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EX-31.1 - CERTIFICATION - Jpak Group, Inc.ex31one.htm
EX-31.2 - CERTIFICATION - Jpak Group, Inc.ex31two.htm
EX-32.1 - CERTIFICATION - Jpak Group, Inc.ex32one.htm
EX-32.2 - CERTIFICATION - Jpak Group, Inc.ex32two.htm
 
 


 
 
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q/A
(Mark One)

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

For the quarterly period ended September 30, 2010


[  ]
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
 
Jpak Group, Inc.
(Exact name of registrant as specified in its charter)

Nevada
 
20-1977020
(State or other jurisdiction
of incorporation or organization)
 
(IRS Employer Identification No.)


15 Xinghua Road, Qingdao, Shandong Province
People’s Republic of China 266401
(Address of principal executive offices (zip code))

(86-532) 84616387
 (Issuer's telephone number)

(Former address)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 (Sec. 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 [  ] No [  ]


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


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes [  ] No [X]

 As of November 15, 2010 there were 36,368,334  shares of the issuer's common stock, par value $.001 per share, outstanding. The issuer also has 5,608,564 shares of Series A Preferred Stock, par value $.0001 per share, outstanding, which shares are convertible into on aggregate of 11,217,128  shares of common stock, and 5,000,000  shares of Series B Convertible Preferred Stock, par value $.0001 per share outstanding, which shares are convertible into an aggregate of 8,333,333 shares of common stock, 12,000,000 shares of Series C Convertible Preferred Stock, par value $0.0001 per share outstanding, which shares are convertible into an aggregate of 12,000,000  shares of common stock.


 
 
 
 

 
 

EXPLANATORY NOTE

We are filing this Form 10-Q/A for the period ended September 30, 2010 (“Amended Report”) to correct a typo contained in our original filed Form 10-Q (“Original Report”) for this same period regarding the Total Equity line item of our Consolidated Balance Sheet.  This Amended Report does not reflect events occurring after the filing of the Form 10-Q on November 15, 2010, nor does it modify or update those disclosures presented therein, except with regard to the modifications described in this Explanatory Note. As such, this Amended Report continues to speak as of November 15, 2010. Accordingly, this Amended Report should be read in conjunction with the Original Report and our other reports filed with the SEC subsequent to the filing of our Original Report, including any amendments to those filings.

In addition, pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as a result of this Amended Report, the certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, filed and furnished, respectively, as exhibits to the Original Report have been re-executed and re-filed as of the date of this Amended Report and are included as exhibits hereto.

 

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
  3
   
Item 1.  Financial Statements
  3
   
      Consolidated Balance Sheets at September 30, 2010 (unaudited) and 2009
3
   
Unaudited Consolidated Statements of Operations for the three months ended September 30, 2010 and 2009
4
   
Unaudited Consolidated Statements of Cash Flows for the  three months ended September 30, 2010 and 2009
5
   
Unaudited 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
24
   
   
PART II – OTHER INFORMATION
  25
   
Item 1.  Legal Proceedings
25
   
Item 1A. Risk Factors
25
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
25
   
Item 3.  Defaults Upon Senior Securities
25
   
Item 4.  (Removed and Reserved)
25
   
Item 5.  Other Information
25
   
Item 6.  Exhibits
25
   


 
 
 
2

 

JPAK GROUP, INC.



PART I – FINANCIAL INFORMATION

Consolidated Balance Sheets

   
September 30,
   
June 30,
 
   
2010
   
2010
 
Assets
 
(Unaudited)
       
Current assets:
           
Cash and cash equivalents
  $ 2,829,020     $ 6,221,273  
Restricted cash
    3,855,884       4,744,084  
Accounts receivable, net of allowance for doubtful accounts of $1,305,286
    11,727,252       10,915,611  
  and $1,284,360 at September 30, 2010 and June 30, 2010, respectively
               
Inventory
    8,952,276       8,298,177  
Trade notes receivable
    399,207       515,150  
Other receivables
    1,237,519       484,003  
Advance payments
    3,521,081       3,670,469  
Prepaid expenses and other current assets
    598,988       299,713  
Total current assets
    33,121,227       35,148,480  
                 
Property and equipment, net
    12,109,509       11,201,241  
                 
Other noncurrent assets:
               
Intangible assets, net
    3,079,635       -  
Deferred loss on sales of assets
    1,884,896       1,899,277  
Prepaid expenses
    902,022       952,676  
                 
Total assets
  $ 51,097,289     $ 49,201,674  
                 
Liabilities
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 3,915,947     $ 2,401,560  
Trade notes payable
    3,251,977       4,659,370  
Short-term bank loans
    2,994,000       2,946,000  
Current portion of long-term debt
    2,631,599       2,589,409  
Income tax payable
    189,718       127,169  
Other current liabilities
    164,765       167,728  
Total current liabilities
    13,148,006       12,891,236  
Long-term debt
    3,189,543       3,049,115  
Total liabilities
    16,337,549       15,940,351  
                 
Equity
               
Stockholders’ equity:
               
Series A convertible preferred stock, $0.0001 par value, 5,608,564
               
  shares authorized, issued and outstanding
    561       561  
Series B convertible preferred stock, $0.0001 par value, 5,000,000
               
  shares authorized, issued and outstanding
    500       500  
Series C convertible preferred stock, $0.0001 par value, 12,000,000
               
  shares authorized, issued and outstanding
    1,200       1,200  
Common stock, $0.001 par value, 300,000,000 shares authorized,
               
  36,368,334 shares issued and outstanding at September 30, 2010
               
  and June 30, 2010, respectively
    36,368       36,368  
Series A preferred stock
    2,484,226       2,484,226  
Series B preferred stock
    1,390,853       1,390,853  
Additional paid-in capital
    23,184,206       23,184,206  
Retained earnings
    2,753,328       1,776,028  
Statutory reserves
    1,551,089       1,551,089  
Accumulated other comprehensive income
    3,250,489       2,731,043  
Total stockholders’ equity
    34,652,820       33,156,074  
Noncontrolling interest
    106,920       105,249  
Total equity
    34,759,740       33,261,323  
                 
Total liabilities and equity
  $ 51,097,289     $ 49,201,674  

The accompanying notes are an integral part of these consolidated financial statements.
 
3

 

JPAK GROUP, INC.



Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
   
For the Three Months Ended
 
   
September 30,
 
   
2010
   
2009
 
             
Sales
  $ 16,185,647     $ 16,561,920  
                 
Cost of sales
    12,625,157       11,837,612  
                 
Gross profit
    3,560,490       4,724,308  
                 
Operating expenses
               
Selling, general and administrative
    2,232,495       2,888,343  
                 
Income from operations
    1,327,995       1,835,965  
                 
Other income (expenses):
               
Interest expense, net
    (150,736 )     (97,051 )
Non-operating expense, net
    (12,567 )     (3,512 )
                 
Total other income (expenses)
    (163,303 )     (100,563 )
                 
Income before provision for income taxes
    1,164,692       1,735,402  
                 
Provision for income taxes
    187,436       242,838  
                 
Net income
    977,256       1,492,564  
                 
Less: Net income attributable to noncontrolling interest
    (44 )     (56 )
                 
Net income attributable to Jpak Group, Inc.
    977,300       1,492,620  
                 
Undistributed income attributable to preferred stockholders
    453,987       654,946  
                 
Net income attributable to common stockholders
    523,313       837,674  
                 
Other comprehensive income
               
Foreign currency translation adjustment
    519,446       32,030  
                 
Comprehensive income
  $ 1,496,746     $ 1,524,650  
                 
Basic earnings per common share
  $ 0.01     $ 0.03  
Diluted earnings per common share
  $ 0.01     $ 0.03  
                 
Weighted average number of common shares outstanding
               
     Basic
    36,368,334       25,005,000  
     Diluted
    67,918,795       44,555,461  


The accompanying notes are an integral part of these consolidated financial statements.
 
4

 

JPAK GROUP, INC.


Consolidated Statements of Cash Flows
(Unaudited)
   
For the Three Months Ended
 
   
September 30,
 
   
2010
   
2009
 
             
Cash flows from operating activities:
           
Net income
  $ 977,256     $ 1,492,564  
Adjustments to reconcile net income to net cash
               
  provided by (used in) operating activities:
               
Depreciation and amortization
    341,021       382,499  
Loss on disposal of fixed assets
    9,165       2,354  
Non-cash payments of rent
    28,911       -  
Changes in assets and liabilities:
               
Accounts receivable
    (626,169 )     (2,289,303 )
Inventory
    (512,655 )     (1,088,422 )
Trade notes receivable
    122,841       (87,966 )
Other receivables
    (736,665 )     (71,260 )
Advance payments
    337,004       (2,315,404 )
Prepaid expenses and other current assets
    (247,447 )     (148,704 )
Accounts payable and accrued expenses
    1,460,432       1,640,738  
Income tax payable
    59,749       75,283  
Other current liabilities
    (5,628 )     413,469  
Total adjustments
    230,559       (3,486,716 )
                 
Net cash Provided by (used in) operating activities
    1,207,815       (1,994,152 )
                 
Cash flows from investing activities:
               
      Advance payments for fixed assets
    (130,326 )     -  
Additions to property and equipment
    (1,023,164 )     (198,913 )
      Proceeds from disposal of fixed assets
    5,802       -  
      Acquisition of intangible assets – land use rights
    (3,032,962 )     -  
Loan receivable
    -       43,983  
                 
Net cash used in investing activities
    (4,180,650 )     (154,930 )
                 
Cash flows from financing activities:
               
      Restricted cash
    953,888       (2,445,022 )
Issuance (repayment) of trade notes payable
    (1,465,474 )     1,990,955  
Proceeds from long-term debt
    67,999       1,036,973  
                 
Net cash provided by (used in) financing activities
    (443,587 )     582,906  
                 
Effect of foreign currency translation on cash
    24,169       7,930  
                 
Net decrease in cash and cash equivalents
    (3,392,253 )     (1,558,246 )
                 
Cash and cash equivalents   beginning
    6,221,273       2,969,699  
                 
Cash and cash equivalents ending
  $ 2,829,020     $ 1,411,453  
                 


 
5

 

JPAK GROUP, INC.



Notes to Consolidated Financial Statements
September 30, 2010 and 2009
(Unaudited)

Note 1 – Organization and Nature of Business

Jpak Group, Inc. (Formerly Rx Staffing Inc.), a public shell company as defined in Rule 12b-2 of the Exchange Act of 1934, was established under the laws of Nevada on December 6, 2004. The accompanying consolidated financial statements include the financial statements of Jpak Group, Inc. and its subsidiaries (the “Company”). The Company’s primary business is to print and produce packaging products for sale to the beverage and other industries.

On August 9, 2007, Rx Staffing Inc. (“Rx Staffing”) completed a reverse acquisition of Jpak Group Co., Ltd., (“Jpak Ltd.”) which was incorporated in the Cayman Islands on June 22, 2006. To accomplish the exchange of shares Rx Staffing issued 23,005,000 shares of common stock on a one to one ratio for a 100% equity interest in Jpak Ltd., per the terms of the Share Exchange and Bill of Sale of assets of Rx Staffing and Shaun Jones. Rx Staffing was delivered with zero assets and zero liabilities at time of closing. Following the reverse acquisition, Rx Staffing changed the name to Jpak Group, Inc. (“Jpak”). The transaction was regarded as a reverse merger whereby Jpak Ltd. was considered to be the accounting acquirer as its shareholders retained control of RX Staffing after the exchange. Although the Company is the legal parent company, the share exchange was treated as a recapitalization of Jpak Ltd.. Thus, Jpak Ltd. is the continuing entity for financial reporting purposes. The financial statements have been prepared as if Jpak Ltd. had always been the reporting company and then on the share exchange date, had changed its name and reorganized its capital stock.

In September 2006, Jpak Ltd. acquired 100% interest in Grand International Industrial Ltd. which was incorporated on August 4, 2006, Hong Kong Special Administrative Region, the People’s Republic of China (“PRC”). In August 2006, Grand International acquired 88.23% interest in Qingdao Renmin Printing Co, Ltd (“Qingdao Renmin”), which was incorporated in May 2001 in the city of Qingdao, the People’s Republic of China. On July 3, 2007, Grand International acquired the remaining 11.77% interest in Qingdao Renmin. The consolidated financial statements reflect all predecessor statements of income and cash flows from the inception of Qingdao Renmin in August 2006. In October 2007, Qingdao Renmin invested in Qingdao Delikang Packing Machinery Co., Ltd., (“Qingdao Delikang”), a joint venture with Xi’an Heiniu Machinery, Co.. Qingdao Renmin acquired 51% interest of Qingdao Delikang.

On January 11, 2010, Qingdao Likang Packaging Co. Ltd (Qingdao Likang), a wholly-owned subsidiary of Grand International, was registered in Qingdao with a capital commitment of $13.5 million. As of September 30, 2010, approximately $7.1 million or 52.6% of total registered capital has been invested and the remaining $6.4 million of the registered capital will be invested within two years since the registration. Grand International is allowed to use the capital raised or the profit generated by Qingdao Renmin for this capital investment.

Substantially all of the Company’s business is conducted through Qingdao Renmin, an operating subsidiary established in the Peoples Republic of China, in which the Company indirectly holds a 100% interest.


 
6

 

JPAK GROUP, INC.


Note 2 – Summary of Significant Accounting Policies

Basis Of Presentation

The Company’s consolidated financial statements include the accounts of its controlled subsidiaries. All intercompany balances and transactions are eliminated in consolidation. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) applicable to interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.

