10-K 1 v180861_10k.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
 
x    Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended: December 31, 2009
 
¨    Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to_______ 

Commission File Number: 000-32253

HUIFENG BIO-PHARMACEUTICAL TECHNOLOGY, INC.
(Exact Name of Registrant as specified in its charter)

Nevada
 
87-0650264
(State or other jurisdiction of
Incorporation or organization)
 
(I.R.S. Employer
Identification Number)

16B/F Ruixin Bldg., No. 25 Gaoxin Road, Xi An, Shaanxi Province, China 710075
(Address of principal executive office)

86-29-8822-4682
(Registrant’s telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $0.018 Per Share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨      No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨      No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (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 Act). Yes ¨ No x

The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, as of June 30, 2009, was approximately $1,625,348. All executive officers and directors of the registrant have been deemed, solely for the purpose of the foregoing calculation, to be "affiliates" of the registrant.

As of March 19, 2010, there were 23,051,169 shares of the issuer's common stock, $0.018 par value per share, issued and outstanding.
 

 
TABLE OF CONTENTS

 
Page
PART I
1
ITEM 1. Business
1
ITEM 1A. Risk Factors
6
ITEM 1B. Unresolved Staff Comments
11
ITEM 2. Properties
11
ITEM 3. Legal Proceedings
11
ITEM 4. Removed and Reserved
11
PART II
11
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
11
ITEM 6. Selected Financial Data
12
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
12
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
19
ITEM 8. Financial Statements and Supplementary Data
19
ITEM 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
19
ITEM 9A(T). Controls and Procedures
20
ITEM 9B. Other Information
20
PART III
20
ITEM 10. Directors, Executive Officers and Corporate Governance
20
ITEM 11. Executive Compensation
22
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
23
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
23
ITEM 14. Principal Accounting Fees and Services
23
PART IV
 
ITEM 15. Exhibits, Financial Statements Schedules
24
 


 
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

In this annual report, the terms “Huifeng Bio-Pharmaceutical,” “HFGB,” the “Company,” “we,” “us,” and “our” refer to Huifeng Bio-Pharmaceutical Technology, Inc., and its subsidiaries, Northwest BioTechnic Inc. (“NBTI”) and Huifeng Biochemistry Joint Stock Company (“Huifeng”).

Except for the historical information contained herein, some of the statements in this Report contain forward-looking statements that involve risks and uncertainties. These statements are found in the sections entitled "Business," "Management's Discussion and Analysis or Plan of Operation," and "Risk Factors." They include statements concerning: our business strategy; expectations of market and customer response; liquidity and capital expenditures; future sources of revenues; expansion of our proposed product line; and trends in industry activity generally. In some cases, you can identify forward-looking statements by words such as "may," "will," "should," "expect," "plan," "could," "anticipate," "intend," "believe," "estimate," "predict," "potential," "goal," or "continue" or similar terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including, but not limited to, the risks outlined under "Risk Factors," that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For example, assumptions that could cause actual results to vary materially from future results include, but are not limited to: our ability to successfully develop and market our products to customers; our ability to generate customer demand for our products in our target markets; the development of our target markets and market opportunities; our ability to manufacture suitable products at competitive cost; market pricing for our products and for competing products; the extent of increasing competition; technological developments in our target markets and the development of alternate, competing technologies in them; and sales of shares by existing shareholders. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Unless we are required to do so under US federal securities laws or other applicable laws, we do not intend to update or revise any forward-looking statements.

PART I

ITEM 1. BUSINESS

History

Our company, Huifeng Bio-Pharmaceutical Technology, Inc. (“we,” “us,” “our,” “HFGB,” the “Company” or “our Company”) was incorporated under the laws of the State of Nevada and trades on the Over the Counter ("OTC") Bulletin Board under the symbol “HFGB.”

The Company was originally incorporated in Nevada on March 16, 2000 under the name “Enternet, Inc.” On May 23, 2002, the Articles of Incorporation were amended to change the name of the Company to “Secured Data, Inc.” On October 12, 2005, the Articles of Incorporation were amended to change the name of the Company to “Huifeng Bio-Pharmaceutical Technology, Inc.”

Since October 2002, management's business plan was to seek out a privately held business with whom the Company can reorganize so as to take advantage of the Company's status as a publicly held corporation.

On December 20, 2004, pursuant to the terms of a Stock Purchase Agreement (“Malone Agreement”), Art Malone, Jr. sold 7,229,601 shares of the common stock of Secured Data, Inc. for $300,000.00 (the “Sale”) to Zhi Lan Wang and Jun Lin, individuals. As a result, the 7,229,601 shares of the common stock of the Company sold represented approximately 56.18% of the total outstanding stock of the Company. Immediately thereafter, pursuant to the terms of an Agreement and Plan of Reorganization dated December 20, 2004 (“Northwest Agreement”), the Company initially purchased 30% of the common shares of Northwest BioTechnic Inc. (“NBTI”), a British Virgin Islands corporation, in exchange for 80,735,590 shares of the Company's common stock (“Acquisition”). The purchase price for the remaining 70% of NBTI's common shares was $1,900,000.00 payable by the Company's issuance of a promissory note (“Promissory Note”) on December 20, 2004. The Promissory Note was subsequently converted into 10,465,725 (post a one for eighteen reverse split) shares of the Company's common stock. As a result, the 80,735,590 shares of the common stock of the Company sold represented approximately 86.3% of the total outstanding stock of the Company.

NBTI was incorporated in the British Virgin Islands on June 25, 2004. NBTI operates through its wholly owned subsidiary, Huifeng Biochemistry Joint Stock Company, which is a joint venture company established under the laws of the PRC and is a company engaging in the production and sales of plant extracts, biochemical products and pharmaceutical raw products in the PRC. On February 22, 2006, Huifeng Biochemistry Joint Stock Company changed its name to Xi’an Huifeng Bio-Technic, Inc. (“Huifeng”).
 
1

 
Business Overview

HFGB, through its wholly owned subsidiary NBTI, owns 100% of Huifeng which produces and sells plant extracts, biochemical products and pharmaceutical raw products in the PRC. Huifeng was founded on January 18, 2000. With its proprietary technology of “Producing Rutin by Eliminating Enzyme and Mucus” together with abundant resources of high quality pagoda rice in the Northwest region of China as raw material, Huifeng developed and specialized itself as one of the major technology based Rutin company in Xian city within two years after establishment. Huifeng possesses one of the most advanced and patented Rutin-refining technologies in China and is a major Rutin supplier for the world market. Huifeng emphasized technology and product innovation and its strategic mission is to commercialize Chinese traditional medicine.

 
§
Produces pharmaceutical raw materials, active pharmaceutical ingredients, and plant extracts.
 
§
Focuses on expanding extract production and new market penetration.
 
§
Currently dominant Chinese producer of Rutin and Diosmin.
 
§
Serves a diverse domestic and international client base.
 
§
Maintains all Chinese qualifying certifications for domestic and international sales of plant extracts and related products.
 
§
Includes ISO9000:2001 and multiple national Good Manufacturing Practices(GMP) qualifications.
 
Our Products
 
The Company’s products are primarily in the chemical category called flavonoids, with medicinal benefits and multiple end markets, including pharmaceuticals used for human and animals, nutraceuticals, cosmetics, functional drink and food. All the products can be reduced to the three categories as following: 
 
Pharmaceutical Raw Materials
 
§
Diosmin EP and other specification clients required.
 
§
Rutin USP standard, Rutin DAB9, Rutin DAB10, Rutin EP5, Rutin BP2006
 
§
Troxerutin DAB1999, Troxerutin EP5, Troxerutin EP6
 
§
Silymarin USP, Silymarin DAB, Silymarin BP2006
 
Active Pharmaceutical Ingredients
 
§
Quercetin , Rhamnose, Glucomannan, Glucuronolactone, Hesperidin, Synephrine, Resveratrol, etc. Soybean Isoflavones, Lutein, Lycopene, 5-HTP, etc.
 
Plant Extracts
 
§
Ginkgo Biloba Extract, Epimedium Extract, Bilberry Extract, Grape Seed Extract, Bitter Melon Extract, Mellisa Officinallis Extract, etc.

During 2006, we finished two new products lines, Diosmin and L-Rhamnose. Since January 2008, the Company began the process of applying the Certificate of Suitability (COS) certificate for Diosmin from the European Directorate for the Quality of Medicines & HealthCare (EDQM). The Company introduced new facilities and equipments for this certificate and fulfilled process managing procedures and files according to the COS requirements. We introduced a Hesperidin production line in 2008 which keeps the stable quality and sufficiency of raw material for Diosmin.

The chemical name of Diosmin is 7-[[6-o(6-Deoxy-2-L-mannopyranosyl)-β-D-glucopyran-osyl]oxy]-5-hydroxy-2-(3-hydroxy-4-methoxyphenyl)-4H-l-ben-zopyran-4-one). Diosmin is a pharmaceutical material, which has comprehensive impact on blood vessel feedback system and is suitable for treatment of acute or chronic hemorrhoids and chronic insufficiency of vein (lower limbs varicosity, dropsy and chronic canker).

The chemical name of L-Rhamnose is (thymidine-5'-diphosphate-L-rhamnose). Belonging to the category of monosackcharide, it is generally applied in manufacturing antivirus and anti-tumor raw medicines. In addition, this product can be an ingredient for food. It has been used for testing permeation of intestines and sweet additives. At present, L-Rhamnose is mostly applied in synthetic perfume of fruit spice. It is the basic material for fruit spice composition. L-Rhamnose has been widely applied in the industrial production and scientific research, such as intermediate synthetic perfumes and heart-strength medicines made from organic matters. Furthermore, as an ingredient for food, L-Rhamnose can be directly added into top-grade coffee, beverage or meat.

The chemical name of Rutin is rue glycoside (Molecular formula: C27H30O163H2O) and it is a kind of plant extract. It can inhibit platelet aggregation and prevent thrombosis. It can also improve the permeability of capillary vessels, and has the properties of:

1.           Anti- inflammatory;
 
2

 
2.           Decreasing blood pressure and fat; and

3.           Mitigating cerebral hemorrhage.

Additionally, it has positive effect in protecting heart and cerebral hemorrhage and ischemia-reperfusion injury. It is widely used as a raw material for the heart and cerebral blood vessel medicines as well as an additive for cosmetics and functional food. The demand for Rutin increases at an annual rate of approximately 30% due to the increased demand for heart and cerebral blood vessel medicines as a result of the aging population. Furthermore, the improvement in living standards in China also stimulates the growth in the demand for functional food and natural cosmetics. Troxerutin, Quercetin, Rhamnose is three kinds derivatives of Rutin.

Production Facilities

On June 28, 2009, Huifeng Bio-Technic disposed its 70% owned interest in Huifeng Engineering, located in Fenghui, Changan, Xian, for a consideration of $21,919 in cash. At present, we have one major production facility that included the following equipment resources:

Manufacturing plant located at No. 1, Huifeng Rd, Changwu, Xianyang:

 
·
This production site is for refining and manufacturing of new products.
 
·
Has a total of 10 buildings including:
 
-
A two-level office building
 
-
A four-level staff building
 
-
An one-level building for clean area under GMP standard
 
-
One raw materials storage building
 
-
Two building for storage of finished products
 
-
One building for dangerous products
 
-
Building for quality testing zone and researching center
 
-
Building for power and maintenance (including boiler, power distribution and maintenance)
 
-
One cafeteria and staff canteen

The production facilities together occupy a total area of approximately 117,569 square feet. The Company has pledged part of its production facilities in Changwu factory valued at approximately $978,851 to Xi'an Beilin District Credit Cooperatives to secure loan in the amount of $253,028 due June 2010.

