities issued with conversion prices lower than the Warrants' exercise price. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions: discount rate – 2.76%; dividend yield – 0%; expected volatility – 100% and term of 3 years. The value of the Warrants was $1,212,278.

In connection with the Financing, the Company entered into an Investor Relations Escrow Agreement, pursuant to which the Company established an escrow account of $150,000 which may be allocated and released to investor relations firms for marketing purposes at the sole discretion of a representative of the Investors. The Company paid $150,000 to an IR firm for it providing IR services over two years. For the six and three months ended June 30, 2010, the Company recorded $33,288 and $18,904 as IR expense, respectively.

In addition the Company issued the following securities: (i) Series A Warrants to purchase 73,528 shares of Common Stock to placement agents, (ii) Series B Warrants to purchase 73,528 shares of Common Stock to placement agents, (iii) 180,000 shares of Common Stock to an investor relations firm, (iv) 600,000 shares of Common Stock to a consultant for business development and capital markets advice, and (v) 7,000 shares of Common Stock for legal services. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions: discount rate – 2.76%; dividend yield – 0%; expected volatility – 100% and term of 3 years. The value of the Warrants was $285,236.

Following is a summary of the warrant activity:

	Number of Shares		Average Exercise Price per Share		Weighed Average Remaining Contractual Term in Years
Granted – series A warrants		386,028		3.00		3
Granted – series B warrants		386,028		5.00		3

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

Exercisable at March 31, 2010		772,056		4.00		2.81

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

WEIKANG BIO-TECHNOLOGY GROUP CO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED)

AND DECEBMER 31, 2009

The Company agreed to file a resale Registration Statement on Form S-1 by April 9, 2010 registering the Investor Shares and the Investors' Warrants with the SEC. In the event the Company was not filed the Registration Statement by the Required Filing Date, or the Registration Statement was not declared effective by the SEC by 120 days after the Required Filing Date, the Company agreed to pay liquidated damages to each Investor, from and including the day following such Filing Default until the date the Registration Statement was filed with the SEC, or until the Registration Statement was declared effective, as applicable, at a rate per month (or portion thereof) equal to 0.50% of the total purchase price of the Shares purchased by such Investor pursuant to the Purchase Agreement. In no event, however, may the penalties exceed 9% in the aggregate of such total purchase price. The Form S-1 was filed with SEC on Mach 25, 2010 and declared effective on April 21, 2010.

In connection with the financing, the Company also issued 27,000 shares to several legal counsels and 200,000 shares to a consultant, First Trust China Ltd.

Deferred Compensation

On January 20, 2010, the Company issued 600,000 shares of Common Stock valued at $3.26 per share (stock price at grant date) to several consultants for providing consulting services to the Company. In the first quarter of 2010, the Company recorded $1,793,000 as deferred compensation, which was to be amortized over periods ranging from 2 months to 6 months. During the six and three months ended June 30, 2010, the Company amortized $1,639,762 and $783,217 as stock-based compensation expense, respectively.

On January 20, 2010, the Company issued 180,000 shares to an IR firm for providing IR services for a period of two years; the stock was valued at $3.26 per share (stock price at grant date). In the first quarter of 2010, the Company recorded $586,800 as deferred compensation. During the six and three months ended June 30, 2010, the Company amortized $129,418 and $73,953 as stock-based compensation expense, respectively.

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

On April 7, 2010, the Company issued 40,000 shares common stock as the annual compensation to four independent directors of the Company with stock valued at $4.65 per share (stock price at grant date). The Company recorded $186,000 as deferred compensation and amortized $43,315 as stock-based compensation during the quarter ended June 30, 2010.

15. STATUTORY RESERVES

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

Surplus Reserve Fund

The Company is now only required to transfer 10% of its net income, as determined under the PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital.

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

Common Welfare Fund

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

WEIKANG BIO-TECHNOLOGY GROUP CO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED)

AND DECEBMER 31, 2009

16. CONTINGENCIES

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

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

17. GOODWILL

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”), codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, goodwill is not amortized but is tested for impairment annually, or when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds the fair value of the reporting unit, with the fair value of the reporting unit determined using a discounted cash flow (DCF) analysis. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and projections of realizations and costs to produce. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.

On July 22, 2008, Heilongjiang Weikang completed the acquisition of 100% of the issued and outstanding equity interests of Tianfang for $15,000,000 (RMB 102,886,500). The total consideration for acquisition exceeded fair value of the net assets acquired by $3,565,578. The excess was recorded as goodwill. Goodwill was recorded as intangible assets.