In preparing the accompanying unaudited consolidated financial statements, we evaluated the period from September 30, 2010 through the date the financial statements were issued, for material subsequent events requiring recognition or disclosure. No such events were identified for this period.

Interim Financial Statements

These interim financial statements should be read in conjunction with the audited financial statements for the years ended June 30, 2010 and 2009, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computations as the audited financial statements for the years ended June 30, 2010 and 2009.

Intangible Assets

Land use rights with a finite useful life are amortized on a straight-line basis over its estimated useful life of 50 years, which is a common term stipulated by the government.

Reclassification

Certain amounts as of June 30, 2010 and September 30, 2009 were reclassified for presentation purposes.

Note 3– Restricted Cash

As of September 30, 2010 and June 30, 2010, the Company had restricted cash of $3,855,884 and $4,744,084, respectively. These restricted cash balances are reserved for settlement of trade notes payable and open letter of credit in connection with inventory purchases. The cash held in custody by bank issuing the trade notes payable and letter of credit is restricted as to withdrawal or use, and is currently earning interest.


 
7

 

JPAK GROUP, INC.


Note 4– Accounts Receivable

Trade accounts receivable are stated at original invoice amount less allowance for doubtful receivables based on management’s periodic review of aging of outstanding balances and customer credit history. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

The balance of allowance for doubtful accounts amounted to $1,305,286 and $1,284,360 as of September 30, 2010 and June 30, 2010, respectively. The allowance was mainly made for a customer currently under bankruptcy restructuring and we estimate that chances to recover the outstanding allowance balance from this customer are remote.

Note 5 – Inventory

Inventory, consisting of material, labor, and manufacturing overhead, at September 30, 2010 and June 30, 2010 consists of the following:

   
September 30, 2010
   
June 30, 2010
 
             
Raw materials
  $ 5,892,597     $ 6,595,076  
Work in process
    585,621       314,794  
Finished goods
    2,271,928       1,237,290  
Parts and supplies
    202,130       151,017  
                 
    Total
  $ 8,952,276     $ 8,298,177  

 
8

 

JPAK GROUP, INC.


Note 6 – Advance Payments

Advance payments as of September 30, 2010 and June 30, 2010 consist of the following:

   
September 30, 2010
   
June 30, 2010
 
             
Advance payments for inventory
  $ 1,566,604     $ 1,287,924  
Advance payments for equipment
    1,954,477       2,382,545  
                 
    Total
  $ 3,521,081     $ 3,670,469  

Note 7 – Property and Equipment

Property and equipment at September 30, 2010 and June 30, 2010 consist of the following:
             
   
September 30, 2010
   
June 30, 2010
 
             
Buildings
  $ 4,749,800     $ 4,673,651  
Machinery and equipment
    14,451,355       12,007,708  
Machinery—capital lease
    1,437,120       1,414,080  
    Subtotal
    20,638,275       18,095,439  
Less: Accumulated depreciation
     9,863,565        9,425,588  
      10,774,710       8,669,851  
Add: Construction in progress
    1,334,799       2,531,390  
                 
    Total
  $ 12,109,509     $ 11,201,241  

Depreciation expenses for the three months ended September 30, 2010 and 2009 were $335,880 and $382,499, respectively. For the three months ended September 30, 2009, amortization of machinery and equipment under capital lease included in depreciation expense was $44,782.

Note 8 – Intangible Assets

Intangible assets at September 30, 2010 and June 30, 2010 consist of the following:
             
   
September 30, 2010
   
June 30, 2010
 
             
Land use rights
  $ 3,084,776     $ -  
Less: accumulated amortization
     5,141        -  
                 
    Total
  $ 3,079,635     $ -  

The intangible assets represent consideration payments and other expenditures for land use rights of Qingdao Likang for a parcel of land with an area of approximately 65,064 square meters. The total cost is amortized over 50 years. Amortization expense for the three months ended September 30, 2010 and 2009 was $5,141 and $-0-, respectively.

 
9

 

JPAK GROUP, INC.



Note 9 – Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses at September 30, 2010 and June 30, 2010 consist of the following:

   
September 30, 2010
   
June 30, 2010
 
             
Accounts payable
  $ 3,654,704     $ 2,105,829  
Accrued expenses
     261,243        295,731  
                 
    Total
  $ 3,915,947     $ 2,401,560  

The carrying values of accounts payable and accrued expenses approximate their fair values due to the short-term nature of these obligations.

Note 10 – Trade Notes Payable

Trade notes payable consist of non-collateralized non-interest bearing promissory notes issued in connection with the acquisition of certain inventory and equipment. Balances outstanding under the notes as of September 30, 2010 and June 30, 2010 were $3,251,977 and $4,659,370, respectively.

Note 11 – Short-Term Bank Loans

Short term bank loans at September 30, 2010 and June 30, 2010 consist of the following:

   
September 30,
   
June 30,
 
   
2010
   
2010
 
             
On January 18, 2010, the Company obtained a loan from Qingdao City Commercial Bank, out of which, the principal is to be paid in full by January 18, 2011. Interest is to be calculated using an annual fixed rate of 5.31% and paid monthly. The loan is secured by the company's property.
  $ 598,800     $ 589,200  
                 
On February 11, 2010, the Company obtained a loan from Qingdao City Commercial Bank, out of which, the principal is to be paid in full by February 11, 2011. Interest is to be calculated using an annual fixed rate of 5.31% and paid monthly. The loan is secured by the company's property.
  $ 2,395,200     $ 2,356,800  
                 
Total short-term bank loans
  $ 2,994,000     $ 2,946,000  


 
10

 

JPAK GROUP, INC.


Note 12 – Long-Term Debt

Long term debt at September 30, 2010 and June 30, 2010 consist of the following:

   
September 30,
   
June 30,
 
   
2010
   
2010
 
             
The Company obtained loans from employees, upon which interest is payable at an annual fixed rate of 10%.  Interest payments are made semi-annually with no principal payments due until May 31, 2010, as per the terms of the loan agreement.
  $ 4,684,113     $ 4,439,622  
                 
On November 27, 2009, the Company entered into a sale-leaseback transaction with International Fareastern Leasing Co., Ltd., which was accounted for as a financing arrangement in the amount of approximately $1.4 million. The annual principal and interest payment is $404,950 and the term of the arrangement is four years. Refer to Note 18 for further information.
  $ 1,137,029     $ 1,198,902  
                 
                 
Total
  $ 5,821,142     $ 5,638,524  
                 
Less: Current portion of loans
    2,220,051       2,184,459  
          Current portion of obligation under capital lease
    411,548       404,950  
                 
               Total Current portion
    2,631,599       2,589,409  
                 
Total long-term portion
  $ 3,189,543     $ 3,049,115  
                 


 
11

 

JPAK GROUP, INC.