In 2006, we introduced two new production lines: Diosmin production line for Diosmin, L-Rhamnose production line. In 2008, we introduced a Hesperidin production line. We constructed a new one-level building for storage of finished products and rebuilt a building for quality testing zone and research center in 2009. All of them were built according to COS standards.

We currently obtain all of our raw materials from third parties and through various farmers located in the Shaanxi province, Gansu province and Shanxi province areas of China. Our principal suppliers include Cungui Zhang, Xiaohe Wang and Yingwei Xu. All of them are the largest wholesalers in their own areas.

Target Markets and Principal Customers

In 2009, we developed three new customers. Two of them are European customers and the other one is an international API distributor based in China. These customers primarily purchase Diosmin from us due to the high quality of our products, as reflected from the fact that we are the only Chinese producer that in the process of applying COS from EDQM.

For the present, our products are all raw materials intermediaries for medicines productions and the users of these products are industrial clients. As a result, Huifeng's main target customers are pharmaceutical companies and manufacturers in nutrient, cosmetics, functional food and drinks.

Dependence on Major Customers

For the fiscal year ended December 31, 2009, our top five customers accounted for approximately 17% of our revenues. We are working towards developing a broad base of customers to minimize our dependency on any major customers.
 
3

 
Sales and Marketing

In 2009, the majority of products were raw materials and intermediaries for production of medicines, nutraceutical and cosmetics. Our target customers were mostly industrial clients and we continued to sell our products to pharmaceutical and nutrition and food manufacturers. Most of our customers placed purchase orders directly with our sales and marketing team. However, in order to diversify and expand our product sales networks, we began using outside distribution channels for some of our export sales in 2009. We accepted purchase orders from professional foreign trade corporations in order to expand our international distribution channels and increase sale revenues from exports.

The sales department was divided into two teams, domestic sales team and export sales team. In 2009, the Company did not add new employee in export sales department. The total number of employees in sales departments is still 24 people. All the sales department staffs were trained with certain professional lessons. Most of them attended the industrial international exhibition and fairs which are held in U.S, European, Shanghai and Beijing, such as CPHI Shows, API, Supplyside West, etc.

We did not establish any regional representative or sales office in 2009 because our products were primarily sold through direct orders from our clients who placed orders with our sales department. There was no need for any retail distribution of our product.

Competition

Huifeng engages in Rutin production in China. With its proprietary technology of “Producing Rutin by Eliminating Enzyme and Mucus” and with abundant resources of high quality pagoda rice in the Northwest region of China as raw material, Huifeng does not face significant competitions within China.

In 2009, our major competitor for Rutin continues to be Sichuan Xieli Pharmaceutical Company Limited (“Xieli”). However, we believe that due to the lack of technology patents and ready access to raw materials, Xieli is gradually fading out of the Rutin refining business and is shifting its business from raw medicine production to finished medicine production.

We also believe that, in 2009, there were fewer small domestic Rutin manufacturers. We do not believe that the remaining small manufacturers pose any threat to our business. On the contrary, they sometimes become our suppliers and support our operations.

In 2009, our competitor for Diosmin and L-Rhamnose is Chengdu Huakang Biology Company (“Huakang”). However, Huakang has no licenses for drug production and cannot sell its products for medicinal use.  The scope of its market is therefore restricted. In addition, unlike us, they did not have the requisite European Certification of Suitability (“COS”). Thus they do not pose any threat to us in terms of market share and sales, particularly in the export market.

Looking forward to 2010, we estimate that there would be some new domestic competitors for certain new products that we have started selling, including Resveratrol. However, we do not believe that these competitors have mature technologies for producing Resveratrol at costs lower than ours. Therefore we do not believe that they pose an immediate threat to our business.

Principal Office

Our principal office is located at 16B/F Ruixin Bldg., No. 25 Gaoxin Road, Xi’an, Shaanxi Province, China 710075.

Employees and Organization

As of December 31, 2009, we had approximately 224 full-time employees. During 2009, we employed 3 new employees. 2 new employees were assigned to the certification department; 1 new employee was assigned to the production department. As a result, by the end of 2009, we had a total of 224 employees. None of our employees are covered by a collective bargaining agreement and we have never experienced a work stoppage, and we consider our labor relations to be good.

As of December 31, 2009, our Company organization was as follow:

 
Department
 
Employee as
of end of
2009
  
Employee as
of end of
2008
  
Sales department:
         
Domestic sales department
 
8
 
8
 
Export sales department:
         
Export section I
 
8
 
8
 
Export section II
 
8
 
8
 
Production department
 
155
 
154
 
Technical department
 
5
 
5
 
Inspection department
 
8
 
8
 
Provision department
 
5
 
5
 
Personnel department
 
5
 
5
 
Finance department
 
7
 
7
 
Security department
 
8
 
8
 
Certification department
 
7
 
5
 
TOTAL
 
224
 
221
 
 
4


Business Development and Acquisitions

In 2009, we still focused on new products development and sales channels development. Looking forward to 2010, we will focus on:

1.           Still preparing for obtaining American FDA authorization and EU COS authorization so as to increase our market share in pharmaceutical raw materials and plant extract products in both international and domestic markets;

2.           Streamlining our organization to ensure smooth operations and productions;

3.           Dominate Chinese Diosmin market and expand international client base; and

4.           Leverage R&D and technological innovation for further product development.

On September 25, 2008, the Company’s subsidiary Huifeng Bio-Technic entered into a series of exclusive contractual agreements with Xi’an Qinba Xintong Medical Limited (“Qinba”), a company organized under the laws of the PRC, and their respective registered shareholders, pursuant to which Huifeng Bio-Technic will provide exclusive management consulting and other general business operation services to Qinba in exchange for service fees amounting to 70% of the total profit of Qinba. Each of the registered PRC shareholders of Qinba also entered into shares pledge agreements and option agreements; each shareholder pledged their respective interests in Qinba for the due performance of such Qinba’s obligations under its respective management entrustment agreement. Huifeng Bio-Technic has been assigned all voting rights by the shareholders of Qinba and has the option to acquire the equity interests of Qinba at a mutually agreed purchase price. As part of this arrangement, Huifeng Bio-Technic has agreed to provide an interest free loan totaling $291,792 to Qinba for working capital purposes as follows: i) $72,948 upon signing of the agreements, ii) $72,948 will be advanced to Qinba after the completion of certain financial due diligence on Qinba, and iii) $145,896 will be advanced to Qinba within three days after the completion of the audit as of December 31, 2008.

Through the above contractual arrangements, Huifeng Bio-Technic would have become the primary beneficiary of Qinba which is a variable interest entity as defined under FIN 46R “Consolidation of Variable Interest Entities.”

In October 2008, Huifeng Bio-Technic advanced Qinba $58,358 as part of the $291,792 loan advancement required to be made for working capital purposes.

Huifeng Bio-Technic was unable to make further loan advances and defaulted on its contractual arrangements with Qinba. Subsequent to the default, Huifeng Bio-Technic in December 2008 entered into discussions with Qinba to terminate its contractual relationship. The parties have verbally agreed to this termination on the basis that Huifeng Bio-Technic shares no profits of Qinba and that Qinba will forfeit $37,933 from the $58,358 interest free loan already advanced by Huifeng Bio-Technic. In January 2009, Qinba refunded $20,425 balance of loan to Huifeng Bio-Technic after the deduction of $37,933 as penalty.

As of December 31, 2008, the Company wrote-off $37,933 from its loan to Qinba as irrecoverable.

Research and Development

In 2009, we continued on research and development of new products and new technologies. We kept the structure of our research and development team.

The amounts we spent on research and development for 2009 and 2008 were $43,629 and $23,726, respectively. The increase is mainly due to the cost of research materials, related external testing and employees’ wages.

Patents and Intellectual Properties

Huifeng's proprietary technology “Producing Rutin by Eliminating Enzyme and Mucus” received Chinese national technology patent with a ten-year protection period.
 
5

 
Government Regulations

The Chinese government requires all medicine and medicinal products related manufacturers to obtain GMP certification for their pharmaceutical manufacturing facilities. Huifeng obtained GMP certification from relevant government regulatory bodies. Other than GMP certification requirements, there was no significant change in the regulatory environment in China.

Compliance with Environmental Laws

We believe that we are in compliance with environmental laws in the PRC which are applicable to us. The costs of such compliance do not have a material effect on our financial condition.

Regulation of Enterprise Income Law

The Enterprise Income Law (“EIT Law’) was promulgated by the National People’s Congress on March 16, 2007 to introduce a new uniform taxation regime in the PRC. Both resident and non-resident enterprises deriving income from the PRC will be subject to this EIT Law from January 1, 2008. It replaced the previous two different tax rates applied to foreign-invested enterprises and domestic enterprises by only one single income tax rate applied for all enterprises in the PRC. Under this EIT Law, except for some hi-tech enterprises which are subject to EIT rates of 15% and other very limited situation that allows EIT rates at 20%, the general applicable EIT rate in the PRC is 25%. Although we still enjoy certain tax incentives applicable to foreign-invested enterprises prior to the introduction of the EIT Law, the current lower EIT rate will be phased up to 25% within a five-year period. Moreover, we may not enjoy further tax incentives for our further established companies in the PRC and therefore our tax advantages over domestic enterprises may be diminished.

ITEM 1A. RISK FACTORS

Risks Related To Our Business

To Maximize Our Potential For Future Growth And Achieve Our Expected Revenues, We Need To Manage Growth In Our Current Operations.

In order to maximize potential growth in our current and potential markets, we believe that we must expand our manufacturing and marketing operations. This expansion will place a significant strain on our management and on our operational, accounting, and information systems. We expect that as we continue to grow we will need to improve our financial controls, operating procedures, and management information systems to handle increased operations. We will also need to effectively train, motivate, and manage our employees. Failure to manage our growth could disrupt our operations and ultimately prevent us from generating the revenues we expect.

We Cannot Guarantee That Our Organic Growth Strategy Will Be Successful.

One of our growth strategies is to grow organically by increasing the distribution and sales of our products in new markets outside of China. However, many obstacles to entering new markets exist, such as the costs associated with entering into new markets, developing and implementing effective marketing efforts abroad and maintaining attractive foreign exchange ratios. We cannot, therefore, assure you that we will be able to successfully overcome such obstacles and establish our products in any additional markets. Our inability to successfully implement our organic growth strategy may have a negative impact on our growth strategy and on our future financial condition, results of operations or cash flows.

We Cannot Assure You That Our Acquisition Growth Strategy Will Be Successful.

In addition to our organic growth strategy we also expect to grow through strategic acquisitions In the case of funds permit.

If We Are Not Able To Implement Our Strategies To Achieve Our Business Objectives, Our Business Operations And Financial Performance May Be Adversely Affected.

Our business plan and growth strategy is based on currently prevailing circumstances and the assumption that certain circumstances will or will not occur, as well as the inherent risks and uncertainties involved in various stages of development. However, there is no assurance that we will be successful in implementing our strategies or that our strategies, even if implemented, will lead to the successful achievement of our objectives. If we are not able to successfully implement our strategies, our business operations and financial performance may be adversely affected.
 
6

 
If We Need Additional Capital To Fund Our Growing Operations, We May Not Be Able To Obtain Sufficient Capital And May Be Forced To Limit The Scope Of Our Operations.

As we implement our growth strategies, we may experience increased capital needs and we may not have enough capital to fund future operations without additional capital investments. Our capital needs will depend on numerous factors, including (1) our profitability; (2) the release of competitive products by our competition; (3) the level of our investment in research and development; and (4) the amount of our capital expenditures. We cannot assure you that we will be able to obtain capital in the future to meet our needs.

