Bohai Pharmaceuticals (OTC BB:BOPH)

BOHAI PHARMACEUTICALS GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

		For the Three Months Ended March 31,								For the Nine Months Ended March 31,
		2012 (unaudited)				2011				2012 (unaudited)				2011
Net revenues		$	36,237,847			$	21,793,631			$	101,002,589			$	60,351,029
Cost of revenues			8,180,762				4,853,768				23,106,879				12,402,897
Gross profit			28,057,085				16,939,863				77,895,710				47,948,132
Selling, general and administrative expenses			19,787,628				12,845,962				54,748,109				32,565,981
Income from operations			8,269,457				4,093,901				23,147,601				15,382,151
Other income (expenses):
Other income			-				1,783				-				99,901
Interest income			13,039				11,176				51,205				40,673
Interest expenses			(1,120,273	)			(554,428	)			(10,694,346	)			(2,203,775	)
Other (expenses) income, net of			(2,163	)			(546	)			(10,205	)			(2,468	)
Amortization of deferred financing fees			-				(232,200	)			-				(736,224	)
Change in fair value of derivative liabilities			317,986				263,118				458,724				3,181,603
Total other income (expenses)			(791,411	)			(511,097	)			(10,194,622	)			379,710
Income before provision for income taxes			7,478,046				3,582,804				12,952,979				15,761,861
Provision for income taxes			(2,174,128	)			(897,458	)			(6,288,779	)			(3,523,145	)
Net income		$	5,303,918			$	2,685,346			$	6,664,200			$	12,238,716
Comprehensive income :
Net income			5,303,918				2,685,346				6,664,200				12,238,716
Other comprehensive income
Unrealized foreign currency translation gain			620,662				400,224				2,276,242				2,061,028
Comprehensive income :		$	5,924,580			$	3,085,570			$	8,940,442			$	14,299,744
Net income per common share
Basic		$	0.30			$	0.15			$	0.37			$	0.72
Diluted		$	0.28			$	0.14			$	0.37			$	0.59
Weighted average common shares outstanding
Basic			17,861,085				17,544,163				17,861,085				16,988,489
Diluted			23,086,085				22,808,885				23,086,085				22,439,202

Item 1.01	Entry Into a Material Definitive Agreement
Item 8.01	Other Events

 

Pursuant to an agreement between Bohai Pharmaceuticals Group, Inc. (the “Company”) and Euro Pacific Capital, Inc. (“Euro Pacific”), on May 14, 2012, the Company repaid a portion of amounts due under its two-year 8% convertible notes, as amended (the “Notes”), in the amount of approximately $314,000, which is equivalent to the amount of the first quarter 2012 interest payment on the Notes (calculated based on an annual rate of 12% as currently provided for in the Notes). The Company will use its best efforts to repay an additional amount of approximately $731,000 due under the Notes as soon as possible, but no later than June 30, 2012. Such $314,000 and $731,000 payments are referred to herein as the “Repayment.”

 

The Notes were issued in a financing completed by the Company in January 2010 for which Euro Pacific acted as placement agent. Euro Pacific also acts as representative of the Note holders.

 

In addition, and as a result of the Company’s payment of the $314,000 portion of the Repayment as described above, on May 15, 2012, the Company and Euro Pacific entered into a Second Amendment to the Notes (the “Second Amendment”) to extend the maturity date thereof from April 5, 2012 to October 5, 2012 (such extra six month period, the “Second Extended Period”); and (ii) maintain the interest rate on the Notes at an annual rate of 12% (or 6% for the Second Extended Period). Pursuant to the terms of the Second Amendment, if the reminder of the Repayment ($731,000) is not received and distributed to Note holders by June 30, 2012, the Second Extended Period will thereafter automatically expire and the outstanding balance of the Notes will become immediately due and payable.

Item 8.01 Other Information

 

(a)	Proposed Extension of the Maturity Date of the Convertible Notes

 

On January 5, 2010, Bohai Pharmaceuticals Group, Inc. (the “Company”) entered into a Securities Purchase Agreement with certain accredited investors (the “Investors”), for which Euro Pacific Capital, Inc. (“Euro Pacific”) is acting as representative, whereby the Company issued two-year convertible notes in the aggregate amount of $12 million (collectively, the “Notes”) and warrants to purchase shares of the Company’s common stock.  As of the date of this Report, there is currently $10.45 million due under the Notes and the original maturity date of the Notes was January 5, 2012.

 

On December 31, 2011, the Company entered into an amendment to the Notes with Euro Pacific as representative of the Investors (the “Amendment”) which: (i) extended the maturity date of the Notes from January 5, 2012 to April 5, 2012 (such extra three month period, the “Extended Period”); and (ii) increased the interest rate on the Notes to an annual rate of 12% (or 3% for the Extended Period).  