Note 13 – Stockholders’ Equity and Related Financing Agreements

On August 9, 2007, the shareholders of Jpak were issued 23,005,000 shares of Rx Staffing’s common stock, which represented 64.4% of all the issued and outstanding shares of Jpak’s common stock, under a Securities Exchange Agreement (the “SEA”), pursuant to which all the shares of Rx Staffing were transferred and Jpak became a wholly-owned subsidiary of Rx Staffing. In connection with the Share Exchange, the company changed its name to Jpak Group, Inc.

On August 9, 2007, Jpak became a party to the Note Purchase Agreement dated May 17, 2007 (“NPA”). Pursuant to the NPA, Jpak issued Convertible Promissory Notes in the aggregate principal amount of $5.5 million to the Investors. As a result of the Share Exchange, and under the terms of the Notes and the NPA, the notes converted to the following: (i) 5,608,564 shares of the Company’s Series A Convertible Preferred Stock, par value $.0001 per share, convertible into an aggregate of 11,217,128 shares of common stock, par value $0.001 per share (the “Common Stock”), (ii) Series A Warrants to purchase an aggregate of 5,500,000 shares of Common Stock (subject to adjustment) at an exercise price of $.60 per share until August 2011 (the “Series A Warrants”), (iii) Series B Warrants to purchase an aggregate of 5,500,000 shares of Common Stock (subject to adjustment) at an exercise price of $.70 per share until August 2011 (the “Series B Warrants”) and (iv) Series J Warrants to purchase (a) an aggregate of 5,000,000 shares of Series B Preferred Stock, which shall contain the same terms as the Series A Preferred Stock (other than conversion price), and will be convertible into 8,333,333 shares of the Company’s Common Stock, (b) Series C Warrants to purchase an aggregate of 4,166,667 shares of Common Stock (subject to adjustment) at an exercise price of $.72 per share (the “Series C Warrants”) and (c) Series D Warrants to purchase an aggregate of 4,166,667 shares of Common Stock (subject to adjustment) at an exercise price of $.84 per share (the “Series D Warrants” and together with the Series A Warrants, Series B Warrants and Series C Warrants, the “Warrants”). The Series J Warrants were exercisable until 90 days following the effective date of a registration statement registering for sale of shares of common stock underlying the securities issued in the financing. Finally, the Company also granted warrants to purchase 990,000 shares of common stock at an exercise price of $.50 per share and 750,000 shares of common stock at an exercise price of $.60 per share to the placement agent in the financing transaction. These warrants have the same terms as the Series A and Series B Warrants, except that they contain a “cashless” exercise provision.

On December 28, 2007, the holders of the Jpak’s outstanding Series J Warrants exercised in full such warrants for aggregate gross proceeds of $5.0 million to the Company. Upon exercise of the Series J Warrants and pursuant to their stated terms, the Company issued to the holders of the Series J Warrants (a) an aggregate of 5,000,000 shares of the Company’s Series B Convertible Preferred Stock, which are convertible into an aggregate of 8,333,333 shares of the Company’s common stock, (b) Series C Warrants to purchase an aggregate of 4,166,667 shares of the Company’s common stock at an exercise price of $0.72 per share and (c) Series D Warrants to purchase an aggregate of 4,166,667 shares of the Company’s common stock (subject to adjustment) at an exercise price of $0.84 per share. The Series C Warrants and Series D Warrants have a term of six years from the date of issuance.

In connection with the exercise of the Series J Warrants, the term of Series A and Series B Warrants was extended from four years to six years, so that such warrants shall now expire on August 9, 2013. The extension of the term of the Series A and Series B Warrants was a condition of the exercise of the Series J Warrants and the subsequent issuance of the Series B Preferred stock (the “Series B financing”).  In this way, the conversion of Series A and Series B convertible Preferred Stock is deemed as “in the money” and therefore contain a beneficial conversion feature which amounted to $2,484,226 and $1,390,853, respectively, after allocation.
 
 

 
12

 

JPAK GROUP, INC.

 
Note 13 – Stockholders’ Equity and Related Financing Agreements (Continued)

On April 1, 2008, Jpak entered into a consulting agreement with Tripoint Capital advisors, LLC to provide consulting services for one year. As a result, Jpak agreed to issue to Tripoint and/or its affiliates 300,000 shares of its capital stock on July 1, 2008. The shares were issued on July 1, 2008. 150,000 shares were vested immediately and the remaining 150,000 were to be vested in equal installments in the next two quarters. The fair value on April 1, 2008 was $404,700 based on the quoted price of the Company’s common stock.

On April 1, 2009, the board of directors approved to issue 200,000 shares of the Company’s common stock to Mr. Dongliang (Frank) Su, the acting CFO of the Company and the shares vested on July 1, 2009. The fair value on April 1, 2009 was $20,000 based on the quoted price of the Company’s common stock on that day.

On November 3, 2009, Jpak completed a financing with one accredited investor. The financing raised gross proceeds of $6.0 million with net proceeds to Jpak of $5,916,500. As a result of the financing, Jpak issued 12,000,000 units of securities at a price of $0.50 per unit. Each unit consists of (i) one (1) share of the Company’s Series C Convertible Preferred Stock, par value $0.0001 per share (the “Preferred Shares”), convertible into one share of the Company’s Common Stock, and (ii) a one-half Series E Warrant (the “Series E Warrant”) and one-half Series F Warrant (the “Series F Warrant”, collectively the “Warrants”).  Each whole Series E Warrant may be exercised to purchase one share of Common Stock at an exercise price of $0.60 per share and each whole Series F Warrant may be exercised to purchase one share of Common Stock at an exercise price of $0.70 per share.  The Warrants are exercisable for a period of five years from the date of issuance. In connection with the financing, the Company paid the fee of $30,000 to Tripoint Global Equities, LLC, who acted as placement agent.

On December 16, 2009, Jpak entered into an Exchange Agreement with each of the holders of the warrants that were issued pursuant to the private financings which closed in August 2007, December 2007 and November 2009.  Pursuant to the Exchange Agreement the Company issued an aggregate of 11,363,334 shares of our common stock in exchange for 5,500,000 Series A Warrants; 5,500,000 Series B Warrants; 4,166,667 Series C Warrants; 4,166,667 Series D Warrants; 6,000,000 Series E Warrants; and 6,000,000 Series F Warrants.  The warrant exchange took the form of a cashless transaction.  As a result, Jpak does not have any warrants outstanding other than those issued to the placement agent of the above mentioned private financings.

Note 14 – Income Taxes

Jpak Group Co., Ltd. was incorporated in the Cayman Islands. Under the laws of Cayman Islands, the Company is not subject to tax on income or capital gain.