If we cannot obtain additional funding, we may be required to:

·           reduce our investments in research and development;
·           limit our marketing efforts; and
·           decrease or eliminate capital expenditures.

Such reductions could have a material adverse affect our business and our ability to compete. Even if we do find a source of additional capital, we may not be able to negotiate acceptable terms and conditions for receiving the additional capital. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our common stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.

We Depend On Third Parties To Supply Raw Materials, And Any Adverse Changes In Such Supply Or The Costs Of Raw Materials May Adversely Affect Our Operations.

We currently obtain all of our raw materials from third parties and through various farms. Due to the nature of the raw materials, mainly plants, the supply of these raw materials can be adversely affected by any material change in the climate or environmental conditions in China, which may, in turn, result in increased costs to purchase these raw materials.

Intense Competition From Existing And New Entities May Adversely Affect Our Revenues And Profitability.

We compete with other companies, many of whom are developing, or can be expected to develop, products similar to ours. Some of our competitors are more established than we are, and have significantly greater financial, technical, marketing and other resources than we presently possess. Some of our competitors have greater name recognition and a larger customer base. These competitors may be able to respond more quickly to new or changing opportunities and customer requirements and may be able to undertake more extensive promotional activities, offer more attractive terms to customers, and adopt more aggressive pricing policies. We intend to create greater brand awareness for our brand name so that we can successfully compete with our competitors. We cannot guarantee that we will be able to compete effectively with current or future competitors or that the competitive pressures we face will not harm our business.

We Depend On Our Key Management Personnel And The Loss Of Their Services Could Adversely Affect Our Business.

We place substantial reliance upon the efforts and abilities of our executive officers, Jingan Wang, our Chairman and Chief Executive Officer; Sanding Tao, our acting Chief Financial Officer. The loss of the services of any of our executive officers could have a material adverse effect on our business, operations, revenues or prospects. We do not maintain key man life insurance on the lives of these individuals.

We May Incur Significant Costs To Ensure Compliance With U.S. Corporate Governance And Accounting Requirements.

We may incur significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the Securities and Exchange Commission and the NASDAQ OTCBB. We expect all of these applicable rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these newly applicable rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
 
7

 
We May Have Difficulty Raising Necessary Capital To Fund Operations As A Result Of Market Price Volatility Of Our Shares Of Common Stock.

If our business development plans are successful, we may require additional financing to continue to develop and exploit existing and new technologies and to expand into new markets. The exploitation of our technologies may, therefore, be dependent upon our ability to obtain equity financing through debt and equity or other means. In recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performance, underlying asset values or prospects of such companies.

For these reasons, our shares of common stock can also be expected to be subject to volatility resulting from purely market forces over which we will have no control. Such volatility may make it more difficult to find investors willing to invest in our common stock, or to negotiate equity financing or terms that are acceptable to us.

Risks Relating To the People's Republic of China

There Could Be Changes In Government Regulations Towards The Pharmaceutical And Health Supplement Industries That May Adversely Affect Our Business.

The manufacture and sale of pharmaceutical products in the PRC is heavily regulated by many state, provincial and local authorities. These regulations significantly increase the difficulty and costs involved in obtaining and maintaining regulatory approvals for marketing new and existing products. Our future growth and profitability depend to a large extent on our ability to obtain regulatory approvals. The State Food and Drug Administration of China recently implemented new guidelines for licensing of pharmaceutical products. All existing manufacturers with licenses, which are currently valid under the previous guidelines, are required to apply for the Good Manufacturing Practices ("GMP") certifications, and we receive approvals in January 2005. We have received our certifications. However, should we fail to maintain the GMP certifications under the new guidelines in the future; our businesses would be materially and adversely affected. Moreover, the laws and regulations regarding acquisitions of the pharmaceutical industry in the PRC may also change and may significantly impact our ability to grow through acquisitions.

Currency Conversion And Exchange Rate Volatility Could Adversely Affect Our Financial Condition.

The PRC government imposes control over the conversion of Renminbi into foreign currencies. Under the current unified floating exchange rate system, the People's Bank of China publishes an exchange rate, which we refer to as the People's Bank of China exchange rate, based on the previous day's dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into foreign exchange transactions at exchange rates within an authorized range above or below the People's Bank of China exchange rate according to market conditions. Pursuant to the Foreign Exchange Control Regulations of the PRC issued by the State Council which came into effect on April 1, 1996, and the Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which came into effect on July 1, 1996, regarding foreign exchange control, conversion of Renminbi into foreign exchange by Foreign Investment Enterprises, for use on current account items, including the distribution of dividends and profits to foreign investors, is permissible. Foreign Investment Enterprises are permitted to convert their after-tax dividends and profits to foreign exchange and remit such foreign exchange to their foreign exchange bank accounts in the PRC. Conversion of Renminbi into foreign currencies for capital account items, including direct investment, loans, and security investment, is still under certain restrictions. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important provision, which provides that the PRC government shall not impose restrictions on recurring international payments and transfers under current account items.

Enterprises in the PRC (including Foreign Investment Enterprises) which require foreign exchange for transactions relating to current account items, may, without approval of the State Administration of Foreign Exchange, or SAFE, effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks by providing valid receipts and proofs.

Most Of Our Assets Are Located In China, Any Dividends Of Proceeds From Liquidation Is Subject To The Approval Of The Relevant Chinese Government Agencies.

Our assets are predominantly located inside China. Under the laws governing foreign invested enterprises in China, dividend distribution and liquidation are allowed but subject to special procedures under the relevant laws and rules. Any dividend payment will be subject to the decision of the board of directors and subject to foreign exchange rules governing such repatriation. Any liquidation is subject to both the relevant government agency's approval and supervision as well the foreign exchange control. This may generate additional risk for our investors in case of dividend payment and liquidation.

China’s economic policies could affect our business.

Substantially all of our assets are located in China and substantially all of our revenue is derived from our operations in China. Accordingly, our results of operations and prospects are subject, to a significant extent, to the economic, political and legal developments in China.
 
8

 
While China's economy has experienced a significant growth in the past twenty years, growth has been irregular, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of China, but may also have a negative effect on us. For example, our operating results and financial condition may be adversely affected by the government control over capital investments or changes in tax regulations.

The economy of China has been transitioning from a planned economy to a more market-oriented economy. In recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform and the reduction of state ownership of productive assets and the establishment of corporate governance in business enterprises; however, a substantial portion of productive assets in China are still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over China's economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

We may face obstacles from the communist system in The People's Republic of China.

Foreign companies conducting operations in The People’s Republic of China face some political, economic and legal risks.

We may have difficulty establishing adequate management, legal and financial controls in The People's Republic of China.

The People's Republic of China historically has been deficient in Western style management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in The People's Republic of China. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.

Because our assets and operations are located in China, you may have difficulty enforcing any civil liabilities against us under the securities and other laws of the United States or any state.

We are a holding company, and all of our assets are located in the People's Republic of China. In addition, our directors and officers are non-residents of the United States, and all or a substantial portion of the assets of these non-residents are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon these non-residents, or to enforce against them judgments obtained in United States courts, including judgments based upon the civil liability provisions of the securities laws of the United States or any state.

There is uncertainty as to whether courts of the People's Republic of China would enforce:

·           Judgments of United States courts obtained against us or these non-residents based on the civil liability provisions of the securities laws of the United States or any state; or

·           In original actions brought in the People's Republic of China, liabilities against us or non-residents predicated upon the securities laws of the United States or any state. Enforcement of a foreign judgment in the People's Republic of China also may be limited or otherwise affected by applicable bankruptcy, insolvency, liquidation, arrangement, moratorium or similar laws relating to or affecting creditors' rights generally and will be subject to a statutory limitation of time within which proceedings may be brought.

The PRC legal system embodies uncertainties, which could limit law enforcement availability.

The PRC legal system is a civil law system based on written statutes. Unlike common law systems, decided legal cases have little precedence. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past 27 years has significantly enhanced the protections afforded to various forms of foreign investment in China. Each of our PRC operating subsidiaries and affiliates is subject to PRC laws and regulations. However, these laws and regulations change frequently and the interpretation and enforcement involve uncertainties. For instance, we may have to resort to administrative and court proceedings to enforce the legal protection that we are entitled to by law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting statutory and contractual terms, it may be difficult to evaluate the outcome of administrative court proceedings and the level of law enforcement that we would receive in more developed legal systems. Such uncertainties, including the inability to enforce our contracts, could affect our business and operation. In addition, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to the industries in which we operate, including the promulgation of new laws. This may include changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the availability of law enforcement, including our ability to enforce our agreements with the government entities and other foreign investors.
 
9

 
Risks Related to Corporate and Stock Matters

The limited trading volume in our stock may cause volatility in the market price of our common stock.

Our common stock is currently traded on a limited basis on the OTCBB under the symbol, "HFGB.OB" The quotation of our common stock on the OTCBB does not assure that a meaningful, consistent and liquid trading market currently exists, and in recent years, such market has experienced extreme price and volume fluctuations that have particularly affected the market prices of many smaller companies like us. Our common stock is thus subject to volatility. In the absence of an active trading market:

·           investors may have difficulty buying and selling or obtaining market quotations;
·           market visibility for our common stock may be limited; and
·           lack of visibility for our common stock may have a depressive effect on the market for our common stock.

Our stock is a penny stock. Trading of our stock may be restricted by the SEC's penny stock regulations which may limit a stockholder's ability to buy and sell our stock.

Our stock is a penny stock. The SEC has adopted Rule 15g-9 which generally defines "penny stock" to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and "accredited investors". The term "accredited investor" refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

NASD sales practice requirements may also limit a stockholder's ability to buy and sell our stock.

Section 15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2 promulgated thereunder by the SEC require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor's account.

Potential investors in our common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be "penny stock." Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii)reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
 
10

 
Shares eligible for future sale may adversely affect the market price of our Common stock, as the future sale of a substantial amount of our restricted stock in the public marketplace could reduce the price of our common stock.

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act ("Rule 144"), subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who has satisfied a one-year holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading -volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitations, by a non-affiliate of our company that has satisfied a two-year holding period. Any substantial sale of common stock pursuant to Rule 144 or pursuant to any resale prospectus may have an adverse effect on the market price of our securities.

If we or our independent registered public accountants cannot attest our adequacy in the internal control measures over our financial reporting, as required by Section 404 of the U.S. Sarbanes-Oxley Act in future, we may be adversely affected.

As a public company, we are subject to report our internal control structure and procedures for financial reporting in our annual reports on Form 10-K, as a requirement of Section 404 of the U.S. Sarbanes-Oxley Act of 2002 by the U.S. Securities and Exchange Commission (the "SEC"). The report must contain an assessment by management about the effectiveness of our internal controls over financial reporting. Moreover, the independent registered public accountants of our Company must attest to and report on management's assessment of the same. Even if our management attests to our internal control measures to be effective, our independent registered public accountants may not be satisfied with our internal control structure and procedures. We cannot guarantee the outcome of the report and it could result in an adverse impact on us in the financial marketplace due to the loss of investor confidence in the reliability of our financial statements, which could negative influence to our stock market price.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

See “Production Facilities” in “ITEM 1. BUSINESS.”

The Company has pledged part of its production facilities in Changwu factory valued at approximately $978,851 to Xi'an Beilin District Credit Cooperatives to secure loan in the amount of $253,028 due June, 2010.

On June 28, 2009, Huifeng Bio-Technic disposed its 70% owned interest in Huifeng Engineering for a consideration of $21,919 in cash. The operations of Huifeng Engineering have been reclassified as discontinued operations in the accompanying consolidated statements of operations for the three and six months ended June 30, 2009 and 2008 and are summarized in Note 16 of the Company’s Form 10-Q filed to SEC on August 14, 2009 (period: June 30, 2009).