18. SUBSEQUENT EVENTS

Settlement Agreement and Release

On August 6, 2010, Sinary on the one hand, and Yin Wang, the Company’s Chief Executive Officer and Chairman of the Board of Directors and his sister, Wei Wang, entered into a Settlement Agreement and Release pursuant to which Yin Wang and Wei Wang waived all of their rights that they have to payment of both the Acquisition Price of approximately $7.72 million and the Advance of $650,000 and contributed the Acquisition Price and the Advance to the Company’s capital. The transaction was approved by the Company’s independent directors.

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

Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the Securities and Exchange Commission (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to Company or Company’s management identify forward-looking statements. Such statements reflect the current view of Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors (including the risks contained in the section of operations and results of operations, and any businesses that Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

Although Company believes that the expectations reflected in the forward-looking statements are reasonable, Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

Our financial statements are prepared in US Dollars and in accordance with accounting principles generally accepted in the United States. See "Foreign Currency Translation and Comprehensive Income (Loss)" and "Foreign Exchange Rates" below for information concerning the exchange rates at the Renminbi ("RMB") were translated into US Dollars ("USD") at various pertinent dates and for pertinent periods.

Overview

The Company, through its wholly-owned subsidiaries, Heilongjiang Weikang Biotechnology Group Co., Ltd. ("Weikang") and Tianfang (Guizhou) Pharmaceutical Co., Ltd. (“Tianfang”), engages in the research, development, manufacturing, marketing, and sales of Traditional Chinese Medicine ("TCM") and other over-the-counter pharmaceutical products in China.

Weikang is located in Heilongjiang Province in northeastern China, with its principal office and manufacturing facility located in the Economic and Technology Development Zone in the city of Shuangcheng, approximately 42 kilometers south of the provincial capital Harbin. Tianfang is located in Guizhou Province in southwestern China, in Zazuo Pharmaceutical Industry Park, about 33 kilometers from Guiyang City, the provincial capital of Guizhou. Most of our products are traditonal Chinese medicines and Chinese herbal-based health and nutritional supplements. Tianfang also develops and manufactures western prescription and OTC medecines.

Weikang’s products are under the brand name of “Rongrun” and Tianfang’s are under that of “Tiangfang”.

The Company grows its business and expands its market share by investing heavily in new product R&D and maintaining a high quality and high margin new product pipeline. We plan to launch four or more new products a year.

We also seek and acquire pharmaceutical companies that have a complementary product portfolio to Weikang’s existing one and extensive distribution networks.

Critical Accounting Policies and Estimates

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

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

Basis of presentation

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

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: (i) Sinary Bio-Technology Holding Group, Inc., a Nevada corporation, (ii) Heilongjiang Weikang Biotechnology Group Co., Ltd., a company organized and operating under the laws of the People’s Republic of China, and (iii) Tianfang(Guizhou) Pharmaceutical Co., Ltd., a company organized and operating under the laws of the People’s Republic of China. All significant inter-company accounts and transactions were eliminated in consolidation.

Accounts Receivable

Inventories

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

Property and Equipment

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

Revenue Recognition

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

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

Foreign Currency Translation and Comprehensive Income (Loss)

The Company’s functional currency is the Renminbi (“RMB”). For financial reporting purposes, RMB were translated into United States dollars ("USD") as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated other comprehensive income". Gains and losses resulting from foreign currency transactions are included in income. There has been no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.

The Company uses SFAS No 130, “Reporting Comprehensive Income”, codified in FASB ASC Topic 220. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders.

NEW ACCOUNTING PRONOUNCEMENTS

Results of Operations

Comparison of the Six Months Ended June 30, 2010 and 2009

The following table summarizes our results of operations. The table and the discussion below should be read in conjunction with the unaudited financial statements and the notes thereto appearing elsewhere in this report.

	June 30, 2010				June 30, 2009
	(in U.S. Dollars, except for percentages)
Net sales	$	24,452,199			$	23,306,974
Cost of sales		10,014,363	41	%		10,564,767	45	%
Gross profit		14,437,836	59	%		12,742,207	55	%
Operating expense		5,214,591	21	%		3,603,898	15	%
Income from operations		9,223,245	38	%		9,138,309	40	%
Other income net		34,477	0	%		488,096	2	%
Income tax expenses		2,798,867	11	%		2,438,475	11	%
Net income	$	6,458,855	27	%	$	7,187,930	31	%

Net sales. During the six months ended June 30, 2010, sales were $24.45 million, compared to $23.31 million for the comparable period in 2009, an increase of $1.15 million or 5%. The increase in sales was primarily a result of increased demand from dealers and distributors as a result of increased acceptance and trust in our products from end users despite an increased selling price of 22%. We believe our sales will continue to grow as we develop new products and continue to improve the quality of our existing products.