The operating subsidiary Qingdao Renmin is a wholly foreign-owned enterprise incorporated in the PRC and subject to PRC Foreign Enterprise Income Tax (“FEIT”) Law. Pursuant to FEIT Law, foreign invested enterprises (“FIEs”) are subject to FEIT at a state tax rate of 30% plus a local tax rate of 3% on PRC taxable income. FIEs are also entitled to be exempted from FEIT for a 2-year period starting from their first profit-making year followed by a 50% reduction of FEIT payable for the subsequent three years, if they fall into the category of production-oriented enterprises with an operational period of more than 10 years in China. Qingdao Renmin started its tax holiday period on January 1, 2007, which will end on December 31, 2011.

On March 16, 2007, the National People’s Congress of China enacted a new Corporate Income Tax (“CIT”) law, under which FIEs and domestic companies would be subject to CIT at a uniform rate of 25%. The new CIT law became effective on January 1, 2008. The grandfathering treatments for unutilized tax holiday are provided for certain qualified FIEs. For those FIEs which have already commenced their qualified tax holidays before 2008, they can continue to enjoy the remaining unutilized tax holidays until expiry. For those qualified old FIEs which have not commenced their tax holidays before 2008 due to cumulative losses, their tax holidays will be deemed to commence in 2008 and can be utilized until expiry. Currently, the Company does not believe that the new CIT law will affect the preferential tax treatments (i.e. the unutilized tax holiday) that it is entitled to. Accordingly, since January 1, 2009, the Company has commenced the 3-year period of tax holidays by a 50% reduction of FEIT with an effective tax rate of 12.5%, and for the three months ended September 30, 2010 and 2009, the income tax expense was $187,436 and $242,838, respectively.

On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign investor(s) in 2008 or after will be exempt from withholding tax (“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT. Since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future.
 

 
13

 

JPAK GROUP, INC.


Note 15 – Employee Welfare Plan

The Company has established an employee welfare plan in accordance with Chinese laws and regulations. Full-time employees of the Company in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations require the Company to accrue for these benefits based on a certain percentage of the employees’ salaries. The total contribution for such employee benefits was $136,676 and $109,266 for the three months ended September 30, 2010 and 2009, respectively.

Note 16 – Risk Factors

The Company's operations are carried out 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 general state of the PRC’s economy. The Company's business may be influenced 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.

Note 17 - Risk of Concentrations and Credit Risk

For the three months ended September 30, 2010 and 2009, five vendors accounted for approximately 77% and 79% of the Company’s purchases, respectively. Total purchases from these vendors were $11,736,904 and $12,914,455 for the three months ended September 30, 2010 and 2009, respectively.

For the three months ended September 30, 2010 and 2009, five customers accounted for approximately 55% and 59% of the Company’s revenue, respectively. Total sales to these customers were $8,840,612 and $9,692,619 for the three months ended September 30, 2010 and 2009, respectively.

Financial instruments which potentially subject the Company to credit risk consist principally of cash on deposit with financial institutions. Management believes that the financial institutions that hold the Company’s cash and cash equivalents are financially sound and minimal credit risk exists with respect to these investments.


 
14

 

JPAK GROUP, INC.


Note 18 – Sale-Leaseback Transaction Accounted for as a Financing Arrangement

On November 27, 2009, the Company completed the refinancing of its printing equipment under a sale-leaseback arrangement with International Fareastern Leasing Co., Ltd. The equipment with book value of approximately $3.4 million was sold for approximately $1.4 million. The cash received was used towards the original invoice amount. The transaction has been accounted for as a financing arrangement, wherein the equipment remains on the Company’s books and will continue to be depreciated.

The loss on the sale of the equipment was deferred and amortized over the remaining useful life of the leased assets as an increase of depreciation expense. For the three months ended September 30, 2010, the Company amortized $44,782 of the deferred loss into depreciation expense. A financing obligation in the amount of $1,137,029, representing the proceeds, has been recorded under long-term debt in the Company’s Balance Sheet, and is being reduced based on payments under the lease.

The lease has a term of four years and requires minimum annual lease payments as follows:

Year Ending June 30
  Amount  
2011
    308,661  
2012
    411,548  
2013
    411,548  
2014
    137,182  
Total
  $ 1,268,939  
 
The Company has the option to purchase the equipment at the end of the lease term.

Note 19 – Earnings Per Share

The Company presents earnings per share (“EPS”) on a basic and diluted basis. Basic earnings per share have been computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share have been computed by dividing income available to common shareholders by the weighted average number of shares outstanding including the dilutive effect of equity securities. All share and per share data have been adjusted retroactively to reflect the recapitalization of the Company pursuant to the Securities Exchange Agreement with Rx Staffing.

The Company uses two-class method to calculate the basic earnings per share. Under the two class method, net income is allocated between ordinary shares and other participating securities based on their respective participating rights. The Company’s Series A, Series B and Series C preferred shares are participating securities. In the event that any dividends are paid on our common stock, the holders of Series A, Series B and Series C preferred stock shall share with the holders of common stock on an as converted basis in such dividends. The 5,608,564 shares of Series A Preferred Stock are convertible into an aggregate of 11,217,128 shares of common stock. The 5,000,000 shares of Series B Preferred Stock are convertible into an aggregate of 8,333,333 shares of common stock. The 12,000,000 shares of Series C Preferred Stock are convertible into an aggregate of 12,000,000 shares of common stock.

Basic EPS for the quarter ended September 30, 2010 was computed as follows:

Net income
  $ 977,300  
Less dividends paid to:
       
  Common shareholders
    -  
  Series A convertible preferred shareholders
    -  
  Series B convertible preferred shareholders
    -  
  Series C convertible preferred shareholders
     -  
Undistributed earnings
  $ 977,300  

Basic earnings per share amounts:                        
         
Series A
   
Series B
   
Series C
 
   
Common
   
convertible
   
convertible
   
convertible
 
   
Stock
   
preferred stock
   
preferred stock
   
preferred stock
 
                         
Distributed earnings
  $ 0.00     $ 0.00     $ 0.00     $ 0.00  
Undistributed earnings
    0.01       0.03       0.02       0.01  
  Totals
  $ 0.01     $ 0.03     $ 0.02     $ 0.01  

 
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JPAK GROUP, INC.


Note 19 – Earnings Per Share (continued)

Diluted EPS for the quarter ended September 30, 2010 was computed as follows using the If-Converted Method:

   
Distributed &
             
   
Undistributed
             
   
earnings to
             
   
Common
   
Common
   
Earnings
 
   
Stock
   
Shares
   
Per Share
 
                   
As reported - Basic
  $ 523,313     $ 36,368,334     $ 0.01  
Warrants
    -       -       -  
      523,313       36,368,334     $ 0.01  
Series A preferred stock conversion
    161,406       11,217,128       -  
Series B preferred stock conversion
    119,910       8,333,333       -  
Series C preferred stock conversion
    172,671       12,000,000       -  
Diluted earnings for common stock
  $ 977,300     $ 67,918,795     $ 0.01  

Basic EPS for the quarter ended September 30, 2009 was computed as follows:

Net income
   
 
    $ 1,492,620  
Less dividends paid to:
               
Common shareholders
            -  
Series A convertible preferred shareholders
            -  
Series B convertible preferred shareholders
             -  
Undistributed earnings
          $ 1,492,620  
                 
Basic earnings per share amounts:
               
         
Series A
   
Series B
 
   
Common
   
convertible
   
convertible
 
   
Stock
   
preferred stock
   
preferred stock
 
                     
Distributed earnings
  $ 0.00     $ 0.00     $ 0.00  
Undistributed earnings
    0.03       0.07       0.06  
  Totals
  $ 0.03     $ 0.07     $ 0.06  
 
 

 
16

 

JPAK GROUP, INC.