 

Due to certain difficulties faced by the Company in China relating to the Company’s ability to convert its cash on hand from RMB (the Chinese currency) to US Dollars and in turn remit such amount outside China, the Company is currently in active discussions with Euro Pacific to (i) extend the maturity date of the Notes from April 5 to October 5, 2012 (such extra six month period, the “Second Extended Period”); and (ii) maintain the interest rate on the Notes as an annual rate of 12% (or 6% for the Second Extended Period). A second amendment to the Notes to memorialize the agreements of the Company and Euro Pacific with respect to the Second Extended Period is expected to be entered into by both parties in the near future.

 

To demonstrate the Company’s efforts to repay the Notes, the Company expects to repay up to 10% of the $10.45 million currently due under the Notes by April 13, 2012.  In addition to such proposed payment, and to further demonstrate the Company’s commitment to repay the Notes in full, the Company expects, as part of the contemplated Note amendment described above, to establish an RMB escrow account in China by April 13, 2012 with a reputable bank agreed upon by both Euro Pacific and the Company and to deposit into such escrow account the remaining outstanding amount of the Notes, which the Company will have no right to dispose of or use except for (i) conversion into US Dollars for the purpose of repayment of the Notes or (ii) releases from such escrow account from time to time in amounts equal to the decreases in the outstanding amount of the Notes, either by payments made by the Company or conversion of the Notes by Noteholders.

 

The Company expects to fulfill its obligations under the Notes on or before applicable due dates pursuant to the terms of the applicable agreements with Euro Pacific and the Investors (including the contemplated Note amendment described above).

Fiscal 2012 Guidance and other information

 

The Company is hereby publishing its preliminary gross revenue guidance for the third quarter of fiscal year 2012 ended March 31, 2012 in the range of $35 million to $39 million which, if achieved, would represent year-over-year quarterly growth of approximately 62.8-69.3%. The Company expects that this revenue growth were driven by a combination of its Yantai Tianzheng acquisition undertaken in mid-2011 and increasing of essential drug sales. In addition, the Company expects that the revenue growth will continue into the fourth quarter of fiscal 2012 (ending June 30, 2012) and the second half of the calendar 2012

On December 31, 2011, Mr. Gene Hsiao submitted to the Board of Directors of the Company his resignation as a director of the Company and the Chief Financial Officer of the Company, which resignation became effective on December 31, 2011. Mr. Hsiao’s resignation was for personal reasons and not as a result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. Mr. Hsiao noted in his resignation letter that his decision to resign was difficult as working at the Company has been a great experience for him for which he is extremely grateful. Mr. Hsiao wished the Company every success in the future and thanked the Company’s Chairman and Chief Executive Officer, Mr. Hongwei Qu, for the opportunities Mr. Hsiao was given during his tenure with the Company.

On January 5, 2010, Bohai Pharmaceuticals Group, Inc. (the “Company”) entered into a Securities Purchase Agreement (the “SPA”) with certain accredited investors (the “Investors”), for which Euro Pacific Capital, Inc. (“Euro Pacific”) is acting as representative, whereby the Company issued two-year convertible notes in the aggregate amount of $12 million (collectively, the “Notes”) and warrants to purchase shares of the Company’s common stock. As of the date of this Report, there is currently $10.5 million due under the Notes and the current maturity date of the Notes is January 5, 2012.

The Company is currently working with Euro Pacific as representative of the Investors on an amendment to the Notes (the “Proposed Amendment”) which would: (i) extend the maturity date of the Notes from January 5, 2012 to April 5, 2012 (such extra three month period, the “Extended Period”); and (ii) increase the interest rate on the Notes to an annual rate of 12% (or 3% for the Extended Period). Under the terms of the SPA, Euro Pacific has the power and authority to enter into the Proposed Amendment on behalf of the Investors and will undertake a process during the month of December 2011 of informing the Investors of the Proposed Amendment, following which (and prior to the original maturity date of the Notes) it is expected that the Company and Euro Pacific will formally enter into the Proposed Amendment.

First Quarter 2012 Results

• Revenue increased 78.3% to $29.9 million for the first quarter of fiscal 2012 from $16.8 million for the first quarter of fiscal 2011
• Gross profit increased 69.2% to $23.0 million versus $13.6 million for the first quarter of fiscal 2011
• Income from operations increased 35.9% to $6.7 million compared to $5.0 million for the same period of fiscal 2011
• Net income was $2.7 million, or $0.15 per diluted share for the first quarter of fiscal 2012, versus $3.0 million, or $0.15 per diluted share for the same period of fiscal 2011
• Non-GAAP net income increased 40.8% to $4.9 million, or $0.25 per diluted share, versus $3.5 million, or $0.17 per diluted share, for the first quarter of fiscal 2011

Mr. Hongwei Qu, Chairman, President and CEO of Bohai Pharmaceuticals, stated, "We are pleased to report another very strong quarter at Bohai. Our revenue growth is being driven by a number of factors, including increasing demand for our core products and brand, an expanding product line, aggressive marketing, China's expanding coverage of TCM under its national medical insurance program and, most recently, our acquisition of Yantai Tianzheng.