ITEM 3. LEGAL PROCEEDINGS

We are currently not involved in any litigation that could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of the Company’s subsidiaries or of the Company's subsidiaries' officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

ITEM 4. REMOVED AND RESERVED
 
PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common stock is quoted on the Over-the-Counter Bulletin Board (OTCBB) under the symbol “HFGB.”

Trading of our common stock has been limited and sporadic. The following table shows the range of high and low bid quotations reported by the OTCBB in each fiscal quarter from January 1, 2008 to December 31, 2009. The OTCBB quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
 
11

 
Quarter
 
High
   
Low
 
Fiscal Year 2009
           
Fourth Quarter
 
$
1.29
   
$
0.45
 
Third Quarter
 
$
0.60
   
$
0.15
 
Second Quarter
 
$
0.50
   
$
0.15
 
First Quarter
 
$
0.26
   
$
0.21
 
Fiscal Year 2008
               
Fourth Quarter
 
$
0.55
   
$
0.25
 
Third Quarter
 
$
0.85
   
$
0.30
 
Second Quarter
 
$
1.40
   
$
0.57
 
First Quarter
 
$
0.72
   
$
0.25
 

Holders

As of March 19, 2010, there were approximately 636 holders of record of our common stock. This number does not include an indeterminate number of shareholders whose shares are held by brokers in street name.

Dividends

We presently intend to retain future earnings, if any, to provide funds for use in the operation and expansion of our business. Accordingly, we have not declared or paid any dividends to our common shareholders and do not presently intend to do so. Any future decision whether to pay dividends will depend on our financial condition and any other factors that our Board of Directors deems relevant.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

On August 17, 2009, the Board of Directors approved the issuance of 1,200,000 shares of restricted common stock having a fair value of $184,359 to a third party for the settlement of outstanding accounts payable of $184,359. The value of the common stock issued was determined based on the outstanding balance of payable, which below the aggregated amount of $420,000 calculated by the closing market price of $0.35 per share on August 17, 2009.

On August 17, 2009, the Company also issued 2,600,000 shares of restricted common stock having a fair value of $421,391 to a third party for the payment of construction costs for an office building located at Changwu County, PRC, of $421,391. The value of the common stock issued was determined based on the outstanding balance of payable, which below the aggregated amount of $910,000 calculated by the closing market price of $0.35 per share on August 17, 2009.

On August 26, 2009, the Company issued 75,000 shares of restricted common stock having a fair value of $37,500 to a legal counsel for legal advisory services provided during the year. The value of the common stock issued was determined based on the closing market price of $0.5 per share on August 26, 2009.

On December 24, 2009, the Company issued 450,000 shares of common stock to the Note holders in consideration of entering into the amendment of the Notes having a fair value of $445,500. The value of the common stock issued was determined based the closing market price of $0.99 per share on December 24, 2009.

Securities Authorized for Issuance Under Equity Compensation Plans

None.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement

This annual report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect,” "intend,” "plan,” "will,” "we believe,” "HFGB believes,” "management believes” and similar language. The forward-looking statements are based on the current expectations of HFGB and are subject to certain risks, uncertainties and assumptions, including those set forth in the discussion under "Description of Business” and "Management's Discussion and Analysis of Financial Condition and Results of Operation.”  The actual results may differ materially from results anticipated in these forward-looking statements. We base the forward-looking statements on information currently available to us, and we assume no obligation to update them.
 
12

  
History

On December 20, 2004, pursuant to the Malone Agreement, Art Malone, Jr. ("Selling Shareholder") sold 7,229,601 shares of the common stock of the Company for $300,000 (the "Sale") to Zhi Lan Wang and Jun Lin, individuals on the closing date of December 20, 2004. As a result, the 7,229,601 shares of the common stock of the Company sold represented approximately 56.18% of the total outstanding stock of the Company. Immediately thereafter, On December 20, 2004 HFGB completed a Northwest Agreement, of which the Company initially purchased 30% of the common shares of NBTI in exchange for 80,735,590 shares of the Company's common stock ("Acquisition"). The purchase price for the remaining 70% of NBTI's common shares was $1,900,000 payable by the Company's issuance of a promissory note ("Promissory Note") on December 20, 2004 The Promissory Note may be convertible into 10,465,725 (post a one for eighteen reverse split) shares of the Company's common stock. As a result, the 80,735,590 shares of the common stock of the Company sold represented approximately 86.3% of the total outstanding stock of the Company. The Exchange resulted in a change of voting control of the Company.

NBTI was incorporated in the British Virgin Islands on June 25, 2004. NBTI operates through its wholly owned subsidiary, Huifeng Biochemistry Joint Stock Company, which is a joint venture company established under the laws of China and is engaged in the production and sales of plant extracts, biochemical products and pharmaceutical raw products in the PRC. On February 22, 2006, Huifeng Biochemistry Joint Stock Company changed its name to Xi’an Huifeng Bio-Technic, Inc. ("Huifeng").

The exchange was treated as a reverse acquisition for accounting purposes. As such, the financial information reflected activity subsequent to the acquisition for HFGB and its subsidiaries and financial activity of NBTI prior to the acquisition. We will continue the business operations conducted by NBTI.

Critical Accounting Policies

We have identified one policy area as critical to the understanding of our consolidated financial statements. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting periods. With respect to net realizable value of the Company's accounts receivable and inventories, significant estimation judgments are made and actual results could differ materially from these estimates.

The Company does not have any reserves against its accounts receivable or inventories at December 31, 2009 and 2008. Management's estimation that there are no reserves is based on the current facts that there is no significant aged accounts receivable and the current inventory turnover is sufficient to realize the current carrying value of the inventories. In making their judgment, management has assumed that there will be continued demand for their products in the future, thereby maintaining adequate turnover of the inventories. Additionally, management has assumed that customers will continue to pay their outstanding invoices in a timely manner, and that their customers' financial position will not deteriorate significantly in the future, which would result in their inability to pay their debts to the Company. While the Company's management currently believes that there is little likelihood that the actual results of their current estimates will differ materially from its current estimates, if customer demand for its products decreases significantly in the near future, or if the financial position of its customers deteriorates in the near future, the Company could realize significant write downs for slow moving inventories or uncollectible accounts receivable.

We believe the following is among the most critical accounting policies that impact our consolidated financial statements. We suggest that our significant accounting policies, as described in our consolidated financial statements in the Summary of Significant Accounting Policies, be read in conjunction with this Management's discussion and Analysis of Financial Condition and Results of Operations.

We recognize revenue in accordance with Staff Accounting Bulletin ("SAB") No. 104. All of the following criteria must exist in order for us to recognize revenue:

1.           Persuasive evidence of an arrangement exists;
2.           Delivery has occurred or services have been rendered;
3.           The seller's price to the buyer is fixed or determinable and
4.           Collectibility is reasonably assured.

The majority of the Company's revenue results from sales contracts with distributors and revenue is generated upon the shipment of goods. The Company's pricing structure is fixed and there are no rebate or discount programs. Management conducts credit background checks for new customers as a means to reduce the subjectivity of assuring collectability. Based on these factors, the Company believes that it can apply the provisions of SAB 104 with minimal subjectivity.
 
13

 
Results of Operations

The following table sets forth selected statement of operations data as a percentage of revenues for the periods indicated.

   
Year Ended
   
Year Ended
 
   
December
   
December
 
   
31, 2009
   
31, 2008
 
                 
Revenues
    100.00 %     100.00 %
Cost of revenues
    (63.31 )%     (65.13 )%
Gross margin
    36.69 %     34.87 %
Selling and distribution expenses
    (1.62 )%     (1.91 )%
General and administrative expenses
    (4.37 )%     (10.56 )%
Depreciation and amortization
    (0.19 )%     (0.14 )%
Interest income
    0.03 %     0.15 %
Interest expenses
    (4.34 )%     (5.39 )%
Other income
    1.67 %     2.41 %
Income tax expense
    (5.39 )%     (4.82 )%
Non-controlling interests
    (0.48 )%     (0.13 )%
Net Profit
    21.63 %     14.17 %

Year Ended December 31, 2009 Compared To Year Ended December 31, 2008

Revenues, Cost of Revenues and Gross Margin

Revenues for the year ended December 31, 2009 were $13,764,886, an increase of $2,807,657 or approximately 25.6% from $10,957,229 in 2008. Our increase in sales revenues in 2009 mainly attributed to the increase in sales of pharmaceutical raw materials. In particular, the sales volume of our Diosmin, Rutin and Troxerutin products increased rapidly, as a result of the high quality of our products. An analysis of our increase in sales of our products is as follows:

   
For the year ended
       
   
December 31,
       
               
Increase/
 
Product
 
2009
   
2008
   
(Decrease)
 
                   
Pharmaceutical raw materials
  $ 8,015,822     $ 5,852,440     $ 2,163,382  
Plant extracts
    1,995,907       1,818,924       176,983  
Pharmaceutical intermediates
    3,753,157       3,285,865     $ 467,292  
TOTAL
  $ 13,764,886     $ 10,957,229     $ 2,807,657  

The increase in the sales of pharmaceutical raw materials in 2009 was mainly due to an increase in the sales of Diosmin, Rutin and Troxerutin, three of our major products in this category. Revenue for Diosmin in 2009 was $3,397,698, an increase of $1,142,372 or 51% from the $2,255,326 of 2008. Our significant revenue growth in Diosmin in international market, especially in Europe, was driven by our higher quality levels compared with the competitors. In China, we are the only Disomin producer that is in the process of applying Certificate of Suitability (COS). The Revenue for Rutin in 2009 was $2,343,218, an increase of $465,910 or 25% from the $1,877,308 of 2008. As the Good Manufacturing Practice (GMP) certified Rutin producer, we experienced rapid growth in both international and domestic market due to our high quality standards.

Cost of revenues for the year ended December 31, 2009 were $8,714,848, an increase of $1,578,356 or 22% from $7,136,492 for the same period in 2008. Compared to 2008, the increase in cost of sales of our products was driven by increase in revenues.

 
14

 

Our gross profit margin increased from 35% in 2008 to 37% in 2009. Our profit margin for pharmaceutical raw materials increased from 30% in 2008 to 31% in 2009. The profit margin for Plant Extracts increased from 50% in 2008 to 51% in 2009. The profit margin for pharmaceutical intermediates increased from 36% in 2008 to 42% in 2009. Gross profit for the year ended December 31, 2009 was $5,050,038, an increase of $1,229,301 or 32% from the $3,820,737 of 2008, in which $508,039 or 41% of gross profit was attributable to the increase in gross margin for Diosmin; $312,611 or 25% was attributable to the increase in gross margin for Troxerutin, and $294,259 or 24% was attributable to the increase in gross margin for Rutin. An analysis of our increase in gross profit margin of our products is as follows:

   
For the year ended
       
   
December 31,
       
               
Increase/
 
Product
 
2009
   
2008
   
(Decrease)
 
                   
Pharmaceutical raw materials
  $ 2,468,805     $ 1,739,544     $ 729,261  
Plant extracts
    1,021,910       906,067       115,843  
Pharmaceutical intermediates
    1,559,323       1,175,126       384,197  
TOTAL
  $ 5,050,038     $ 3,820,737     $ 1,229,301  

General and Administrative Expenses

General and administrative expenses totaled to $602,139 for the year ended December 31, 2009, a decrease of $554,702 or 48% from $1,156,841 for the same period in 2008. The increase in general and administrative expenses was mainly due to changes in the following expenses:

1. Decrease in exchanges losses from foreign currency fluctuations by $206,263 or 49%
:
The increase of value of the Renminbi against the U.S. dollar in 2009 was less than the increase in 2008.
     