Cost of sales. Cost of sales decreased $0.55 million or 5%, from $10.56 million in the six months ended June 30, 2009 to $10.01 million for the six months ended June 30, 2010. The cost of sales as a percentage of sales for the six months ended June 30, 2010, was 41% as compared to 45% for the comparable period of 2009, which was attributable to decreased cost of sales of Tianfang, from 51% to 47% of sales; the cost of sales was 30% of the sales for Heilongjiang Weikang, a decrease of 3% when compared with the comparable period of 2009, which was mainly due to our continuous efficient cost control.

Gross profit. Gross profit was $14.44 million for the six months ended June 30, 2010, compared to $12.74 million for the comparable period of 2009, representing gross margin of 59% and 55% of sales, respectively. The increase in our gross profit margin in the six months ended June 30, 2010 was mainly due to decreased cost of sales as a percentage of sales for the reasons described above.

Operating expenses. Total operating expenses consisted of selling, general and administrative expenses and research and development expenses of $5.21 million for the six months ended June 30, 2010 compared to $3.60 million for the six months ended June 30, 2009, an increase of $1.61 million or 45%. Operating expenses as a percentage of sales was 21% for the six months ended June 30, 2010 compared to 15% for the same period in 2009. This increase was attributable to the increased promotion and marketing expenses for developing our products in new regions, and increased stock compensation expenses of $1.76 million with respect to stock issued to consultants.

Net other income (expense). Other income was $34,477 in the six months ended June 30, 2010 compared to $0.49 million in the six months ended June 30, 2009. Other income in the first six months of 2009 mainly consisted of lease income received from leasing a workshop and right to use our technology for manufacturing royal jelly.

Net income. Our net income for the six months ended June 30, 2010 was $6.46 million compared to net income of $7.19 million for the six months ended June 30, 2009, a decrease of $0.73 million or 10%. The decrease was mainly attributed to increase operating expenses. Our management believes net income will increase we continue to offer better quality and variety of products and continue to improve our manufacturing efficiency.

Comparison of the Three Months Ended June 30, 2010 and 2009

	June 30, 2010				June 30, 2009
	(in U.S. Dollars, except for percentages)
Net sales	$	10,493,659			$	13,195,767
Cost of sales		4,374,061	42	%		6,103,182	46	%
Gross profit		6,119,598	58	%		7,092,585	54	%
Operating expense		3,263,153	31	%		2,964,586	22	%
Income from operations		2,856,445	27	%		4,127,999	31	%
Other income (expense), net		18,723	0	%		244,542	2	%
Income tax expenses		957,758	9	%		1,038,216	8	%
Net income	$	1,917,410	18	%	$	3,334,325	25	%

Net sales. During the three months ended June 30, 2010, we had sales of $10.49 million, compared to $13.20 million for the comparable period of 2009, a decrease of $2.70 million or 20%. This decrease was mainly attributable to (i) the transportation problem for delivering our products to the customers in southern part of China due to the flood disasters (ii) Some orders of Tianfang were postponed to July of 2010 as a result of the same transportation problems (iii) Shortage of some ingredients for production in Weikang which resulted in decreased production volume, and (iv) Elevated humidity levels in Harbin as a result of the unusually heavy rain fall resulted in an extended drying cycle for raw material to two to three times longer than normal at Weikang’s production facilities. These adverse weather conditions have improved and we believe our sales will resume a healthy growth rate as we expand our distribution network and enhance our product portfolio.

Cost of sales. Cost of sales decreased $1.73 million or 28%, from $6.10 million in the three months ended June 30, 2009 to $4.37 million for the three months ended June 30, 2010. The decrease was mainly due to decreased sales and production. The cost of sales as a percentage of sales for the three months ended June 30, 2010, was 42% compared to 46% for the comparable period of 2009, which was attributable to decreased cost of sales of Tianfang, from 52% to 47% of the sales, which was a result of management’s continuous effort on cost control.

Gross profit. Gross profit was $6.12 million for the three months ended June 30, 2010, compared to $7.09 million for the comparable period of 2009, representing gross margin of 58% and 54% of sales, respectively. The increase in our gross profit margin was mainly due to decrease in cost of sales as a percentage of sales in Tianfang’s operations during the second quarter of 2010 for the reason described above.