"We completed the acquisition of Yantai Tianzheng this past August and, by doing so, have expanded our existing product line while achieving economies of scale. The acquisition was immediately accretive to our business. We currently produce 19 varieties of approved traditional Chinese herbal medicines in seven delivery systems: tablets, granules, capsules, formulations, concentrated powder, tincture and medicinal wine. Of these 19 products, 12 are prescription drugs and 7 are over the counter (or OTC) products. Approximately 20% of the increase in our revenues during the third quarter was from Bohai and 58% was from Tianzheng.

"Our competitive advantage in the marketplace is the fact that all of our lead products are listed for coverage and reimbursement under China's national medical insurance program. The sale of our prescription drug products for the fiscal first quarter of 2012 represented 74.0% of total net revenue compared to 60.5% for the same period in last year. The increase in prescription sales was primary due to increases in sales volume from two of our core products, Tongbi Capsules and Tongbi Tablets, as well as prescription product sales from Yantai Tianzheng Pharmaceuticals. We are in a strong position in the Chinese market and seek to capture additional market share in the months ahead."

In concluding, Mr. Qu stated, "We anticipate our revenue and net profit will continue to increase as a result of the Chinese government's expansion of healthcare coverage and reimbursement for an increasing number of products produced by Bohai. By the end of 2011, China's healthcare system will provide individual health insurance for over 90% of the country's population. The health plan includes traditional Chinese medicines for coverage and reimbursement from hospitals and medical centers all over China."

Fiscal 2011 Financial Highlights:

• Revenue increased 37.2% to $81.3 million in fiscal 2011 from $59.3 million in fiscal 2010
   
• Gross profit increased 30.4% to $64.0 million versus $49.1 million for the fiscal 2010
   
• Income from operations increased 42.1% to $18.3 million compared to $12.8 million in fiscal 2010
   
• Net income was $14.0 million, or $0.75 per diluted share in fiscal 2011, versus $9.1 million, or $0.55 per diluted share in fiscal 2010
   
• Non-GAAP net income increased 37.4% to $11.8 million, or $0.66 per diluted share, versus $8.6 million, or $0.52 per diluted share, in fiscal 2010

Mr. Hongwei Qu, Chairman, President and CEO of Bohai Pharmaceuticals, stated, "A combination of company-driven initiatives, quality products and favorable healthcare coverage trends in China are the driving forces behind Bohai's impressive growth. We are pleased to report a 37.2% increase in sales for 2011 and 37.4% growth in adjusted, non-GAAP net income. Our four lead products continue to gain traction in the markets we serve and now comprise 76% of our total revenue. These products include Lung Nourishing Syrup, Tongbi Capsules, Tongbi Tablets and Shantongning Tablets. We currently manufacture 19 varieties of approved traditional Chinese herbal medicines of which 12 are prescription drugs and seven are over-the-counter."

"We will continue to roll out new products already in our pipeline and we recently expanded our product lines through the acquisition of Yantai Tianzheng Pharmaceutical Co., Ltd., in August 2011. Yantai Tianzheng has a sales network that covers 14 major provinces in China and had revenue of $37.9 million in 2010, an increase of 60.5% over 2009. We plan to leverage our respective distribution channels and manufacturing capabilities, as well as streamline operations through the integration of our respective companies. The acquisition also expands Bohai's pipeline of SFDA approved, exclusive and/or protected TCM medicines. The government's plan to provide 90% of China's population with healthcare coverage by the end of 2011 will further enhance Bohai's penetration into its intended market."

In concluding, Mr. Qu stated, "With Bohai's strong and growing pipeline of both prescription and non-prescription products and the Chinese government's plan to provide reimbursement for an expanded universe of traditional Chinese medicines, we believe we are in an exceptionally strong position to increase sales as well as shareholder value."

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

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

(i) the completion of the acquisition of Yantai Tianzheng (currently $12 million is due within 12 months, and a total of $29 million is due); and

(ii) the repayment our convertible promissory notes due January 5, 2012 (currently $10.45 million due).

As such, we will be required to raise substantial additional capital to fund these obligations, either through the issuance of debt or equity securities, bank loans or other methods. Readers are cautioned that additional funding, capital or loans may be unavailable to us on favorable terms, if at all. If adequate funds are not available, we would likely have to renegotiate the terms of these obligations, which we may be unable to do on favorable terms.

 

On August 8, 2011, Yantai Nirui Pharmaceuticals, Ltd. (“Yantai Nirui”), a company formed under the laws of the People’s Republic of China (the “PRC”) and wholly owned by Bohai Pharmaceuticals Group, Inc. (the “Company”), entered into a Share Purchase Agreement (the “SPA”) pursuant to which Yantai Nirui acquired, from the three individual holders thereof, one hundred percent (100%) of the outstanding equity interests (the “Shares”) in Yantai Tianzheng Pharmaceuticals Co. Ltd., a company formed under the laws of the PRC (“Yantai Tianzheng”).