2. Decrease in legal and professional expenses by $214,678 or 51%
:
The legal advisory services cost significantly less in 2009. The higher cost in 2008 was driven by the legal and consulting expenses related to fund raising.
     
3. Decrease in allowance for doubtful accounts by $127,393 or 104%
:
The decrease in allowance for doubtful accounts was driven by improvement on collection of account receivables compared with 2008.

Selling and Distribution Expenses

Selling and distribution expenses amounted to $222,474 for the year ended December 31, 2009, an increase of $13,343 or 6% from $209,131 for the same period in 2008. The increase in our selling and distribution expenses in 2009 compared to 2008 was mainly due to the following:

Increase in transportation costs of $37,297 or 38%
:
In 2009, our overseas sales represented 64% of the total revenue, an increase by 10%.

Liquidity and Capital Resources

Cash

Our cash balance amounted to $556,763 at December 31, 2009.

During the year ended December 31, 2009, our cash provided by operating activities amounted to $565,623, primarily due to the net profit in the current year of $2,976,892, offset by the increases in accounts receivable of $2,685,021. In the current year, our changes in accounts receivable increased by $1,511,947 or 129% to $2,685,021 compared to $1,173,074 for the same period in 2008, our increase in accounts receivable was due to 26% increase in our net sales compared to the same period in 2008 and increase in proportion of our credit sales. Additionally, our increase in inventories was $903,917, which was $971,151 or 52% less than the increase in 2008 of $1,875,068 as part of our strategy to enhance our production operation. Sufficient inventories storage allows us to reduce seasonal fluctuation in raw material availability and cost, and ensures that we have sufficient supply of raw materials to meet the increase in demand for our products in 2009 and in future.

 
15

 

During the year ended December 31, 2009, net cash used in investing activities amounted to $610,713, a decrease of $2,036,756 or 77% as compared to net cash provided by investing activities of $2,647,469 in 2008. The net cash used in investing activities was mainly due to the construction of our new finished goods warehouse and costs incurred to achieve the requirement of Certificate of Suitability. The net cash provided by financing activities amounted to $555,484, representing proceeds from notes payable for new bank loans granted from a bank in May and September 2009.

The Company is currently funding its operations from and in addition to sales revenues.

Working Capital

Our working capital amounted to $10,011,833 at December 31, 2009, an increase of $5,330,239 or 114%, compared with the $4,681,594 of 2008, primarily driven by the $2,698,453 increases in accounts receivables and $916,190 increases in inventories.

Accounts Receivable balance at December 31, 2009 was $5,576,321, an increase of $2,698,453 or 94% from the $2,877,868 of December 31, 2008; and an increase of $1,758,085 or 46% from the $3,818,236 of September 30, 2009. This was due to the significant increase in quarter four 2009 revenue, primarily export sales with three months credit terms, compared with the same quarter last year. The quarter four 2009 revenue was $4,881,696, an increase of US$2,810,532 or 136% compared with the $2,071,164 for the same period last year.

Inventory balance at December 31, 2009 was $5,656,420, an increase of $916,190 from the $4,740,230 of December 31, 2008, primarily driven by raw materials which increased $714,406 during this period. The Company’s products are consisted of pharmaceutical raw materials and intermediates, which are extracted from the plants. The plants are purchased once a year after the harvesting season, i.e. from August to November, resulting higher inventory levels after around November due to purchase made once a year and lower inventory levels before around August due to production consumption. The Year over Year increase in inventory levels at 2009 year end was driven by the inventory built up to satisfy export sales orders, especially for French contract with Safic-Alcan.

Recent Accounting Pronouncements

Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC or Condification), “Generally Accepted Accounting Principles – Overall” (ASC Topic 105-10). The Codification established one source for all U.S. GAAP. The Codification supersedes, but does not change, all then-existing non-SEC accounting and reporting standards. Throughout this report, references provided to applicable portions of the Codification also include reference to the original FASB standard (SFAS), staff position (FSP) or consensus of the Emerging Issues Task Force (EITF).

In December 2008, the FASB issued Staff Position No. FAS 132(R)-1 “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”) (ASC Topic 715-20-65). FSP FAS 132(R)-1 (ASC Topic 715-20-65) requires more detailed disclosures about employers’ plan assets in a defined benefit pension or other postretirement plan, including employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets, and inputs and valuation techniques used to measure the fair value of plan assets. FSP FAS 132(R)-1 (ASC Topic 715-20-65) also requires, for fair value measurements using significant unobservable inputs (Level 3), disclosure of the effect of the measurements on changes in plan assets for the period. The disclosures about plan assets required by FSP FAS 132(R)-1 (ASC Topic 715-20-65) must be provided for fiscal years ending after December 15, 2009. As this pronouncement is only disclosure-related, the Company does not have an impact on the financial position and results of operations.

In February 2010, FASB issued ASU 2010-9 Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements ("ASU 2010-9"). ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is effective for interim and annual periods ending after June 15, 2010. The Company does not expect the adoption of ASU 2010-09 to have a material impact on its consolidated results of operations or financial position.

In January 2010, FASB issued ASU 2010-6 Improving Disclosures about Fair Measurements ("ASU 2010-6"). ASU 2010-6 provides amendments to subtopic 820-10 that require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value measurements and the presentation of separate information regarding purchases, sales, issuances and settlements for Level 3 fair value measurements. Additionally, ASU 2010-6 provides amendments to subtopic 820-10 that clarify existing disclosures about the level of disaggregation and inputs and valuation techniques. ASU 2010-6 is effective for financial statements issued for interim and annual periods ending after December 15, 2010. The Company does not expect the adoption of ASU 2010-06 to have a material impact on its consolidated results of operations or financial position.

 
16

 

In January 2010, FASB issued ASU 2010-2 Accounting and Reporting for Decreases in Ownership of a Subsidiary- a Scope Clarification ("ASU 2010-2"). ASU 2010-2 addresses implementation issues related to the changes in ownership provisions in the Consolidation—Overall Subtopic (Subtopic 810-10) of the FASB Accounting Standards Codification, originally issued as FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements. Subtopic 810-10 establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. ASU 2010-2 is effective for the Company starting January 3, 2010. The Company does not expect the adoption of ASU 2010-2 to have a material impact on the Company's consolidated results of operations or financial position.

In December 2009, FASB issued ASU 2009-17 Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities ("ASU 2009-17"). ASU 2009-17 amends the FASB ASC for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in ASU 2009-17 replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. ASU 2009-17 also requires additional disclosures about an enterprise's involvement in variable interest entities. ASU 2009-17 is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009. The Company does not expect the adoption of ASU 2009-17 to have a material impact on its consolidated results of operations or financial position.

In December 2009, FASB issued ASU 2009-16 Transfers and Servicing (Topic 860) Accounting for Transfers of Financial Assets ("ASU 2009-16"). ASU 2009-16 amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. The amendments in ASU 2009-16 improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. ASU 2009-16 is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009.  The Company does not expect the adoption of ASU 2009-16 to have a material impact on its consolidated results of operations or financial position.

In October, 2009, the FASB issued ASU 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”( amendments to ASC Topic 470, Debt)” (“ASU 2009-15”), and provides guidance for accounting and reporting for own-share lending arrangements issued in contemplation of a convertible debt issuance.  At the date of issuance, a share-lending arrangement entered into on an entity’s own shares should be measured at fair value in accordance with Topic 820 and recognized as an issuance cost, with an offset to additional paid-in capital.  Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs.  The amendments also require several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement.  The effective dates of the amendments are dependent upon the date the share-lending arrangement was entered into and include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009.  The Company does not expect the adoption of ASU 2009-15 to have a material impact on its financial statements.
 
In October 2009, the FASB issued ASU 2009-14, “Certain Arrangements That Include Software Elements, (amendments to ASC Topic 985, Software)” (“ASU 2009-14”). ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company does not expect the adoption of ASU 2009-14 to have a material impact on its financial statements.

In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements, (amendments to ASC Topic 605, Revenue Recognition)” (“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company does not expect the adoption of ASU 2009-13 to have a material impact on its financial statements.

 
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In September 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-12, Fair Value Measurements and Disclosures (Topic 820)—Investments in Certain Entities That Calculate Net Asset Value Per Share (or Its Equivalent) which amended Accounting Standards Codification Subtopic 820-10, Fair Value Measurements and Disclosures—Overall. The amended guidance offers investors a practical expedient for measuring the fair value of investments in certain entities that calculate net asset value per share (NAV). The ASU is effective for the first reporting period (including interim periods) ending after December 15, 2009. The adoption of ASU 2009-12 did not have a material impact on the Company’s financial position or results of operations at the date of adoption.

In September 2009, the FASB issued ASU 2009-06, Income Taxes (Topic 740)—Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities (formerly proposed as FASB Staff Position No. 48-d, Application Guidance for Pass-Through Entities and Tax-Exempt Not-for-Profit Entities and Disclosure Modifications for Nonpublic Entities), which amended Accounting Standards Codification Subtopic 740-10, Income Taxes – Overall. ASU 2009-06 clarifies that an entity’s assertion that it is a pass-through entity is a tax position and should be assessed in accordance with Subtopic 740-10. Additionally, the ASU provides implementation guidance on the attribution of income taxes to entities and owners. The revised guidance is effective for periods ending after September 15, 2009. The adoption of ASU 2009-06 did not have a material impact on the Company’s financial position or results of operations at the date of adoption.

 In August 2009, FASB issued ASU 2009-5 Fair Value Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value ("ASU 2009-5"). ASU 2009-5 provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of liabilities. ASU 2009-5 clarifies that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value. ASU 2009-5 was effective for the Company for interim and annual periods ending after October 3, 2009. The adoption of ASU 2009-5 did not have a material impact on the Company's consolidated results of operations or financial position.

 In August 2009, FASB issued ASU 2009-4 Accounting for Redeemable Equity Instruments—an Amendment to Section 480-10-S99 ("ASU 2009-4"). ASU 2009-4 represents a Securities and Exchange Commission ("SEC") update to Section 480-10-S99, Distinguishing Liabilities from Equity. The adoption of guidance within ASU 2009-4 did not have an impact on the Company's consolidated results of operations or financial position.

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (subsequently codified into FASB ASC Topic 105) which established the FASB Accounting Standards Codification (“ASC” or the “Codification”) as the single source of authoritative accounting principles for U.S. GAAP issued by the FASB. The Codification supersedes all existing non-SEC accounting and reporting standards and subsequent to adoption, the FASB will issue new standards in the form of ASUs, and no longer as SFASs, FASB Staff Positions or Emerging Issues Task Force Abstracts. The Codification is effective for reporting periods ending on or after September 15, 2009. The adoption of the Codification did not have any impact on the Company’s financial position or results of operations at the date of adoption.

In May 2009, the FASB issued guidance on subsequent events (originally issued as SFAS No. 165, Subsequent Events, and subsequently codified into FASB ASC Topic 855). Topic 855 addresses the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Topic 855 is effective for interim or annual periods ending after June 15, 2009. The adoption of Topic 855 did not have any impact on the Company’s financial position or results of operations at the date of adoption.

In April 2009, the FASB issued guidance on determining fair value when the volume and level of activity for an asset or liability has significantly decreased and identifying transactions that are not orderly (originally issued as FASB Staff Position SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, and subsequently codified within FASB ASC Topic 820). The guidance provides additional guidance to expand on the factors that should be considered in estimating fair value when there has been a significant decrease in market activity for an asset or liability. The guidance is effective for interim and annual periods ending after June 15, 2009. The adoption did not have any impact on the Company’s financial position or results of operations at the date of adoption.