Operating expenses. Total operating expenses consisted of selling, general and administrative expenses and research and development expense of $3.26 million for the three months ended June 30, 2010, compared to $2.96 million for the three months ended June 30, 2009, an increase of $0.30 million or 10%. Operating expenses as a percentage of sales was 31% for the three months ended June 30, 2010 while it was 22% for the comparable period of 2009, the increase was primarily due to $0.85 million consulting expense to certain financial advisors and increased expenses on promoting and marketing of our products during the second quarter of 2010. In the three month ended June 30, 2010, we had research and development expense of $0.73 million for the first installment payment to a professional research and development team for research and developing licorice flavonoids extraction technology for industrialization of use in therapeutics, while in the comparable period of 2009, we had research and development expense of $1.9 million for developing certain new medicine and health supplemental products with the Botany medicine research center of Northeast Forestry University.

Net other income (expense). Other income was $0.02 million in the three months ended June 30, 2010 compared to $0.24 million in the three months ended June 30, 2009. Other income in the second quarter of 2009 mainly consisted of lease income received from leasing a workshop and right to use our technology for manufacturing the royal jelly, the lease was expired at the end of 2009.

Net income. Our net income for the three months ended June 30, 2010 was $1.92 million compared to net income of $3.33 million for the three months ended June 30, 2009, a decrease of $1.41 million or 42%. The decrease was mainly attributed to the impact of flood disasters to the transportation which caused some orders to be postponed and shortage of some ingredients for production. Our management believes net income will increase when the flood disaster is over and we continue to offer better quality and variety of products and continue to improve our manufacturing efficiency.

Liquidity and Capital Resources

At June 30, 2010, the Company had cash and cash equivalents of $20.49 million, other current assets of $1.33 million, and current liabilities of $1.56 million. In addition, at June 30, 2010, working capital was $20.25 million and the ratio of current assets to current liabilities was 13.97-to-1.

The following is a summary of cash provided by or used in each of the indicated types of activities during the six months ended June 30, 2010 and 2009, respectively:

	June 30, 2010			June 30, 2009
Cash provided by (used in):
Operating Activities	$	7,232,874		$	7,603,863
Investing Activities	$	(453,446	)	$	(2,178	)
Financing Activities	$	2,222,408		$	(2,687,128	)

Net cash provided by operating activities was $7.23 million for the six months ended June 30, 2010, compared to $7.60 million for the comparable period of 2009. The increase in net cash inflow from operating activities was mainly due to an increase in our net income with faster collection on accounts receivable.

Net cash used in investing activities was $0.45 million for the six months ended June 30, 2010, compared to $2,178 for the comparable period of 2009. The cash outflow during the six months ended June 30, 2010 was mainly due to construction of a new workshop and acquisition of equipments.

Net cash provided by financing activities was $2.22 million for the six months ended June 30, 2010 compared to $2.69 million cash outflow for the comparable period of 2009. The cash inflow in financing activities for the six months ended June 30, 2010 mainly consisted of proceeds of $2.20 million for stock issued.

We do not believe inflation had a significant negative impact on our results of operations during the six months ended June 30, 2010.

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosure About Market Risks.

We do not use derivative financial instruments in our investment portfolio and has no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable and long-term obligations. We consider investments in highly liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents. However, in order to manage the foreign exchange risks, we may engage in hedging activities to manage our financial exposure related to currency exchange fluctuation. In these hedging activities, we might use fixed-price, forward, futures, financial swaps and option contracts traded in the over-the-counter markets or on exchanges, as well as long-term structured transactions when feasible.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by paragraph (b) of Rules 13a-15 or 15d-15 under the Securities Exchange Act of 1934, the Company's principal executive officer and principal financial officer have evaluated the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation these officers have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective and were adequate to insure that the information required to be disclosed by the Company in reports it files or submits under the Exchange Act were recorded, processed, summarized and reported within the time period specified in the Commission's rules and forms.

Changes in Internal Control Over Financial Reporting

There have been no significant changes in our internal controls over financial reporting that could materially affect such controls over financial reporting subsequent to the date we completed our evaluation. Therefore, no corrective actions were taken.

Inherent Limitations of Internal Controls

Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

We may be subject to, from time to time, various legal proceedings relating to claims arising out of our operations in the ordinary course of our business. We are not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the business, financial condition, or results of operations of the Company.

Item 1A. Risk Factors.

There have been no material changes to the risk factors previously disclosed in the Company’s Registration Statement as Amended, as filed with the United States Securities and Exchange Commission on April 14, 2010.

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

On April 7, 2010, the Company issued 40,000 shares of its common stock to its four independent directors, valued at $4.65 per share (stock price at grant date). The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

Item 3. Defaults on Senior Securities.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

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

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

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

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

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

	WEIKANG BIO-TECHNOLOGY GROUP COMPANY, INC.

Dated: August 13, 2010	By:	/s/ Yin Wang
		Yin Wang
		Chief Executive Officer
		(Principal Executive Officer)

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

Attached files

WEIKANG BIO-TECHNOLOGY GROUP CO., INC. Reports

Also read