Third Quarter Fiscal 2011 Financial Highlights:

• Revenue increased 44.6% to $22.2 million from $15.3 million for the third quarter of fiscal 2010
• Gross profit increased 35.7% to $16.9 million versus $12.5 million for the third quarter of fiscal 2010
• Income from operations increased 24.8% to $4.1 million compared to $3.3 million for the third quarter of fiscal 2010
• Net income was $2.7 million, or $0.14 per diluted share, versus $3.1 million, or $0.16 per diluted share for the third quarter of fiscal 2010
• Non-GAAP net income increased 26.2% to $2.6 million, or $0.14 per diluted share, versus $2.1 million, or $0.11 per diluted share, in the fiscal third quarter of 2010, excluding $997,626 of net gains for non-cash related activities

Mr. Hongwei Qu, Chairman, President and CEO of Bohai Pharmaceuticals, stated, "The continued growth and acceptance of our traditional Chinese medicines in China is very gratifying and we are pleased to report another quarter of strong revenue growth. We continued the execution of our operational plan by investing heavily in sales and marketing this quarter, and we believe our 44.6% increase in revenue demonstrates that this effort is paying off. In addition, we added 200 level 2 hospitals and 10 new drug store chains to our national network of retail locations selling our lead product--Lung Nourishing Syrup. We now sell this product in approximately 1,600 level 2 hospitals and 36 drug store chains in China. We believe that our strong distribution network, combined with an internal sales force of more 300 direct sales representatives, provides an important competitive advantage and bodes extremely well for the future. Moreover, we have significant capacity within our existing manufacturing facilities, which should enable us to gain significant operating leverage as we continue to grow."

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

From December 14, 2010:

Bohai Pharmaceuticals Group, Inc. has entered into a binding agreement with Shandong Daxin Microbiology Pharmaceutical Industry Co., Ltd. to acquire the rights to 14 approved TCM medicines that were previously issued to Daxin by the Shandong Branch of the State Food and Drug Administration of China ("SFDA").  The aggregate purchase price is approximately $7,200,000 (CNY 48 million), of which approximately $3,000,000 (CNY 20 million) will be paid within 15 days from the execution of the agreement.  The remaining balance will be paid on or before January 31, 2011. 
 
The product acquisitions expand Bohai's delivery platforms to include two new categories: powder and pellet formulations.  The Chinese government's Essential Drug List (EDL) for TCM, which was established in 2009 as part of China's healthcare reform, has the most product categories in these two areas.  Among the 14 medicines being acquired by Bohai, four are currently included on the EDL and an additional five medicines are included in the National Drug Reimbursement List (NRDL).  Additionally, 3 of the 14 are prescription medicines and 11 will be available for sale Over-the-Counter.  Inclusion on either the EDL or NRDL allows for up to 100% insurance coverage by the Chinese government. 
 
"Bohai is excited to significantly expand our potential product offerings with the acquisition of these 14 products, which we believe offer great value to our shareholders," said Mr. Hongwei Qu, Chairman, President and CEO of Bohai Pharmaceuticals Group. "The ongoing national health insurance reform promises to drive tremendous growth in the Chinese markets, particularly with respect to TCM and in rural areas, where over 900 million people reside.  Patient purchased drugs from the EDL will receive 100% government coverage, so ensuring Bohai expands patient options for medicines on this list will be a key component of our growth strategy.  Importantly, these new products will leverage our existing 300 person sales-force and help us gain additional TCM market-share in China."
 
Bohai's 14 newly acquired medicines are in addition to the 29 traditional Chinese medicine products that the Company is authorized to produce, of which 15 are currently in production. 
 
For additional information on this transaction, please see the Form 8-K that the Company plans to file with the U.S. Securities and Exchange Commission. 

For The Three Months Ended
				September 30,
		Notes		2010				2009
Net revenues				$	17,029,648			$	13,954,604
Cost of revenues					(3,447,266	)			(2,217,604	)
Gross profit					13,582,382				11,737,000
Selling, general and administrative expenses		15			(8,614,758	)			(9,174,693	)
Income from operations					4,967,624				2,562,307
Other incomes (expenses)
Other income					14,208				69,072
Amortization of deferred financing fees					(259,965	)			-
Interest expense		16			(494,039	)			(148,395	)
Other expense					(3,115	)			(5,269	)
Change in fair value of derivative liabilities					(30,554	)			-
Total other income (expenses)					(773,465	)			(84,592	)
Income before provision for income taxes					4,194,159				2,477,715
Provision for income taxes		17			(1,181,684	)			(555,474	)
Net income				$	3,012,475			$	1,922,241
Comprehensive income:
Net income				$	3,012,475			$	1,922,241
Other comprehensive income
Unrealized foreign currency translation gain (loss)					926,468				(47,583	)
Comprehensive income				$	3,938,943			$	1,874,658
Earnings per common share
Basic		11		$	0.18			$	0.15
Diluted				$	0.15			$	0.15
Weighted average common shares outstanding
Basic		11			16,506,626				13,162,500
Diluted					22,250,104				13,162,500