 In April 2009, FASB issued Staff Position ("FSP") No. 115-2 and FSP 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (now codified within ASC 320, Investments—Debt and Equity Securities ("ASC 320")). ASC 320 provides greater clarity about the credit and noncredit component of an other-than-temporary impairment event and more effectively communicates when an other-than-temporary impairment event has occurred. ASC 320 amends the other-than-temporary impairment model for debt securities. The impairment model for equity securities was not affected. Under ASC 320, an other-than-temporary impairment must be recognized through earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis. This standard was effective for interim periods ending after June 15, 2009. The adoption of ASC 320 did not have a material impact on the Company's consolidated results of operations or financial position.

 
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In April 2009, FASB issued FSP 107-1 and Accounting Principles Board 28-1, Interim Disclosures about Fair Value of Financial Instruments (now codified within ASC 825, Financial Instruments ("ASC 825")). ASC 825 requires disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. ASC 825 was effective for interim periods ending after June 15, 2009. The adoption of ASC 825 did not have a material impact on the Company's consolidated results of operations or financial position.

Inflation

Inflation has had some impacts on our business. It increased the purchase cost of our raw materials resulting in an increase in our production cost.

Currency Exchange Fluctuations

All of Company's revenues and majority of the expenses in 2009 were denominated primarily in Renminbi ("RMB"), the currency of China, and was converted into US dollars using the closing rate method. The balance sheet items are translated into US$ using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the year. All exchange differences are recorded within equity. As a result of the appreciation of RMB during 2009 we recognized a foreign currency translation gain of $31,347. There could be no assurance that RMB-to-U.S. dollar exchange rates will remain stable. The appreciation of RMB relative to the U.S. dollar would affect our business, financial condition and results of operations. We do not engage in currency hedging.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company and its subsidiaries including the notes thereto, together with reports thereon of Baker Tilly Hong Kong Limited and Jimmy C.H. Cheung & Co. are presented beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

On February 17, 2010, the Company was notified of the resignation, effective immediately, of the US Audit Practice of Jimmy C.H. Cheung & Co. (“JCHC”), as the Company’s independent registered public accounting firm in connection with JCHC’s merger on January 29, 2010, with Baker Tilly Hong Kong Limited (“BTHK”). On February 19, 2010, the Company’s Board of Directors approved the appointment of BTHK as the Company’s independent registered public accounting firm.

The audit reports of JCHC on the financial statements of the Company as of and for the years ended December 31, 2008 and 2007 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.

In connection with the audits of the Company’s financial statements for the fiscal years ended December 31, 2008 and 2007 and through the date of this Current Report, there were: (i) no disagreements between the Company and JCHC on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of JCHC, would have caused JCHC to make reference to the subject matter of the disagreement in their reports on the Company’s financial statements for such years, and (ii) on reportable vents within the meaning set forth in Item 304 (a)(1)(v) of Regulation S-K.

During the Company’s most two recent fiscal years ended December 31, 2008 and 2007 and through January 29, 2010, the Company did not consult with BTHK on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on the Company’s financial statements, and BTHK did not provide either a written report or oral advice to the Company that was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) the subject of any disagreement, as defined in ITEM 304 (a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304 (a)(1)(v) of Regulation S-K.

 
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ITEM 9A(T). CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Annual Report, being December 31, 2009, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation ("Evaluation") was performed by our Chief Executive Officer and our Chief Financial Officer in consultation with our accounting personnel.

Based upon the Evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this Annual Report, our disclosure controls and procedures were effective in ensuring that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Management’s Annual Report on Internal Control over Financial Reporting

The management of HFGB is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

There were no significant changes in our internal controls over financial reporting identified in connection with this evaluation that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, HFGB's internal controls over financial reporting.

Under the supervision and with the participation of the Chief Executive Officer and acting Chief Financial Officer, management conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2009. The framework on which such evaluation was based is contained in the report entitled "Internal Control — Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO Report"). Based on that evaluation and the criteria set forth in the COSO Report, management concluded that its internal control over financial reporting was effective as of December 31, 2009.

This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

Management and Board of Directors

The following table sets forth the names and ages of our current directors and executive officers, their principal offices and positions and the date each such person became a director or executive officer of our company. Our executive officers are elected annually by the Board of Directors. Our directors serve one year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. There are no family relationships between any of the directors and executive officers. In addition, there were no arrangements or understanding between any executive officer and any other person pursuant to which any person was selected as an executive officer. Currently, directors are not compensated for serving on the Board of Directors. We have not established compensation or executive committees. Currently, our entire board of directors serves as our audit committee. Because of the small size of the Company and the risk attendant to a small public company, we are currently unable to attract an audit committee financial expert to our Board of Directors.

 
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Name
 
Position
 
Date Of Appointment
 
Age
Jing’an Wang
 
Chief Executive Officer
 
December 20, 2004
 
49
Sanding Tao
 
Chief Financial Officer
 
December 20, 2004
 
41
Xinwen Hou*
 
Director and Secretary
 
December 20, 2004
 
41
Xiaoli Sun**
 
Director
 
February 25, 2010
 
52
Angela Aichun Li**
 
Director
 
February 25, 2010
 
37
John Zhang**
  
Director
  
February 25, 2010
  
39

*Xinwen Hou resigned as Secretary and Director of the Company on September 21, 2009.
** Xiaoli Sun, Angela Aichun Li and John Zhang were appointed as Company’s independent directors on February 25, 2010.

Biographies of Officers and Directors

Jingan Wang

Mr. Jingan Wang, age 49, Chief Executive Officer of the Company, is the founder and currently serves as President of Huifeng. Mr. Wang has over fifteen years of experience in accounting and financial management area. Mr. Wang has served as Accounting Supervisors and Chief Financial Officers for various companies during his professional career. Before Mr. Wang founded Huifeng in 2000, he was the Chief Financial Officer for Wei Xing Enterprises from 1999 to 2000. In 2004, he was awarded "the Entrepreneur of the Year" by the Xian Hi Tech Development Zone. Mr. Wang is also a certified public accountant.

Sanding Tao

Mr. Sanding Tao, age 41, Chief Financial Officer of the Company and of Huifeng. Mr. Tao served as VP of Finance and CFO for various technology and bio-tech firms before he joined Huifeng in 2003. From 1998 - 2000, Mr. Tao served as Chief Financial Officer for Xian Lan Xi Science & Technology, Inc.; and from 2000 -2003, Mr. Tao served as Chief Financial Officer for Xian Xing Yi Science & Technology, Inc. Mr. Tao is a graduate of Chinese Southern Financial College.

Xinwen Hou

Mr. Xinwen Hou, age 41, Director and Secretary of the Company, currently also serves as Assistant to the President and as Company Secretary for Huifeng Biochemistry Joint Stock Company ("Huifeng") in Xian, China. Mr. Hou held various leadership positions in different public companies in China before he joined Huifeng in January 2004. From 1997 - 2003, Mr. Hou served as Company Secretary for De Li Bang Pharmaceutical Inc., which is listed on China's A share stock exchange. He is also a reputable economist. He graduated from Xian Transportation University with a major in Business Administration.

Xiaoli Sun

Dr. Sun has more than thirty years’ experiences in medicine research specializing in cardiovascular and cerebrovascular diseases and chiral technology.  Since 2003, Dr. Sun has been serving as the professor and director of The Fourth Military Medical University.  Dr. Sun is also serving as the director of Shaanxi Province Chemistry Institute and an expert of Chinese Military Medical Judge Team.  Dr. Sun received her Bachelor degree in chemistry from the University of Jilin in Jilin Province in 1980.  She then completed her Master degree in organic synthesis from Northwest University in Shaanxi Province and received her Doctorial degree in pharmacology from The Fourth Military Medical University.

Angela Aichun Li

Ms. Li held a number of positions in accounting and finance with various US companies in the past nine years.  Since June 2006, Ms. Li has been serving as a Senior Financial Analyst in the CFO group of Bank of America.  She is an account owner overseeing the financial performance of key P&L accounts.  From 2003 to 2006, Ms. Li also served as a Senior Accountant with Nucor Corporation, a leading steel manufacturing company.  Before joining Nucor, Ms. Li was a consultant with Deloitte and Touché, one of the global leaders in accounting and consulting services.  Ms. Li is a certified public accountant (CPA) in the State of North Carolina.  Ms. Li holds a Master degree in Accounting from Wake Forest University in 2001 and an MBA degree from Duke University in 2004.

John Zhang

Mr. Zhang has a decade of diverse experiences in banking, consulting and finance and business development.  Mr. Zhang currently serves as the CEO of JC Global Capital Partners LLC, a boutique financial consulting firm in Shanghai that specializes in cross-border capital market transactions.  Prior to founding JC Global in September 2006, from September 2003 to August 2006, Mr. Zhang was the Managing Director of FirsTrust Group, a US merchant bank headquartered in Atlanta, GA, where he was responsible for its entire China operation.  Prior to joining FirsTrust, Mr. Zhang held senior positions in two other US companies, ASI Computer Technology Inc. and CTX International.  Mr. Zhang received his Bachelor of Science from The University of Alabama in Huntsville in 1993 and his MBA degree from Goizueta Business School of Emory University in 2002.

 
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Indemnification of Directors and Officers

Our articles of incorporation limit the liability of directors to the maximum extent permitted by Nevada law. This limitation of liability is subject to exceptions including intentional misconduct, obtaining an improper personal benefit and abdication or reckless disregard of director duties. Our articles of incorporation and bylaws provide that we may indemnify its directors, officer, employees and other agents to the fullest extent permitted by law. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the bylaws would permit indemnification. We currently do not have such an insurance policy.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted for our directors, officers and controlling 1934 persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
 
Family Relationships

There is no family relationship among any of our officers or directors.

Board Composition and Committees

Our Board of Directors currently does not have standing audit, nominating or compensation committees as of the date hereof and the entire board is performing the functions normally associated with an audit, nominating and compensation committee. However, we anticipate the Company will in the future seek to form audit and other board committees in a manner consistent with NYSE Amex listed companies in the future.

Code of Ethics

We have adopted a Code of Ethics and Business Conduct authorizing the establishment of a committee to ensure that our disclosure controls and procedures remain effective. Our Code also defines the standard of conduct expected by our officers, directors and employees.

Compliance with Section 16(A) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the Securities and Exchange Commission regulations to furnish our Company with copies of all Section 16(a) reports they file.

To the Company's knowledge, based solely on a review of the copies of the reports furnished to the Company, none of the required parties are delinquent in their Section 16(a) filings, except for the following directors and executive officers who have not filed a Form 3: Xiaoli Sun, Angela Aichun Li and John Zhang.

Directors Compensation

The directors and executives of the Company received no compensation from the Company for the fiscal year ended December 31, 2009. The Company currently has no agreements for compensation of its executives, and has no stock option plan or other equity compensation plan for its employees.
 
Involvement in Certain Legal Proceedings

The Company is not aware of any legal proceedings in which any director, officer, or any owner of record or beneficial owner of more than five percent of any class of voting securities of the Company, or any affiliate of any such director, officer, affiliate of the Company, or security holder, is a party adverse to the Company or has a material interest adverse to the Company.

ITEM 11. EXECUTIVE COMPENSATION

The directors and executives of the Company received no compensation from the Company for the fiscal year ended December 31, 2009. The Company currently has no agreements for compensation of its executives, and has no stock option plan or other equity compensation plan for its employees.