 
Note 19 – Earnings Per Share (continued)

Diluted EPS for the quarter ended September 30, 2009 was computed as follows using the If-Converted Method:

   
Distributed &
             
   
Undistributed
             
   
earnings to
             
   
Common
   
Common
   
Earnings
 
   
Stock
   
Shares
   
Per Share
 
                   
As reported - Basic
  $ 837,674       25,005,000     $ 0.03  
Warrants
    -       -       -  
 
    837,674       25,005,000     $ 0.03  
Series A preferred stock conversion
    375,777       11,217,128       -  
Series B preferred stock conversion
    279,169       8,333,333       -  
Diluted earnings for common stock
  $ 1,492,620       44,555,461     $ 0.03  

Note 20 – Supplemental Cash Flow Information

   
Three Months Ended September 30,
 
   
2010
   
2009
 
             
Cash paid for interest
  $ 186,075     $ 126,967  
Cash paid for income taxes
  $ 127,687     $ 167,429  

Note 21 – Subsequent Event

None.
 
 
 
 
17

 
 
Item 2.                      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and result of operations contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of the other reports we file with the Securities and Exchange Commission. Actual results may differ materially from those contained in any forward-looking statements.
 

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of Jpak for the three months ended September 30, 2010 and 2009 and should be read in conjunction with such financial statements and related notes included in this report.
 
Overview
 

We are engaged primarily in the development, manufacture and distribution of aseptic liquid food and beverage cartons for milk, fruit juices, soy milk, yogurt drinks, iced tea, wine, sauces and other liquid foods and beverages in China. Since 2004, we have focused on research and development and we believe we are one of the largest and leading domestic suppliers of aseptic liquid food and beverage cartons in China. Our business is primarily focused in China, but we have begun exporting our manufacturing products to several foreign countries.

Company History

Our operations are conducted in China through Qingdao Renmin. Qingdao Renmin commenced operations in China in 1958 as a state-owned, traditional printing and packaging company. Management completed the buyout of 88.23% of the state-owned equity interest in 2004, and in the same year started the development of aseptic liquid food and beverage cartons which was launched in the China market in 2005.

On June 22, 2006, Jpak Group Co., Ltd (“Jpak Ltd.”) was incorporated in the Cayman Islands in September 2006, Jpak Ltd. completed the acquisition of 88.23% of the equity interest in Qingdao Renmin through Grand International, the 100% owned subsidiary of Jpak Ltd.. In July 2007, Grand International completed the acquisition of the remaining 11.77% of the state-owned equity interest and now owns 100% of the equity interest of Qingdao Renmin.

On August 9, 2007, Rx Staffing completed a reverse acquisition of Jpak Ltd. and issued 23,005,000 shares of common stock on a one to one ratio for a 100% equity interest in Jpak Ltd., whereby Jpak Ltd. becomes a subsidiary of Rx Staffing. On the same day, Rx Staffing changed its corporate name to Jpak Group, Inc. (“Jpak”).
 
On January 11, 2010, Qingdao Likang Packaging Co. Ltd (“Qingdao Likang”), a wholly-owned subsidiary of Grand International, was registered in Qingdao with a capital commitment of $13.5 million. As of September 30, 2010, approximately $7.1 million or 52.6% of total registered capital has been invested and the rest will be invested within two years since the registration. Grand International is allowed to use the capital raised or the profit generated by Qingdao Renmin for this capital injection.

Competitive environment

The market for packaging products is competitive. Our operations may be affected by technological advances of competitors, industry consolidation, competitive combination products and new information of marketed products or post-marketing surveillance.
 
 
 
18

 
 

Due to China’s new anti-monopoly laws, some of our larger competitors decreased the amounts of bundled products they offer, which may cause them to lower their prices. We have also seen signs of more competition from the new entry of local suppliers as they are attracted by the relatively higher margin of this sector.

Dairy industry environment and its impact on Jpak

Currently, nearly 70% of our total revenue comes from dairy packaging. Additionally, seven out of our top ten customers are from the dairy industry. As such, our performance, to a large extent, is affected by the environment and the trends of the domestic dairy market.

Since the Chinese Health Ministry announced in September 2008 that several babies died and thousands were sickened by contaminated milk formula powder, the dairy industry in China experienced a difficult period lasting over 18 months. As a package supplier for many small dairy companies, we were adversely impacted by this scandal and our sales to dairy customers fell sharply. As a result, some major clients and business relationships were lost in the fiscal year 2009.

Since the beginning of this fiscal year, July 2009, there have been signs of recovery in the dairy industry. Data from Chinese Commercial Ministry shows that sales of liquid dairy products in February 2010 increased by 47% and sales of milk powder by almost 30%, compared with the year of 2009. Nevertheless, the overall industry has yet to return to the sales levels that existed prior to this scandal.

Management has taken various actions to minimize the loss and monitor both short and long-term impact on our business and operations. We tightened our credit control by installing ceilings on our customers’ credit limits and more closely monitoring the financial situation of our customers. So far, management’s efforts to realign our marketing effort with the post-scandal market place have shown positive results which were reflected by the performance of the fiscal year ended June 30, 2010. Further, we believe the increasing trend of domestic dairy demand will generate more concurrent demand for packaging and we hope that our new plant of Qingdao Likang will help us to capture a larger share within this industry sector.

Strategy

Our growth strategy consists of consolidating our market leader position among domestic liquid food and beverage aseptic carton suppliers and pursuing expansion in the China market as well as selective Asian and Middle Eastern markets. We intend to achieve our goal by implementing the following strategies:

-
Increasing output to further penetrate the China market;  
-
Developing bundled packaging materials and liquid filling machines;  
-
Increasing sales to selective Asian and other markets;
-
Partnering with top milk producers;
-
Establishing brand names and brand awareness; and
-
Enhancing the Company’s competitive advantages through R&D.

 
 
 
 
19

 

 
Research and Development

To maintain and expand our market share, our top priority is to achieve technology breakthroughs on SIG packages and self-developed filling equipment.