“Improving upon our past financial achievements, Bohai is excited to announce its record results for the first quarter of fiscal 2011,” said Mr. Hongwei Qu, Chairman, President and CEO of Bohai Pharmaceuticals Group. “During the quarter, we recognized double digit top line growth by focusing our strong marketing efforts on our lead products while at the same time continuing the roll out of our five new TCM products. We were also able to cut administrative costs, allowing us to boost net income by 57% compared to the same period last year. We look forward to making further progress with our sales initiatives as we continue to take advantage of the Chinese government’s growing support of the TCM industry through the implementation of its new healthcare policies.”

As a key driver of Bohai’s growth, the company’s three lead TCM products (Tongbi Capsules and Tablets and Lung Nourishing Cream) are eligible for reimbursement under China’s national medical insurance program enacted in 2009. Bohai believes that this provides a distinct advantage to the company’s business strategy, which places a particular marketing focus on these lead products going forward. Among other features, this new government plan seeks to extend national medical insurance coverage to China’s rural areas, with a target population in excess of 900 million potential healthcare consumers. The plan also seeks to promote the use of TCM products. Bohai currently produces 15 TCM products in China and is authorized to produce an additional 14 products.

Sales in the first quarter were generated mainly from Bohai’s lead products, Lung Nourishing Cream, Tongbi Capsules and Tongbi Tablets, which together represented over 70% of Bohai’s total net revenues. However, progress has been made on the five products that Bohai introduced in April and May of 2010. Although the new product sales only represented less than 5% of total net revenues in the first quarter, the net revenues for the five new products in the quarter ended September 30, 2010 increased by 160% compared to the quarter ended June 30, 2010.

Mr. Qu added, “We anticipate our overall net revenues will continue to increase due to the national medical and health plan initiated by Chinese government in 2009, which is expected to eventually cover individual health insurance over 90% of China’s population by 2011. As these policies continue to be implemented, we believe endorsements for Traditional Chinese Medicine, along with its coverage and reimbursement from hospitals and medical

Transcript of the Bohai Pharmaceuticals Group, Inc: Fiscal Year 2010 Earnings Conference Call

Participants
Darren Minton, Trilogy Capital Partners, President
Gene Hsiao, Bohai Pharmaceuticals Group Inc., CFO

Darren Minton – Trilogy Partners – President

Thank you Diego and thank you to everyone who has joined us today for Bohai Pharmaceuticals Group’s Fiscal Year 2010 Earnings Conference Call.  I am joined here today by Gene Hsiao, Bohai’s Chief Financial Officer.  Bohai is lucky to have someone of Gene’s caliber on board, as he has over 15 years of experience working with public companies, and as an added benefit to Bohai’s investors he is based in the United States and is fluent in both English and Mandarin.

There are a number of items that we look forward to discussing with you this morning including Bohai’s record financial results for the fiscal year ended June 30th 2010, recent developments in the traditional Chinese medicine industry (also known as “TCM”), as well as Bohai’s plans for the future.  At the conclusion of this call we will be answering questions during a brief Q&A session.

Before we get started I will take a moment to read the safe harbor statement regarding today’s conference call.  This conference call will contain forward-looking statements within the meaning of the US Federal Securities Law concerning Bohai Pharmaceuticals Group, Inc.  Forward-looking statements can be identified by words such as “estimate,” “expect,” “project,” “guidance,” “intend,” “believe,” “anticipate,” “seek” and other words of similar meaning in connection with any discussion of future events.  Listeners are cautioned that Bohai’s actual results may differ materially or even substantially from what is stated in the forward looking statements depending on a number of risk factors, including, but not limited to risks associated with: general economic, political and business conditions in China; the Chinese government’s support of healthcare and TCM in China; Bohai’s manufacturing and shipment capabilities; market acceptance of both new and existing Bohai products; competition; Bohai’s sales and marketing initiatives; and Bohai’s corporate governance, accounting and disclosure procedures, as well as various other factors, many of which are beyond Bohai’s control.  All forward-looking statements are expressly qualified in their entirety by this cautionary statement and the full listing of risk factors detailed in Bohai’s filings with the SEC.  Except as required by applicable law, Bohai undertakes no duty to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

Now with that I would like to start the call with a few words from Bohai’s CFO, Gene Hsiao.  Gene?

Gene Hsiao – Bohai Pharmaceuticals Group, Inc. – CFO

Thank you, Darren.  Good morning everyone. It’s a pleasure to be here.
Our first order of business today will be providing a brief overview of Bohai’s business for those of you that are new to the company, and discussing the June 30 year-end financials in greater detail.  I’ll end our prepared remarks with Bohai’s recent developments, at which point we will enter the question and answer session.