Name and Principal Position
 
Fiscal Year
 
Annual Salary
   
Bonus
   
Stock
Awards
   
Option Awards
   
Total
 
Jingan Wang
 
2009
  $ 0     $ 0     $ 0     $ 0     $ 0  
Chief Executive Officer
 
2008
  $ 0     $ 0     $ 0     $ 0     $ 0  
                                             
Sanding Tao
 
2009
  $ 0     $ 0     $ 0     $ 0     $ 0  
Chief Financial Officer
 
2008
  $ 0     $ 0     $ 0     $ 0     $ 0  
                                             
Xinwen Hou*
 
2009
  $ 0     $ 0     $ 0     $ 0     $ 0  
Secretary
 
2008
  $ 0     $ 0     $ 0     $ 0     $ 0  
 
 
22

 

*Xinwen Hou resigned as Secretary and Director of the Company on September 21, 2009.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information regarding beneficial ownership of common stock as of March 19, 2010 by each person known to us to own beneficially more than 5% of our common stock, each of our directors, each of our named executive officers; and all executive officers and directors as a group. Except as otherwise indicated, all persons listed below have (i) sole voting power and investment power with respect to their shares of Common Stock, except to the extent that authority is shared by spouses under applicable law, and (ii) record and beneficial ownership with respect to their shares of stock. The percentage of beneficial ownership is based upon 23,051,169 shares of Common Stock outstanding as of March 19, 2010. Unless otherwise identified, the address of the directors, officers and 5% beneficial owners of the Company listed above is 16B/F Ruixin Bldg. No. 25 Gaoxin Road, Xi’an, Shaanxi Province, China 710075.

Name
 
Position Held
 
Shares
Owned
   
% Owned
 
Jing’an Wang
 
Chief Executive Officer
    7,305,074       31.69 %
Sanding Tao
 
Chief Financial Officer
    325,442       1.41 %
Xinwen Hou*
 
Director and Secretary
    325,442       1.41 %
All directors and executive officers as a group above (3 persons)
                   
Xi’an Jucheng Investment & Consulting Ltd. *
 
None
    2,600,000       11.28 %
Xu Yingwei*
 
None
    1,200,000       5.21 %

*Xinwen Hou resigned as Secretary and Director of the Company on September 21, 2009.

*On August 27, 2009, the Company issued 1,200,000 shares of its common stock to its supplier in lieu of cash payment for overdue accounts payable.

*On September 2, 2009, the Company issued 2,600,000 of its common stock as partial payment in lieu of cash payment for the construction of an office building located at the Chang Wu Factory.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The current Chief Executive Officer and two other stockholders pledged a total of 5,272,860 shares of common stock held by them to secure the Company’s performance of the Convertible Notes issued on December 31, 2007, which due on December 31, 2009 and extended to June 30, 2011.

Effective December 24, 2009, the remaining Purchasers who had not converted the Notes (“Amendment Purchasers”) have entered into an Amendment to Secured Convertible Promissory Notes and Warrants (the “Amendment”).  Pursuant to the Amendment, the maturity date of the Notes has been extended from December 31, 2009 to June 30, 2011.  In addition to the continued 10% per annum interest payments based on the outstanding principal, the remaining $1,800,000 in principal will be paid down. The transaction is disclosed and filed to SEC in Form 8-K on January 25, 2010.

The two directors of the Company Jing’an Wang and Sanding Tao are executive officers of the Company. Xiaoli Sun, Angela Aichun Li, John Zhang are independent directors.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for our audit of annual financial statements and review of financial statements included in our Form 10-K or 10-KSBs and 10-Q or 10-QSBs for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were:

2009: 
$30,000 - Jimmy C.H. Cheung & Co.
 
$30,000 - Baker Tilly Hong Kong Limited

2008: 
$81,550 - Jimmy C.H. Cheung & Co.

 
23

 
 
Audit-Related Fees

For fiscal 2009 and 2008, the Company's auditors did not bill any fees for assurance and related services that are reasonably related to the performance of the audit or review of the Company's financial statements and are not reported under "Audit Fees" above.

Tax Fees

No fees were billed by the Company's auditors for professional services for tax compliance, tax advice, and tax planning for fiscal 2009 and 2008, respectively.

All Other Fees

No fees were billed in each of the last two fiscal years for the products and services provided by the principal accountant, other than the services reported in paragraph (1).

Audit Committee

The Company's Board of Directors acts as its audit committee, and it meets prior to filing of any Form 10-Q or 10-K to approve those filings. In addition, the committee meets to discuss audit plans and anticipated fees for audit and tax work prior to the commencement of that work. Approximately 100% of all fees paid to our independent auditors for fiscal 2009 are pre-approved by the audit committee.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

EXHIBITS

Exhibit No.
 
Description
     
3.1
 
Articles of Incorporation (1)
     
3.2
 
Certificate of Amendment to Articles of Incorporation (Incorporated by reference to the exhibits to the Annual Report on Form 10-K filed on June 20, 2005.)
     
3.3
 
Bylaws of the Company (1)
     
4.1
 
Secured Convertible Promissory Note due and payable in full on December 30, 2009 (2)
     
4.2
 
Form of Warrant (2)
     
10.1
 
Purchase Agreement made as of October 27, 2006 among Xi’an Huifeng Biochemistry Group Co., Ltd. and Shaanxi Pharmaceutical Chemical Facility Co., Ltd. (Incorporated by reference to the exhibits to the Form 8-K filed on October 31, 2006.)
     
10.2
 
Securities Purchase Agreement dated December 31, 2007 by and among Professional Offshore Opportunity Fund, Peter Treadway, Janet Wang, Manilal Patel Ltd., Ancora Greater China Fund, Strategic Alliance Fund, L.P., and Strategic Alliance Fund II, L.P. (2)
     
10.3
 
Registration Rights Agreement dated December 31, 2007 by and among Professional Offshore Opportunity Fund, Ltd., Peter Treadway, Janet Wang, Manilal Patel, Ancora Greater China Fund, Strategic Alliance Fund, L.P., and Strategic Alliance Fund II, L.P. (2)
     
10.4
 
Pledge Agreement dated December 31, 2007 by and among Jing’an Wang, Junchao Wang and Zhihua Zhang (collectively, the “Pledgors”), Professional Offshore Opportunity Fund, Ltd., Peter Treadway, Janet Wang, Manilal Patel, Ancora Greater China Fund, Strategic Alliance Fund, L.P., and Strategic Alliance Fund II, L.P. (collectively, the “Pledgee”) (2)
     
10.5
 
Pledge Agreement dated as of December 31st, 2007 by and among Jing'an Wang, Xinwen Hou, Junqi Zhang, Binjun Wang, Xugang Wang, and Zhilan Wang (collectively, the “Pledgor”), Professional Offshore Opportunity Fund, Ltd., Peter Treadway, Janet Wang, Manilal Patel, Ancora Greater China Fund, Strategic Alliance Fund, L.P. and Strategic Alliance Fund II, L.P. (collectively, The “Pledgee”) and Northwest Biotechnic Inc., a British Virgin Islands corporation (2)
     
10.6
 
Management Entrustment Agreement (3)
     
10.7
 
Share Pledge Agreement (3)
     
10.8
 
Shareholder’s Voting Proxy Agreement (3)

 
24

 

10.9
 
Exclusive Option Agreement(3)
     
21.1
 
List of Subsidiaries (Incorporated by reference to the exhibits to the Registration Statement on Form SB-2 filed on January 30, 2008)
     
31.1
 
Sarbanes Oxley Section 302 Certification of Chief Executive Officer*
     
31.2
 
Sarbanes Oxley Section 302 Certification of Chief Financial Officer*
     
32.1
 
Sarbanes Oxley Section 906 Certification of Chief Executive Officer*
     
32.2
 
Sarbanes Oxley Section 906 Certification of Chief Financial Officer*
     
99.1
 
Code of Ethics (4)
 
* Filed herewith
(1)
Incorporated by reference to the exhibits to the Registration Statement on Form SB-2 filed on July 28, 2000.
(2)
Incorporated by reference to the exhibits to the Form 8-K filed on January 3, 2008.
(3)
Incorporated by reference to the exhibits to the Form 8-K filed on September 29, 2008.
(4)
Incorporated by reference from the Annual Report on Form 10-K filed on June 20, 2005.

25

 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: April 15, 2010
   
     
 
Huifeng Bio-Pharmaceutical Technology, Inc.
   
 
By:
/s/ Jing’an Wang
     
   
Jing’an Wang
   
Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Jing’an Wang
 
Chairman and Chief Executive Office
 
April 15, 2010
   
(Principal Executive Officer)
   
         
/s/ Sanding Tao
 
Chief Financing Officer
 
April 15, 2010
   
(Principal Financial and Accounting Officer)
   
         
/s/ Xiaoli Sun
 
Director
 
April 15, 2010
         
/s/ Angela Aichun Li
 
Director
 
April 15, 2010
         
/s/ John Zhang
 
Director
 
April 15, 2010
 
 
26

 
 
HUIFENG BIO-PHARMACEUTICAL TECHNOLOGY INC.
AND SUBSIDIARIES

 
CONTENTS

 
   
Pages
     
Reports of Independent Registered Public Accounting Firm
 
F-1 - F-2
     
Consolidated Balance Sheets as of December 31, 2009 and 2008
 
F-3
     
Consolidated Statements of Operations and Comprehensive income for the years ended December 31, 2009 and 2008
 
F-4
     
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2009 and 2008
 
F-5
     
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008
 
F- 6
     
Notes to Consolidated Financial Statements as of December 31, 2009 and 2008
 
F-7 - F-19

 
29

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of:
Huifeng Bio-Pharmaceutical Technology Inc.

We have audited the accompanying consolidated balance sheet of Huifeng Bio-Pharmaceutical Technology Inc. and subsidiaries as of December 31, 2009 and the related consolidated statement of operations and comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2009. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits of the financial statements provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Huifeng Bio-Pharmaceutical Technology Inc. and subsidiaries as of December 31, 2009 and the consolidated results of its operations and its cash flows for the year ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
 

/s/ Baker Tilly Hong Kong Limited
BAKER TILLY HONG KONG LIMITED
Certified Public Accountants
 
Hong Kong

Date: April 7, 2010

 
 
F-1

 
 
 
Jimmy C.H. Cheung & Co
Certified Public Accountants
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of:
Huifeng Bio-Pharmaceutical Technology Inc.