In October 2006, Qingdao Renmin invested in Qingdao Delikang Packing Machinery Co., Ltd., (“Qingdao Delikang”), a joint venture with Xi’an Heiniu Machinery, Co.. Qingdao Renmin is the 51% owner of Qingdao Delikang. The main business of this joint venture is to research and develop filling machines. Our first filling machine can run at approximately 12,000 packages output per hour and is currently being tested by one of our customers by December 2010. We are also planning to invest in the second line soon.

In addition, we are dedicated to developing packaging materials that can be used in the filling machines created by SIG. We have achieved technology breakthroughs with our first SIG packaging line, which can produce packages for small customers.  Our second SIG packaging line was recently installed and has begun production as well.  We continue to improve both quality and stability of these two new lines. We plan to add up to eight additional lines in the near future. Management believes that these new SIG packaging lines will significantly increase our revenue and also provide relatively higher gross margins in the next several years.

Manufacturing, Sales and Marketing

We support commercialized products with manufacturing, sales and marketing efforts. We are also moving forward with additional investments to enhance our infrastructure and business, including capital expenditures for the new production machinery. Our current annual capacity is approximately 3.5 billion packs for normal packaging. Once SIG packaging passes tests proving its ability to produce packages in large batches, assuming funding is available, management plans to introduce up to eight more production lines with anticipated annual capacity of 80 million packs per line.

Management continually reviews the business, including manufacturing operations, to identify actions that will enhance long-term competitiveness. By continuously streamlining the management of the production processes and improving production efficiency, we decreased the scrap percentage and lowered our costs. However, because of rising raw material prices, we were unable to lower our prices further, which may have resulted in a slower pace of growth than we might have experienced had we lowered our prices.

With the planning and construction of our new plant of Qingdao Likang, we anticipate that a new line for normal packs and four new lines for SIG packs will be put into production in spring 2011. As our finances permit, further expansion will be continued in the following two or three years which may increase our annual capacity to 8.0 billion packs per annum in total.


Results of Operations
 

The following table shows the results of operations of our business.
 

 
20

 
 
Comparison of the three months ended September 30, 2010 and 2009

Three Months Ended September 30
 
2010
   
2009
 
Sales
  $ 16,185,647     $ 16,561,920  
Cost of sales
  $ 12,625,157     $ 11,837,612  
Gross profit
  $ 3,560,490     $ 4,724,308  
Selling, general and administrative expenses
  $ 2,232,495     $ 2,888,343  
Other income (expense)
  $ (163,303 )   $ (100,563 )
Income taxes
  $ 187,436     $ 242,838  
Noncontrolling interest
  $ (44 )   $ (56 )
Net income (loss)
  $ 977,300     $ 1,492,620  
Foreign currency translation adjustment
  $ 519,446     $ 32,030  
Comprehensive income (loss)
  $ 1,496,746     $ 1,524,650  

Sales. Total sales were approximately $16.2 million for the three months ended September 30, 2010 as compared with approximately $16.6 million for the three months ended September 30, 2009, a slight decrease of approximately $0.4 million, or 2.3%. Although the total sales volume increased in this period, our revenue did not grow because the sale price of one of our major products - pillow packages, have relative lower margins compared to other types of package, and the sale volume of this product accounts for larger proportion in total volume during this period.

Cost of Sales. Cost of sales for the three months ended September 30, 2010 was approximately $12.6 million, or 78% of sales, as compared with $11.8 million, or 71.5% of sales, for the three months ended September 30, 2009, an increase of approximately $0.8 million or 6.7%. Our cost of sales is primarily composed of the costs of direct raw materials (mainly paper materials, polyethylene materials, aluminum materials, printing materials), labor, depreciation and amortization of manufacturing equipment and facilities, and other overhead. The increase of cost of sales as a percentage of sales by 6.5% was due to the purchase price escalation of major raw materials such as paper and plastic particles, which led to a narrower profit margin in the period covered by this Report. Our cost of sales may continue to rise as the global commodity prices move higher. We have no control over the cost of our major raw materials such as paper and plastic particles. Although we try to use material saving techniques to cut down the portion of cost of sales, our efforts may be limited compared with the price increase of certain raw materials.
 
Gross profit. As a result of the increase in the percentage of cost of sales, the gross profit margin for the three months ended September 30, 2010 was approximately 22% as compared with 28.5% for the three months ended September 30, 2009, a decrease of 6.5%.

Selling, general and administrative expenses. Selling, general and administrative expenses were approximately $2.2 million for the three months ended September 30, 2010 as compared with approximately $2.9 million for the three months ended September 30, 2009, a decrease of approximately $0.7 million, or 22.7%. The decrease was mainly due to the decrease of expenses for research and development and post-sale services in the three months ended September 30, 2010 by nearly $0.7 million. In addition, listing-related expenses decreased by $0.2 million.

Income tax.  Income tax was approximately $0.19 million for the three months ended September 30, 2010 as compared with approximately $0.24 million for the three months ended September 30, 2009, a decrease of approximately $0.05 million or 22.8% in accordance with the change of profit before tax.
 
  Net income.  Net income was approximately $1.0 million for the three months ended September 30, 2010 as compared with net income of $1.5 million for the three months ended September 30, 2009, a decrease of approximately $0.5 million, or 34.5%. The increase in net income was primarily due to the decrease of sales and increase of cost of sales.
 
 
 
 
21

 

 
Foreign currency translation adjustment.  Our reporting currency is the US dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
 
Currency translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of shareholders' equity and was a gain of $519,446 for the three months ended September 30, 2010 compared with a gain of $32,030 for the three months ended September 30, 2009. The balance sheet amounts with the exception of equity at September 30, 2010 were translated at RMB6.6800 to US$1.00 as compared with RMB6.8166 to US$1.00 at September 30, 2009. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the three months ended September 30, 2010 and 2009 were RMB6.7613 and RMB6.8208 to US$1.00.

Comprehensive income. The comprehensive income, which adds the currency adjustment to net income, was $1.5 million for the three months ended September 30, 2010 as compared with $1.5 million for the three months ended September 30, 2009. For the large amount of foreign currency translation adjustment due to rapid appreciation of RMB, the comprehensive income for the three months ended September 30, 2010 was close to that of three months ended September 30, 2009 even though the net profit is much lower.
 

 
Liquidity and Capital Resources

   
For the three months ended September 30,
 
   
2010
   
2009
 
Cash flow from operating activities
  $ 1,207,815     $ (1,994,152 )
Cash flow from investing activities
    (4,180,560 )     (154,930 )
Cash flow from financing activities
    (443,587 )     582,906  
 
     As of September 30, 2010, we had working capital totaling approximately $20.0 million, including cash and cash equivalents of $2.8 million.

     Net cash generated in operating activities was approximately $1.2 million for the three months ended September 30, 2010. This net cash generated was primarily due to the increase of accounts payable balances by approximately $1.5 million. Net cash used in operating activities was $2.0 million for the three months ended September 30, 2009 due to the increase of accounts receivable, advanced payment and inventory balances as a result of the increase in sales in the period.