Bohai Pharmaceuticals Group is involved in the production, manufacturing and distribution of herbal pharmaceuticals based on Traditional Chinese Medicine in China. Bohai’s medicines address common health problems ranging from arthritis to viral infections, and cardio vascular issues to respiratory diseases. Our products are sold either by prescription through hospitals, or over-the-counter through local pharmacies and retail drug store chains.

To understand our business model, it is important to have a general appreciation for the many macro-economic drivers that are currently influencing the healthcare system in China, as well as new PRC mandated policies that support the use of Traditional Chinese Medicine.  First and foremost, there is an ongoing and dramatic expansion of national health insurance in China through the implementation of new government programs established in early 2009 that are seeking to extend health insurance coverage to previously uncovered Chinese citizens.  With the government paying up to 90 percent of certain pharmaceutical products’ costs, these policies are opening up the pharmaceutical industry in China to a target demographic of approximately 900 million rural Chinese, who for the most part, have not purchased medicines on a large scale due to their limited income.

Going forward, it has been estimated that China plans to increase its healthcare spending from 96 billion in 2008 to approximately 125 billion by 2011, with the goal of covering 90% of its population with basic medical insurance at that time.  As these polices go into effect, and of further benefit to Bohai, the Chinese government is officially supporting the use of Traditional Chinese Medicine by including these drugs in its list of nationally reimbursable products.  Bohai’s three lead products, Tongbi Capsules, Tongbi Tablets and Lung Nourishing Cream, are eligible for reimbursement under China’s National Medical Insurance Program.

For this reason, in fiscal 2010 we placed (and we expect to continue to place) a significant emphasis on these products in our marketing budget through increased advertising, sales initiatives, and prescription drug promotion via conferences, seminars and directly to hospitals. With over 300 employees devoted to sales, operating from 20 offices throughout China, Bohai is committed to meeting the greater demand for Traditional Chinese Medicine.  As evidenced by our numbers this year, Bohai has positioned itself to take full advantage of the favorable market conditions in China.

Looking first at our consolidated year-end figures, our net revenues increased 20% to 59.3 million, up 10 million from 2009 net revenues of 49.3 million. We increased revenues primarily through sales of our main products: Lung Nourishing Cream (which is taken orally, similar to a cough syrup) and Tongbi Capsules and Tongbi Tablets (both of which treat arthritis).  As mentioned previously, each of these 3 products have been listed for national insurance coverage in China.  The increase in sales was also attributed to Bohai’s enhanced marketing strategy that was implemented in January 2010 when we raised 12 million dollars from US investors. As mentioned in the 10-K, due to temporary disruptions in the hospital bidding process, (as various PRC mandated healthcare policies have been implemented) fourth quarter net revenues decreased by approximately $173,000 compared to the same period of 2009.  Management believes that these changes to the local bidding process are temporary and they should NOT have a material impact on our overall sales going forward.

With Bohai’s increase in fiscal year 2010 net revenue, gross profit increased to 49.1 million as compared to 41.4 million last year.  Our overall gross profit margins as a percentage of revenue have now exceeded 80% for the last two fiscal years.  SG&A expenses increased to 36.3 million in fiscal 2010, compared to 31.3 million in 2009.  This increase was mainly attributable to an increase of advertising expense of approximately 2.3 million as part of Bohai’s increased marketing activities, as well as an increase on commission expense for our expanded sales team of approximately 2.7 million.

Bohai generated net income of 9.5 million in 2010, compared to 7.9 million last year, an approximate 19% increase.  Earnings per share increased to 57 cents per fully diluted share, or approximately 64 cents per basic share in 2010, compared to 60 cents per basic share in 2009.

Now, looking at the balance sheet. Cash and cash equivalents increased from 2.5 million as of June 30, 2009 to 17.1 million as of June 2010, mainly as a result of the 12 million dollar financing in January of this year and cash generated from operations.  As of June, current assets totaled 30.4 million, and current liabilities were 8.8 million. Working capital at the end of the year was a healthy 21.6 million, as compared to 8.5 million last year.  Derivative liabilities relating to investor and placement agent warrants for the year totaled 5.5 million.  Our shareholders' equity was 50.1 million compared to 33.4 million at June 30, 2009.
In addition to our record financial metrics, Bohai has experienced a number of significant events over the past year:

In January 2010, Bohai became a U.S. listed operating company and raised $12 million in a convertible note and warrant financing. Using these funds, Bohai has been implementing a proactive marketing strategy designed to significantly increased revenue on all the TCM products Bohai currently sells, with a particular focus on our 3 lead products.