We have audited the accompanying consolidated balance sheet of Huifeng Bio-Pharmaceutical Technology Inc. and subsidiaries as of December 31, 2008 and the related consolidated statement of operations and comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits of the financial statements provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Huifeng Bio-Pharmaceutical Technology Inc. and subsidiaries as of December 31, 2008 and the consolidated results of its operations and its cash flows for the year ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
 

/s/ Jimmy C.H. Cheung & Co.
JIMMY C.H. CHEUNG & CO.
Certified Public Accountants


Hong Kong

Date:
March 24, 2009 except for Note 1
as to which the date is April 7, 2010
 
 
 


1607 Dominion Centre, 43 Queens Road East, Wanchai, Hong Kong
Tel:  (852) 25295500   Fax:  (852) 28651067   Email: jimmy.cheung@jchcheungco.hk
Website:  http://www.jchcheungco.hk
 
F-2


HUIFENG BIO-PHARMACEUTICAL TECHNOLOGY INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2009 AND 2008

   
2009
   
2008
 
             
ASSETS
           
             
CURRENT ASSETS
           
Cash and cash equivalents
  $ 556,763     $ 44,898  
Accounts receivable, net
    5,576,321       2,877,868  
Inventories, net
    5,656,420       4,740,230  
Other assets
    573,117       328,996  
Assets related to discontinued operations, held for sale
    -       114,577  
Total Current Assets
    12,362,621       8,106,569  
                 
PROPERTY AND EQUIPMENT, NET
    6,278,619       5,833,557  
LAND USE RIGHTS, NET
    145,605       148,564  
                 
TOTAL ASSETS
  $ 18,786,845     $ 14,088,690  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
Accounts payable
  $ 397,292     $ 520,280  
Other payables and accrued expenses
    422,902       390,598  
Income tax and other tax payables
    692,532       538,483  
Notes payable
    838,062       281,579  
Convertible notes payable (net of unamortized discount of $323,093 and due on December 31, 2009)
    -       1,676,907  
Liabilities related to discontinued operations, held for sale
    -       17,128  
Total Current Liabilities
    2,350,788       3,424,975  
                 
LONG-TERM LIABILITIES
               
Convertible notes payable (net of unamortized discount of $1,120,447 and due on June 30, 2011)
    679,553       -  
                 
TOTAL LIABILITIES
    3,030,341       3,424,975  
                 
COMMITMENTS AND CONTINGENCIES
    -       -  
                 
EQUITY
               
HFGB Stockholders' Equity
               
Preferred stock ($0.001 par value, 5,000,000 shares authorized, none issued and outstanding)
    -       -  
Common stock ($0.018 par value, 100,000,000 shares authorized, 22,991,169 shares issued and outstanding as of December 31, 2009 and 18, 466,169 shares issued and outstanding as of December 31, 2008)
    413,838       332,388  
Additional paid-in capital
    10,315,847       8,355,863  
Retained earnings (deficit)
               
Unappropriated
    2,189,692       (403,795 )
Appropriated
    888,185       504,780  
Accumulated other comprehensive income
    1,398,147       1,366,800  
Total HFGB Stockholders' Equity
    15,205,709       10,156,036  
                 
Non-controlling Interests
    550,795       507,679  
TOTAL EQUITY
    15,756,504       10,663,715  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 18,786,845     $ 14,088,690  

The accompanying notes are an integral part of these financial statements

 
F-3

 

HUIFENG BIO-PHARMACEUTICAL TECHNOLOGY INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

   
2009
   
2008
 
             
NET SALES
  $ 13,764,886     $ 10,957,229  
                 
COST OF SALES
    (8,714,848 )     (7,136,492 )
                 
GROSS PROFIT
    5,050,038       3,820,737  
                 
OPERATING EXPENSES
               
Selling expenses and distribution expenses
    222,474       209,131  
General and administrative expenses
    602,139       1,156,841  
Depreciation and amortization
    26,280       15,511  
Total Operating Expenses
    850,893       1,381,483  
                 
INCOME FROM CONTINUING OPERATIONS
    4,199,145       2,439,254  
                 
OTHER INCOME (EXPENSES)
               
Interest income
    3,626       16,820  
Interest expenses
    (596,938 )     (590,602 )
Other income
    230,505       264,004  
Total Other (Expenses) Income
    (362,807 )     (309,778 )
                 
INCOME FROM OPERATIONS BEFORE INCOME TAXES
    3,836,338       2,129,476  
                 
INCOME TAX EXPENSE
    (742,059 )     (528,570 )
                 
NET INCOME FROM CONTINUING OPERATIONS
    3,094,279       1,600,906  
                 
DISCONTINUED OPERATIONS
               
Loss from discontinued operations, net of income taxes
    (16,961 )     (33,840 )
Loss from disposal of discontinued operations
    (34,458 )     -  
NET LOSS FROM DISCONTINUED OPERATIONS
    (51,419 )     (33,840 )
                 
NET INCOME
    3,042,860       1,567,066  
Less: Net income attributable to non-controlling interests
    (65,968 )     (14,635 )
NET INCOME ATTRIBUTABLE TO HFGB COMMON
               
STOCKHOLDERS
    2,976,892       1,552,431  
OTHER COMPREHENSIVE  INCOME
               
Total other comprehensive income
    8,495       633,033  
Less: foreign currency translation (gain) loss attributable to non-controlling interests
    22,852       (31,218 )
                 
Foreign currency translation gain attributable to HFGB common stockholders
    31,347       601,815  
                 
COMPREHENSIVE INCOME
  $ 3,008,239     $ 2,154,246  
                 
Income per share-basic
               
Continuing operations
  $ 0.15     $ 0.08  
Discontinued operations
    -       -  
Net income per share - basic
  $ 0.15     $ 0.08  
                 
Income per share-diluted
               
Continuing operations
  $ 0.15     $ 0.08  
Discontinued operations
    -       -  
Net income per share - diluted
  $ 0.15     $ 0.08  
                 
Weighted average number of shares outstanding during the year-basic
    19,933,018       18,466,169  
                 
Weighted average number of shares outstanding during the year-diluted
    19,982,333       20,466,169  

The accompanying notes are an integral part of these financial statements

 
F-4

 

HUIFENG BIO-PHARMACEUTICAL TECHNOLOGY INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

               
Additional
   
Unappropriated
   
Appropriated
   
Other
   
Total HFGB
             
   
Common Stock
   
paid-in
   
retained
   
retained
   
comprehensive
   
Stockholders'
   
Non-controlling
       
   
Shares
   
Amount
   
capital
   
deficit
   
earnings
   
income
   
equity
   
interests
   
Total equity
 
         
US$
   
US$
   
US$
   
US$
   
US$
   
US$
   
US$
   
US$
 
                                                       
Balance at January 1, 2008
    18,466,169       332,388       8,326,752       (1,671,410 )     219,964       764,985       7,972,679       461,826       8,434,505  
Components of comprehensive income
                                                                       
Net income for the year
    -       -       -       1,552,431       -       -       1,552,431       14,635       1,567,066  
Foreign currency translation income
    -       -       -       -       -       601,815       601,815       31,218       633,033  
Comprehensive income
                                                                    2,200,099  
Stock option issued to a legal advisor
    -       -       29,111       -       -       -       29,111       -       29,111  
Transfer from retained earnings to statutory reserves
    -       -       -       (284,816 )     284,816       -       -       -       -  
Balance at December 31, 2008
    18,466,169       332,388       8,355,863       (403,795 )     504,780       1,366,800       10,156,036       507,679       10,663,715  
Components of comprehensive loss
                                                                       
Net income for the year
    -       -       -       2,976,892       -       -       2,976,892       65,968       3,042,860  
Foreign currency translation income
    -       -       -       -       -       31,347       31,347       (22,852 )     8,495  
Comprehensive loss
                                                                    3,051,355  
Stock issued for settlement of debts
    1,200,000       21,600       162,759       -       -       -       184,359       -       184,359  
Stock issued for acquisition of fixed assets
    2,600,000       46,800       374,591       -       -       -       421,391       -       421,391  
Stock issued for services
    75,000       1,350       36,150       -       -       -       37,500       -       37,500  
Stock option issued to a legal advisor
    -       -       58,221       -       -       -       58,221       -       58,221  
Conversion of Covertible Notes
    200,000       3,600       196,400       -       -       -       200,000       -       200,000  
Value of warrants associated with convertible notes
    -       -       352,463       -       -       -       352,463       -       352,463  
Value of beneficial conversion feature of convertible notes to common stock
    -       -       342,000       -       -       -       342,000       -       342,000  
Issuance of stock associated with convertible notes
    450,000       8,100       437,400       -       -       -       445,500       -       445,500  
Transfer from retained earnings to statutory reserves
    -       -       -       (383,405 )     383,405               -               -  
Balance at December.31, 2009
    22,991,169       413,838       10,315,847       2,189,692       888,185       1,398,147       15,205,709       550,795       15,756,504  
 
The accompanying notes are an integral part of these financial statements

 
F-5

 

HUIFENG BIO-PHARMACEUTICAL TECHNOLOGY INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

   
2009
   
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income continuing operations
  $ 2,993,853     $ 1,586,271  
Net loss from discontinued operations
    (16,961 )     (33,840 )
Net income continuing operations
    2,976,892       1,552,431  
                 
Adjusted to reconcile net income to cash provided by (used in) operating activities:
               
(Beneficial of) allowance for doubtful accounts - accounts receivable
    (4,829 )     84,631  
Depreciation and amortization - cost of sales
    594,165       433,276  
Depreciation and amortization
    26,280       15,511  
Amortization of discount on convertible notes
    172,859       153,343  
Amortization of deferred financing costs
    169,750       169,750  
Stock options issued to a legal counsel
    58,221       29,111  
Stock issued to a legal counsel
    37,500       -  
Non-controlling interests
    65,968       14,635  
Loss from disposal of discontinued operations
    34,446       -  
Changes in operating assets and liabilities (Increase) decrease in:
               
Accounts receivable, net
    (2,685,021 )     (1,173,074 )
Inventories, net
    (903,917 )     (1,875,068 )
Other assets
    (243,172 )     739,237  
Increase (decrease) in:
               
Accounts payable
    59,972       414,373  
Other payables and accrued expenses
    37,128       143,121  
Income tax and other taxes payable
    152,628       6,271  
Due to stockholders
    -       (294,679 )
Net cash provided by operating activities - continuing operations
    548,870       412,869  
Net cash provided by operating activities - discontinued operations
    16,753       33,787  
Net cash provided by operating activities
    565,623       446,656  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Net cash inflow from disposal of discontinued operations
    15,612       -  
Purchase of property and equipment
    (626,325 )     (2,647,469 )
Net cash used in investing activities - continuing operations
    (610,713 )     (2,647,469 )
Net cash provided by investing activities - discontinued operations
    -       -  
Net cash used in investing activities
    (610,713 )     (2,647,469 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from (repayment of) notes payable
    555,484       (33,035 )
Net cash (used in) provided by financing activities - continuing operations
    555,484       (33,035 )
Net cash provided by financing activities - discontinued operations
    -       -  
Net cash provided by (used in) financing activities
    555,484       (33,035 )
                 
EFFECT OF EXCHANGE RATES ON CASH
    795       59,728  
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    511,189       (2,174,120 )
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    45,574       2,219,694  
                 
CASH AND CASH EQUIVALENTS AT END OF YEAR
  $ 556,763     $ 45,574  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
                 
Cash paid during the year for:
               
Income taxes
  $ 726,103     $ 400,023  
                 
Interest expenses
  $ 254,330     $ 250,842  

 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

On August 17, 2009, the Company issued 1,200,000 shares of restricted common stock having a fair value of $184,359 to a third party for the settlement of outstanding accounts payable.

On August 17, 2009, the Company issued 2,600,000 shares of restricted common stock having a fair value of $421,391 to a third party for the payment of construction costs for an office building located at Changwu County, PRC.

On December 24, 2009, the Company issued 450,000 shares of restricted common stock having a fair value of $445,500 to sixinvestors as consideration to extend the maturity date of $1,800,000 of the remaining Notes from December 2009 to June 2011.

The accompanying notes are an integral part of these financial statements

 
F-6

 
 
HUIFENG BIO-PHARMACEUTICAL TECHNOLOGY INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2009 AND 2008

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION

 
(A)
Organization

Huifeng Bio-Pharmaceutical Technology Inc. and all of its subsidiaries (collectively “Huifeng Bio-Pharmaceutical”) or the “Company”) are principally engaged in the manufacture of plant extracts and bio-chemical products in the People’s Republic of China (“PRC”), for sale in the PRC market, Japan and some European countries.

Huifeng Bio-Pharmaceutical was incorporated in Nevada on March 16, 2000 under the name Enternet, Inc. with headquarters in Xi’an City, PRC.

Details of the Company’s principal subsidiaries as of December 31, 2009 are described in Note 2 – Subsidiaries.

(B)
Use of estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(C)
Principles of consolidation