Net cash used in investing activities for the three months ended September 30, 2010 totaled $4.2 million and related primarily to the purchase and advanced payments for property and equipment and the consideration paid for a land use right of Qingdao Likang. Net cash used in investing activities for the three months ended September 30, 2009 totaled $0.15 million and also related primarily to the purchase of property and equipment.
 
 
 
 
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    Net cash used in financing activities for the three months ended September 30, 2010 was $0.4 million and related primarily to the repayment of trade notes payable. Net cash generated in financing activities for the three months ended September 30, 2009 was $0.6 million and was related primarily to the issue of trade notes payable and proceeds of borrowings from employees during the period.

    On November 3, 2009, we completed an equity financing with one accredited investor. The financing raised gross proceeds of $6.0 million with net proceeds of approximately $5,917,000.

 Borrowings and Credit Facilities

We have entered into two loan agreements with our primary lenders, Qingdao City Commercial Bank, with which we have term loans. The short-term bank borrowings outstanding as of September 30, 2010 and 2009 were approximately $3.0 million and $2.4 million, respectively, both of which bore an average interest rate of 5.31% per annum. Secured by properties and equipment of Qindao Renmin, the loan agreements have one-year terms, contain customary affirmative and negative covenants and will expire in January and February 2011. As of September 30, 2010, we were in material compliance with the terms of our loan agreements. The current borrowings will probably extend after expiration in consideration of the capital demand from our company.

    On November 27, 2009, the Company entered into three sale-leaseback contracts with International Far-eastern Leasing Co., Ltd, one of which was completed and accounted for as a financing arrangement in the amount of approximately $1.4 million. The annual principal and interest payment is $411,548 and the term of the arrangement is four years. The other two uncompleted contracts related to $1.6 million financing proceeds for their contracted purchase of equipment for approximately $2.3 million in the future, pursuant to which the Company will pay back principal and interest of $463,643 per annum within four years once the acquisitions of equipment are completed.

Capital Commitment
 
On August 12, 2010, Qingdao Likang, our indirectly owned subsidiary, entered into a land use right transfer agreement with Qingdao Territories and House Administration Bureau, pursuant to which, Qingdao Likang was granted a 50-year use right for a parcel of land in Qingdao with an area of approximately 65,064 square meters. Qingdao Likang has paid the consideration and started building a new plant on the land and the construction is estimated to be completed by June 2011.
 
The agreement also included provisions that require total investment for the project no less than RMB242.1 million (US$35.66 million) before August 12, 2013 with a conditional one-year extension. The amount of total investment refers to the amount of capital that will be spent in the construction and operations of the plant. It includes not only the registered capital, but also future borrowings such as bank loans.

Critical Accounting Policies and Estimates
 
 
    Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Jpak’s Form 10-K for the year ended June 30, 2010 for disclosures regarding Jpak’s critical accounting policies and estimates.  The interim financial statements follow the same accounting policies and methods of computations as those for the year ended June 30, 2010.

Off-Balance Sheet Arrangements
 
    We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. 
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable.
 
 
 
 
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ITEM 4. CONTROLS AND PROCEDURES

(a)
Evaluation of disclosure controls and procedures
 
We maintain disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Acting Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Acting Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.  Based on this evaluation, our Chief Executive Officer and our Acting Chief Financial Officer have concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission, and are effective in providing reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Acting Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  
 
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on 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. 

(b)
Changes in internal control over financial reporting

Since April 2009, we have been working diligently on the evaluation of internal controls based on COSO framework. The evaluation covers all the major financial reporting processes, including procurement, revenue, inventory, fixed assets, tax, treasury and financial reporting. As of June 30, 2010, we completed our documentation both at the entity level and process level. As a result, we have identified a number of significant deficiencies and improvement opportunities with each process. We have subsequently implemented remediation measures to correct most of these weaknesses.  We believe that these corrective steps have remediated the material weaknesses disclosed in our annual report on Form 10-K for the year ended June 30, 2009 and our internal controls are now effective.

Nevertheless, we would like to draw your attention to a number of remaining significant deficiencies with our internal controls, as described in our Form 10-K for the year ended June 30, 2010.  A significant deficiency is a deficiency, or a combination of deficiencies, that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting. After evaluation we believe these deficiencies are signifant, but not material after taking into account our risk assessment and existing controls both at the entity and process levels.  The significant deficiencies identified in the Form 10-K for the year ended June 30, 2010 have been partially remediated due to the following:

1.
Currently the Company’s Acting Chief Financial Officer and his assistant, who are experienced with US GAAP reporting, are assisting in the preparation of financial statements in conformity with US GAAP and the SEC reporting requirements. Additionally, the Company has made efforts to enhance the knowledge of US GAAP reporting of its financial staff as part of its Sarbanes-Oxley Act Section 404 compliance project (“SOX project”) and other on the job training in applying US GAAP in addition to the SOX project.
 
 
 
 
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2.
Although the Company does not have a Board with a majority of independent members and does not have an audit committee, it hired Mr. Wenjie Li as its independent director in July 2010.  The Company is also seeking additional independent members, including a qualified financial expert to fulfill the role of audit committee chairman.  Nevertheless, the Company cannot assure you of when it will identify a qualified candidate or when it will be able to form an indepent audit committee.

Except as described above, there have been no changes in our internal controls over financial reporting that occurred during our last fiscal quarter to which this Quarterly Report on Form 10-Q/A relates that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

 
PART II - OTHER INFORMATION
 
 
ITEM 1.   Legal Proceedings

None.

Item 1A. Risk Factors

Not applicable to smaller reporting companies.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
(a)             Not Applicable.

(b)             Not Applicable.

(c)             Not Applicable
             
 
ITEM 3. Defaults upon Senior Securities

(a)             Not Applicable.

(b)             Not Applicable.


ITEM 4.  (Removed and Reserved)
 


ITEM 5. OTHER INFORMATION
 
(a)             Not applicable.

(b)             Not applicable.

 
 
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ITEM 6.  EXHIBITS

(a) The following exhibits are filed as part of this report.
           
Exhibit No
 
Description
3.1
 
Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 to our Annual Report on Form 10-K filed on September 29, 2008)
     
3.2
 
Bylaws (Incorporated by reference to Exhibit 3.2 to our Annual Report on Form 10-K filed on September 29, 2008)
     
31.1
 
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of the Acting Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification of the Acting Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 
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SIGNATURES
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
   
JPAK GROUP, INC.
 
 
         
   
By:
/s/ Yijun Wang
 
     
Yijun Wang
Chief Executive Officer,
Chief Accounting Officer,
 
     
President & Director 
 
         
   
By:
/s/ Dongliang Su
 
     
Dongliang Su
Acting Chief Financial Officer
 
 
Date:  December 6, 2010


 
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