In April and May of this year, Bohai introduced a total of five new products, increasing its total TCM offering from 10 to 15.  In addition, Bohai has the right to produce 14 additional products based on an aggregate portfolio of 29 TCM formulations that we are approved by the PRC government to manufacture.

Throughout the year, we have taken steps to enhance our corporate governance as we seek to be a model US listed Chinese company.  I was pleased to join the company earlier this year and in July we added three distinguished independent directors to join our CEO on the board.  Included in this group are a renowned expert in TCM, a well regarded public company accounting expert and the China Capital Markets group leader of an international law firm.

In September, as part of our increased investor awareness initiatives, Bohai conducted a non-deal US road show with our CEO Mr. Hongwei Qu, myself, and our PRC treasurer Lucy Jiang.  We visited numerous institutions, investment banks and prospective investors, in cities throughout the United States; however we want the investor community to know that this was only the first step in our enhanced awareness campaign and I will be conducting additional meetings and road shows due to my general availability as a CFO based in the United States.
 
As we move into fiscal 2011, we expect to further increase marketing and advertising for our growing portfolio of TCM medicines, with a particular focus on our lead products: Tongbi Capsules and Tongbi Tablets, formulated to treat various forms of arthritis, and Lung Nourishing Cream, a liquid product used in the treatment of asthma and other common respiratory ailments.  Not only are these products reimbursable through insurance in China, two of them are sheltered from competition in some way.  Tongbi Capsules are a “protected” medicine in China, meaning Bohai is the only manufacturer permitted to sell the product, and Lung Nourishing Cream was recently awarded a patent in June lasting 20 years.

As we wrap up the reporting for 2010 we would like to thank our shareholders for their continued support.  On a macro-level, we anticipate strong demand for Traditional Chinese Medicine as PRC policies, national insurance coverage, and various other economic drivers contribute to the benefit of our sales initiatives.

Now, that concludes our prepared remarks.  I’d like to thank you for joining us.  We will now be conducting our question and answer session.

Q&A

<Q>:  Hello Gene, this is Pat Murphy, thanks for taking my call.  You mentioned that the Q4 flat sales was temporary and I just wanted to see how sales look in the first quarter of the new fiscal year?

Gene Hsiao – Bohai Pharmaceuticals Group, Inc. – CFO

Yes even though this information has not been disclosed but based on the first two months of the first quarter information the sales revenue is on track.

<Q>:  Yes thank you for taking my question.  Could you talk a little bit about the competitive landscape and some of the competitors that you are running up against, just to provide some transparency there?

Gene Hsiao – Bohai Pharmaceuticals Group, Inc. – CFO

Right, yes.  I think the advantage we have over our competitors is that first of all this is a very fragmented market and a lot of smaller companies use different products and we believe we are on top of the competition, because a lot of our products are either protected by the government under protective status or exclusive status and one of our products even has a patent awarded. So these are the advantages we have.  Again, it is a very fragmented market out there and our company has focused products, for example like for the arthritis and the lung nourishing cream, those are the products that, so far, we believe we are the leader in those fields.
 
Gene Hsiao – Bohai Pharmaceuticals Group, Inc. – CFO

I would like to thank everyone for joining us this morning and attending Bohai’s first conference call.  We look forward to keeping investors apprised of our latest developments and holding regular earnings conference calls in the future.  Thank you so much.

Summary of Fiscal Year Ended June 30, 2010 Financial Results:

• Net revenues for the twelve months ended June 30, 2010 increased by approximately $9,916,110, or 20.1%, to $59,264,724 as compared to $49,348,614 for the twelve months ended June 30, 2009.  This increase was primarily due to increase in revenue from three of our main products, Lung Nourishing Cream, Tongbi Capsules and Tongbi Tablets, which together had over 50% of our total net revenue and all of which are listed for coverage and reimbursement under national medical insurance starting in December 2009.  The increase was also due to the marketing strategy we implemented beginning in January 2010.

• Net income of $9,488,192 for the twelve months ended June 30, 2010, as compared to net income of $7,947,900 for the twelve months ended June 30, 2009, an increase in net income of $1,540,292, or 19.4%.
  
• Fully diluted EPS of $0.57 for fiscal 2010 vs. $0.60.
  
• Basic EPS of $0.64 for fiscal 2010, exceeding previously issued guidance of $0.61

GeoTeam® Note:

Net revenues for the fourth quarter ended June 30, 2010 decreased by approximately $173,000, or approximately 1%, compared to the fourth quarter ended June 30, 2009.  The decrease was due to the fact that some product orders were put on hold by hospitals as a result of changes in bidding processes for some state and local Chinese governments.  The national health insurance reform started in 2009 at national levels and, as a result, some state and local governments have tried to improve their overall new policies.  Changes in local bidding processes were temporary and should not have a material impact of our overall net revenues going forward.

"We anticipate our overall net revenue will continue to increase due to a national medical and health plan initiated by Chinese government in 2009, which plan will eventually cover individual health insurance over 90% of China’s population by 2011 and includes traditional Chinese medicines for coverage and reimbursement from hospitals and medical centers all over China."

Based on a preliminary assessment of Bohai’s year-end financials, which will be finalized toward the end of September and announced through a 10-K filing with the SEC, Bohai expects to report record levels of net revenue and net income in comparison to its fiscal 2008 and 2009 results.

The company’s projected guidance for its June 30, 2010 fiscal year results are as follows:

• FY 2010 projected net revenue of $58 million (vs. $49.3 million FY 2009), equating to an 18% year-over-year net revenue increase.
  
• FY 2010 projected net income of $9.0 million (vs. $7.9 million FY 2009), equating to an approximate 14% year-over-year net income increase.
  
• EPS of approximately $0.61 based on 14.7 million weighted average basic shares outstanding.

"We remain unequivocal in our commitment to driving revenue and earnings growth,” said Mr. Hongwei Qu, President and Chief Executive Officer of Bohai Pharmaceuticals. “We believe that our business model, which focuses on the government supported pharmaceutical and healthcare markets in China, is validated by our nine months ended March 31, 2010 top line results as well as current and forecasted top line and bottom line numbers for our June 30 fiscal year end. We believe our proactive sales initiatives and increased budget due to our capital raise in January will serve to drive our revenues, earnings and, ultimately, shareholder value.”

Effective July 12, 2010, the board of directors (consisting of Hongwei Qu, the sole director) of Bohai Pharmaceuticals Group, Inc. (the “Company”), by written consent to action and pursuant to the Company’s Amended and Restated Bylaws (which provides for a classified board of directors of the Company), appointed the following persons to serve on the board of directors of the Company

• Wang Chengde  and Hongwei Qu (for terms ending with the 2010 annual meeting of stockholders)

•   Louis A. Bevilacqua, Esq. (for a term ending with the 2011 annual meeting of stockholders)

•    Adam Wasserman (for a term ending with the 2012 annual meeting of stockholders)
  

Post Merger Share Calculation:

• Pre reverse merger outstanding shares: 3,450,000
• Shares of Common Stock issued in connection to the Bridge Investors: 200,000
• Shares cancelled as part of the Share Exchange: 1,500,000
• Newly issued shares of Common Stock: 13,162,500
• Shares from convertible notes associated with private placement: 6 million
• Shares from warrants associated with private placement: 6 million
• Share issued to financial institutions (Agents): 600 thousand
  
  

GeoTeam® best effort calculation of total post reverse merger outstanding shares assuming full conversions:  27,912,500

Source: SEC Form 8K (January 5, 2009)

 

Yantai Bohai Pharmaceuticals Group Co., Ltd. went public via a share exchange on January 5, with Link Resources.

Highlights:

• Bohai is a profitable company principally engaged in the production, manufacturing and distribution of herbal pharmaceuticals based on traditional Chinese medicine in China.
• Bohai’s medicines address common health problems such as rheumatism, rheumatoid arthritis, respiratory diseases, viral infections, gynecological diseases and cardio vascular issues.
• Bohai’s products are sold either by prescription through hospitals or Over the Counter through local pharmacies and retail drug store chains.
• Bohai generated approximately $50.2 million in audited revenues and approximately $8.0 million in audited net earnings for the fiscal year ended June 30, 2009

Source: Business Wire (January 5, 2010)

Three Months Ended September 30,
		2009				2008
Sales		$	14,181,772			$	11,412,018
Less: Sales Tax			(227,168	)			(183,821	)
Net sales			13,954,604				11,228,197
Cost of sales			(2,217,604	)			(1,854,478	)
Gross profit			11,737,000				9,373,719
Selling, general and administrative expenses			(9,174,693	)			(6,651,539	)
Interest expenses			(148,395	)			(65,038	)
Operating income			2,413,912				2,657,142
Non-operating income			69,072				-
Non-operating costs			(5,269	)			(31	)
Income before taxes			2,477,715				2,657,111
Income taxes			(555,474	)			(600,199	)
Net income		$	1,922,241			$	2,056,912

________________________________________________________________________________________

Fiscal Year Ended June 30,
		2009				2008
Sales		$	50,170,014			$	38,172,513
Less: Sales Tax			(821,400	)			(629,489	)
Net sales			49,348,614				37,543,024
Cost of sales			(7,975,267	)			(5,950,680	)
Gross profit			41,373,347				31,592,344
Selling, general and administrative expenses			(31,301,811	)			(22,601,932	)
Interest expenses			(184,404	)			(234,101	)
Operating income			9,887,132				8,756,311
Non-operating income			49,447				8
Non-operating costs			(36,366	)			(835	)
Income before taxes			9,900,213				8,755,484
Income taxes			(1,906,985	)			(2,303,712	)
Net income		$	7,993,228			$	6,451,772

Using our post reverse merger share count of 27,912,500 yields a trailing EPS number of $0.29.